Annual Report 2012 to Our Shareholders
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ANNUAL REPORT 2012 TO OUR SHAREHOLDERS The year 2012 marked a decade of transition. During that time we worked together to change our business from a high-cost legacy airline to a vibrant, energetic, and successful company focused on our future. It has been a remarkable journey – one that I am honored to have been a part of. Last year also marked the end of my tenure as the CEO and the beginning of a new chapter under the leadership of Brad Tilden. I have invited Brad to share his thoughts on the year and where we’re headed. Sincerely, Bill Ayer Chairman 2012 was a good year for Alaska Air Group. We reported record adjusted profits and our ninth consecutive year of adjusted earnings. We carried more passengers than we ever have, and we now fly to more destinations than at any time in our history. The Company has grown from a small bush airline flying in the state of Alaska to a large national carrier serving over 90 destinations in the United States, Mexico and Canada. With growth comes responsibility. And we are working hard to ensure we continue to provide excellent service for our customers, good careers for our employees, and solid returns for our investors. In 2012, we received our fifth consecutive J.D. Power and Associates Award for “Highest in Customer Satisfaction Among Traditional Network Carriers in North America.”* At Alaska Air Group, we hired over 1,200 new employees, and we paid out more than $88 million in bonuses. And for our shareholders, we repurchased $60 million of our common stock and announced a new $250 million buyback program. We are not stopping here. As we close the books on another year, we begin 2013 with engaged employees that are working together better than ever. It’s no secret, though, that this is a tough industry. We’re looking to the future as we work on a host of initiatives that will sustain our performance and make Alaska a great business as well as a great airline. In order to succeed, we need to execute on a solid plan for the future. We are entering the second year of a five-year strategic plan that we simply call our “Five Focus Areas.” This plan focuses on all key stakeholders – our employees, our customers and you, our shareholders. The Five Focus Areas are laid out in the following pages. I’d like to invite you to take a journey with us as we highlight some of the accomplishments of 2012 and share our vision of the future. Sincerely, Brad Tilden Chief Executive Officer *Alaska Airlines received the highest numerical score among seven traditional network airline carriers (tied in 2008)in the proprietary J.D. Power and Associates 2008–2012 North America Airline Satisfaction StudiesSM. 2012 study based on responses from 13,763 passengers who flew on a major North American airline between May 2011 and April 2012. Proprietary study results are based on experiences and perceptions of consumers surveyed July 2011–April 2012. Your experiences may vary. Visit jdpower.com. 1 “The Company has grown from a small bush airline flying in the state of Alaska to a large national carrier.” 2 UNWAVERING COMMITMENT TO SAFETY AND COMPLIANCE Safety and compliance are the foundation of everything we do. We have an unwavering commitment to safety and compliance, and we will not compromise this commitment in the pursuit of other initiatives. 3 “Safety and compliance are the foundation of everything we do.” 4 PEOPLE FOCUS While airplanes and technology enable us to do what we do, we recognize that this is fundamentally a people business, and our future depends on how we work together to win in this extremely competitive environment. As we grow, we want to strengthen our small company feel while also providing people of all backgrounds equal access to opportunities based on individual abilities and performance. We will succeed where others fail because of our pride and passion, and because of the way we treat our customers, our suppliers and partners, and each other. 5 “We recognize that this is fundamentally a people business, and our future depends on how we work together.” 6 HASSLE-FREE CUSTOMER EXPERIENCE We cultivate loyal customer relationships by offering an intuitive and trouble-free experience at all touch-points that is enabled by industry-leading technology and by reliable and best-in-class customer service. 7 “We cultivate loyal customer relationships by offering an intuitive and trouble-free experience.” 8 ENERGETIC AND COMPELLING BRAND We will create a deeper emotional connection between our brand, our people, our customers and our communities. We will position our brand as friendly, genuine, and relevant to a changing customer profile, and we will use our brand and our technology to develop a more direct relationship with our customers. We will position Alaska as the industry leader in environmental stewardship. 9 “We will use our brand and our technology to develop a more direct relationship with our customers.” 10 LOW FARES, LOW COSTS AND NETWORK GROWTH We will become known for our low fares and high value in order to broaden our appeal, reduce our vulnerability to low-cost carriers, and fuel growth. We will fund low fares by relentlessly pursuing simplicity, low overhead and high productivity. We will establish ourselves as the preferred airline for all travelers living on the West Coast by defending and growing Alaska and the Pacific Northwest, and by growing Hawaii and California. We are targeting 4% to 8% annual growth for the Alaska mainline operation, assuming acceptable profitability. 11 2013 PROXY STATEMENT ALASKA AIR GROUP, INC. NOTICE OF ANNUAL MEETING OF STOCKHOLDERS AND PROXY STATEMENT TABLE OF CONTENTS GENERAL INFORMATION Annual Meeting Information ......................................................... 1 Questions and Answers about the Annual Meeting ....................................... 1 PROPOSALS TO BE VOTED ON Proposal 1: Election of Directors to One-Year Terms ..................................... 10 Proposal 2: Ratification of the Appointment of the Company’s Independent Accountants ......... 16 Proposal 3: Advisory Vote Regarding the Compensation of the Company’s Named Executive Officers . 16 Proposal 4: Stockholder Proposal — Limit Acceleration of Equity............................ 18 CORPORATE GOVERNANCE Structure of the Board of Directors ................................................... 21 Director Independence ............................................................ 24 Director Nomination Policy .......................................................... 26 Board Leadership ................................................................ 30 Executive Sessions and Lead Director ................................................ 30 Risk Oversight ................................................................... 31 Code of Conduct and Ethics ........................................................ 32 Certain Relationships and Related Transactions ......................................... 32 Stockholder Communication Policy ................................................... 33 AUDIT COMMITTEE MATTERS Independent Registered Public Accountants ............................................ 34 Audit Committee Report ........................................................... 35 DIRECTOR COMPENSATION 2012 Director Compensation ....................................................... 37 Director Stock Ownership Policy ..................................................... 38 EXECUTIVE COMPENSATION Compensation Discussion and Analysis ............................................... 39 Compensation and Leadership Development Committee Report ............................ 55 Compensation and Leadership Development Committee Interlocks and Insider Participation ...... 56 2012 Summary Compensation Table ................................................. 56 2012 Grants of Plan-Based Awards ................................................... 59 2012 Outstanding Equity Awards at Fiscal Year End ...................................... 60 2012 Option Exercises and Stock Vested .............................................. 61 Pension and Other Retirement Plans .................................................. 62 2012 Nonqualified Deferred Compensation ............................................ 64 Potential Payments Upon Change in Control and Termination .............................. 65 SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Security Ownership of Management .................................................. 68 Beneficial Owners of 5% or More ..................................................... 69 Section 16(a) Beneficial Ownership Reporting Compliance ................................. 70 NOTICE OF ANNUAL MEETING OF STOCKHOLDERS P.O. Box 68947 Seattle, Washington 98168 To our Stockholders: owning Company common stock at the close The Annual Meeting of Stockholders of of business on March 22, 2013, are entitled Alaska Air Group, Inc. (the “Annual to receive this notice and to vote at the Meeting”) will be held in the Bay Auditorium meeting. All stockholders are requested to on the third floor of the Bell Harbor be present in person or by proxy. Whether or Proxy International Conference Center at not you attend the meeting in person, we Š 2211 Alaskan Way, Pier 66, in Seattle, encourage you to vote by Internet or phone Washington at 2 p.m. on Tuesday, May 21, or to complete, sign and return your proxy 2013, for the following purposes: prior to the meeting. 1. To elect to the Board of Directors the Because the majority of our stockholders eleven nominees