~~Table of Contents~~UNITED STATES

~~UNITED~~SECURITIES AND ~~STATES~~EXCHANGE COMMISSION

~~SECURITIES~~WASHINGTON, DC ~~AND EXCHANGE COMMISSION~~ 20549

~~WASHINGTON, DC 20549~~ FORM 10-K

~~FORM 10-K~~ (Mark One)

~~(Mark~~x ~~One~~ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

xFor ~~ANNUAL~~the fiscal ~~REPORT~~year ~~PURSUANT~~ended TODecember 31, ~~SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]~~2009

~~For the fiscal year ended December 31, 2008~~ OR

 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

¨For ~~TRANSITION~~the transition ~~REPORT~~period ~~PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]~~from to

~~For~~Commission File ~~the~~Number ~~transition period from to~~ 000-19978

~~Commission~~ALASKA ~~File~~AIRLINES, ~~Number 000-19978~~ INC.

~~ALASKA~~An Alaska ~~AIRLINES, INC.~~ Corporation

An92-0009235 ~~Alaska~~19300 ~~Corporation~~International Boulevard, Seattle, Washington 98188 Telephone: (206) 392-5040 (I.R.S. Employer Identification No.)

~~92-0009235~~Securities registered ~~19300~~pursuant ~~International~~to ~~Boulevard, Seattle, Washington 98188 Telephone:~~ Section 12(~~206~~b) ~~392-5040~~of ~~(I.R.S. Employer Identification No.)~~the Act: None

Securities registered pursuant to Section 12(bg) of the Act: None

~~Securities~~Indicate by ~~registered~~check ~~pursuant~~mark toif ~~Section 12(g)~~the registrant is a well-known seasoned issuer, as defined in Rule 405 of the ~~Act:~~Securities ~~None~~ Act. Yes  No x

Indicate by check mark if the registrant is anot ~~well-known~~required ~~seasoned~~to ~~issuer,~~file asreports ~~defined~~pursuant into Section 13 ~~Rule~~or ~~405~~Section 15(d) of the ~~Securities~~ Act. Yes ¨  No x

Indicate by check mark ifwhether the registrant is(1) has ~~not~~filed ~~required~~all ~~to file~~ reports ~~pursuant~~required to be filed by Section 13 or ~~Section~~ 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x ¨ No x 

Indicate by check mark ~~whether~~if ~~the~~disclosure ~~registrant~~of ~~(1) has~~delinquent ~~filed~~filers ~~all~~pursuant ~~reports required~~ to beItem 405 ~~filed~~of Regulation byS-K ~~Section 13~~is ornot ~~15(d)~~contained ofherein, ~~the~~and ~~Securities~~will ~~Exchange~~not ~~Act~~be ofcontained, ~~1934~~to ~~during~~ the ~~preceding~~best of 12registrant’s ~~months~~knowledge, ~~(or~~in ~~for~~definitive ~~such~~proxy ~~shorter~~or ~~period~~information ~~that the~~statements ~~registrant~~incorporated ~~was~~by ~~required~~reference toin ~~file~~Part ~~such~~III ~~reports),~~of ~~and~~this ~~(2) has~~Form ~~been~~10-K ~~subject~~or toany ~~such~~amendment ~~filing~~to ~~requirements~~this Form ~~for the past 90 days~~10-K. ~~Yes~~ x ~~No ¨~~

Indicate by check mark ifwhether ~~disclosure of~~the ~~delinquent~~registrant ~~filers~~has ~~pursuant~~submitted toelectronically ~~Item 405~~and ofposted ~~Regulation~~on its ~~S-K~~corporate isWeb ~~not~~site, ~~contained~~if ~~herein~~any, ~~and~~every ~~will~~Interactive ~~not~~Data File required to be submitted ~~contained,~~and posted pursuant to ~~the~~Rule ~~best~~405 of ~~registrant’s~~Regulation ~~knowledge,~~S-T in(§232.405 ~~definitive~~of ~~proxy~~this chapter) orduring ~~information~~the ~~statements~~preceding ~~incorporated~~12 bymonths ~~reference~~(or infor ~~Part~~such ~~III~~shorter ~~of this~~period ~~Form~~that ~~10-K~~the registrant orwas ~~any~~required ~~amendment~~ to ~~this~~submit ~~Form~~and ~~10-K~~post such files). x Yes  No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer  ¨ Accelerated filer ¨  Non-accelerated filer x Smaller reporting company ¨ 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ¨  No x x

The registrant meets the conditions specified in General Instruction I(1)(a) and (b) of Form 10-K and is therefore filing this Form 10-K with the reduced disclosure format permitted by General Instruction I(2).

The registrant is a wholly -owned subsidiary of Alaska Air Group, Inc., a Delaware corporation, and there is no market for the registrant’s common stock, par value $1.00 per share. As of February 15, ~~2009~~2010, shares of common stock outstanding totaled 500.

~~Table of Contents~~ALASKA AIRLINES, INC.

~~ALASKA~~ANNUAL REPORT ~~AIRLINES,~~ON FORM ~~INC.~~10-K FOR THE YEAR ENDED DECEMBER 31, 2009

~~Annual~~TABLE ~~Report~~OF ~~on Form 10-K for the year ended December 31, 2008~~ CONTENTS

TABLE OF CONTENTS


PART I				4
ITEM 1.	OUR BUSINESS			4
	WHERE YOU CAN FIND MORE INFORMATION			4
	OUR OPERATIONS			4
ITEM 1A.	RISK FACTORS			5
ITEM 1B.	UNRESOLVED STAFF COMMENTS			9
ITEM 2.	PROPERTIES			9
	AIRCRAFT			9
	GROUND FACILITIES AND SERVICES			10
ITEM 3.	LEGAL PROCEEDINGS			10
PART II				10
ITEM 5.	MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES			10
ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			11
	OVERVIEW			11
	YEAR IN REVIEW			11
	RESULTS OF OPERATIONS			14
	2009 COMPARED WITH 2008			14
		Nonoperating Income (Expense)	21
		Income Tax Expense (Benefit)	21
ITEM 7A.		QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK	21
		MARKET RISK – AIRCRAFT FUEL	21
		FINANCIAL MARKET RISK	22
ITEM 8.		FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	22
		SELECTED QUARTERLY FINANCIAL INFORMATION	22
		REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM	23
		BALANCE SHEETS	24
		STATEMENTS OF OPERATIONS	26
		STATEMENTS OF SHAREHOLDER’S EQUITY	27
		STATEMENTS OF CASH FLOWS	29
		NOTES TO FINANCIAL STATEMENTS	30
ITEM 9.		CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	53
ITEM 9A.		CONTROLS AND PROCEDURES	53
		EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES	53
		CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING	53
		MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING	53
ITEM 9B.		OTHER INFORMATION	53
PART IV			53
ITEM 15.		EXHIBITS, FINANCIAL STATEMENT SCHEDULES	53
SIGNATURES			54

PART I		5
ITEM 1. OUR BUSINESS		5
WHERE YOU CAN FIND MORE INFORMATION		5
OUR OPERATIONS		5
ITEM 1A. RISK FACTORS		6
ITEM 1B. UNRESOLVED STAFF COMMENTS		11
ITEM 2. PROPERTIES		11
AIRCRAFT		11
GROUND FACILITIES AND SERVICES		12
ITEM 3. LEGAL PROCEEDINGS		12
PART II		13
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES		13
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		13
OVERVIEW		13
YEAR IN REVIEW		13
RESULTS OF OPERATIONS		16
2008 COMPARED WITH 2007		16
NONOPERATING INCOME (EXPENSE)		24
INCOME TAX EXPENSE (BENEFIT)		24
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK		25
MARKET RISK – AIRCRAFT FUEL		25
FINANCIAL MARKET RISK		25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA		26
SELECTED QUARTERLY FINANCIAL INFORMATION		26
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM		27
BALANCE SHEETS		28
STATEMENTS OF OPERATIONS		30
STATEMENTS OF SHAREHOLDER’S EQUITY		31
STATEMENTS OF CASH FLOWS		33
NOTES TO FINANCIAL STATEMENTS		34

As used in this Form 10-K, the terms “Alaska,” “our,” “we” and the “Company” refer to Alaska Airlines, Inc., unless the context indicates otherwise.

-2 -

Table of Contents

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE		58
ITEM 9A. CONTROLS AND PROCEDURES		58
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES		58
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING		58
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING		58
ITEM 9B. OTHER INFORMATION		59
PART IV		59
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES		59
SIGNATURES		60

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

3In addition to historical information, this Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. Forward-looking statements are those that predict or describe future events or trends and that do not relate solely to historical matters. You can generally identify forward-looking statements as statements containing the words “believe,” “expect,” “will,” “anticipate,” “intend,” “estimate,” “project,” “assume” or other similar expressions, although not all forward-looking statements contain these identifying words. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from historical experience or the Company’s present expectations.

~~Table~~You should not place undue reliance on our forward-looking statements because the matters they describe are subject to known and unknown risks, uncertainties and other unpredictable factors, many of ~~Contents~~which are beyond our control.

AsOur forward-looking ~~used~~statements inare based on the information currently available to us and speak only as of the date on which this ~~Form~~report 10was filed with the SEC. We expressly disclaim any obligation to issue any updates or revisions to our forward-Klooking statements, even if subsequent events cause our expectations to change regarding the ~~terms~~matters ~~“Alaska~~discussed in those statements. Over time,” “our actual results,” ~~“we”~~performance ~~and~~or achievements will likely differ from the anticipated ~~“Company”~~results, performance or achievements that are expressed or implied ~~refer~~by toour ~~Alaska~~forward-looking ~~Airlines~~statements, ~~Inc~~and such differences might be significant and materially adverse to our shareholders. For a discussion of these and other risk factors in this Form 10-K, ~~unless~~see ~~the~~“Item ~~context~~1A: ~~indicates~~Risk ~~otherwise~~Factors.” Please consider our forward-looking statements in light of those risks as you read this report.

~~Cautionary Note Regarding Forward~~-~~Looking Statements~~ 3-

InTable ~~addition to historical information, this Form 10-K contains forward-looking statements within the meaning~~ of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. Forward-looking statements are those that predict or describe future events or trends and that do not relate solely to historical matters. You can generally identify forward-looking statements as statements containing the words “believe,” “expect,” “will,” “anticipate,” “intend,” “estimate,” “project,” “assume” or other similar expressions, although not all forward-looking statements contain these identifying words. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from historical experience or the Company’s present expectations. Some of the things that could cause our actual results to differ from our expectations are: Contents

•PART ~~general economic conditions, including the impact of the economic recession on customer travel behavior;~~I

•ITEM ~~changes~~1. inOUR ~~our operating costs, including fuel, which can be volatile;~~BUSINESS

•Alaska Airlines, Inc., an Alaska corporation, is a wholly-owned subsidiary of Alaska Air Group, Inc. (Air Group), a Delaware corporation. Air Group is also the ~~competitive~~parent ~~environment~~company of Horizon Air Industries, Inc. (Horizon) and Alaska Air Group Leasing. Alaska is a major airline organized in ~~our~~1932 ~~industry;~~and incorporated in the state of Alaska in 1937. We became a wholly-owned subsidiary of Air Group in 1985 pursuant to reorganization into a holding company structure. We operate an all-jet fleet with an average passenger trip length in 2009 of 1,180 miles. Horizon is a regional airline that operates both turboprop and jet aircraft

•We continue ~~labor~~to ~~disputes~~distinguish ourselves from competitors by providing award-winning customer service and differentiating amenities. Our outstanding employees and excellent service in the form of advance seat assignments, expedited check-in with Airport of the Future®, web check-in, flight alerts, an award-winning frequent flyer program, well-maintained aircraft, a first-class section, and other amenities are regularly recognized by independent studies, awards, and surveys of air travelers. For example, Alaska has ranked “Highest in Customer Satisfaction among Traditional Network Carriers” in both 2009 and 2008 by J.D. Power and Associates and won the “Program of the Year” Freddie award for 2008 and 2007 for our ~~ability~~Mileage toPlan ~~attract~~program. We are very proud of these awards and ~~retain~~we continue ~~qualified~~to ~~personnel;~~strive to have the best customer service in the industry.

•WHERE ~~our~~YOU ~~significant~~CAN ~~indebtedness;~~FIND MORE INFORMATION

•Our filings ~~compliance~~with the Securities and Exchange Commission, including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports are available on our website at www.alaskaair.com, free of charge, as soon as reasonably practicable after the electronic filing of these reports with the Securities and Exchange Commission. The information contained on our ~~financial~~website ~~covenants;~~is not a part of this annual report on Form 10-K.

•ALASKA ~~potential~~RANKED ~~downgrades~~“HIGHEST ofIN ~~our~~CUSTOMER ~~credit~~SATISFACTION ~~ratings~~AMONG ~~and~~TRADITIONAL ~~the~~NETWORK ~~availability~~CARRIERS” ofIN ~~financing;~~BOTH 2009 AND 2008 BY J.D. POWER AND ASSOCIATES.

OUR OPERATIONS

•We ~~our~~offer extensive ~~ability~~north/south service within the western U.S., Canada and Mexico, and passenger and dedicated cargo services to ~~meet~~and within the state of Alaska. We also provide long-haul east/west service to Hawaii and twelve cities in the mid-continental and eastern U.S., primarily from Seattle, where we have our largest ~~cost~~concentration ~~reduction~~of ~~goals~~departures; although we do offer long-haul departures from other cities as well.

•In ~~operational~~2009, we ~~disruptions;~~carried 15.6 million revenue passengers in our mainline operations, and we carry more passengers between Alaska and the U.S. mainland than any other airline. Based on the number of passengers carried in 2009, our leading airports are Seattle, Los Angeles, Anchorage and Portland. Based on 2009 revenues, the leading nonstop routes are Seattle-Anchorage, Seattle-Los Angeles, and Seattle-San Diego. At December 31, 2009, our operating fleet consisted of 115 jet aircraft, compared to 110 aircraft as of December 31, 2008.

•Our ~~the~~passenger ~~concentration~~traffic ofby ~~our~~market ~~revenue~~is presented ~~from~~below: ~~a few key markets;~~

• actual or threatened terrorist attacks, global instability and potential U.S. military actions or activities;

	2009			2008
West Coast		36	%		41	%
Within Alaska and between Alaska and the U.S. mainland		21	%		23	%
Transcon/midcon		23	%		20	%
Mexico		9	%		8	%
Hawaii		9	%		5	%
Canada		2	%		3	%
Total		100	%		100	%

•Alaska and ~~insurance~~Horizon ~~costs;~~integrate their flight schedules to provide convenient, competitive connections between most points served by their systems. In 2009 and 2008, approximately 22% and 23%, respectively, of Horizon’s passengers connected to flights operated by Alaska.

~~• our inability to achieve or maintain profitability;~~-4-

•Table ~~fluctuations~~of ~~in our quarterly results;~~Contents

•For ana more ~~aircraft~~in-depth ~~accident~~discussion orof ~~incident;~~our business, the industry, regulatory environment, and other important matters, please see Air Group’s annual report on Form 10-K filed with the Securities and Exchange Commission on February 19, 2010.

•ITEM ~~liability~~1A. ~~and~~RISK ~~other claims asserted against us;~~FACTORS

•If ~~our~~any ~~reliance~~of the onfollowing ~~automated~~occurs, ~~systems~~our business, financial condition and results of operations could suffer. In such case, the trading price of our common stock could also decline. We operate in a continually changing business environment. In this environment, new risks ~~associated~~may ~~with~~emerge ~~changes~~and ~~made~~already identified torisks ~~those~~may ~~systems;~~vary significantly in terms of impact and likelihood of occurrence. Management cannot predict such developments, nor can it assess the impact, if any, on our business of such new risk factors or of events described in any forward-looking statements.

•ECONOMY AND ~~our reliance on third-party vendors and partners;~~FINANCE

•The current ~~changes~~economic inclimate ~~laws~~has impacted demand for our product and ~~regulations;~~could harm our financial condition and results of operations if the environment does not improve.

•The recent ~~increases~~economic recession resulted in ~~government~~a ~~fees~~decline in demand for air travel. If the economic climate does not improve and ~~taxes~~traffic does not improve as we expect, we will likely need to adjust our capacity plans, which could harm our business, financial condition and results of operations.

~~You should~~Our ~~not~~business, ~~place~~financial ~~undue reliance on our forward-looking statements because the matters they describe are subject to known and unknown risks~~condition, ~~uncertainties~~ and ~~other~~results ~~unpredictable factors, many~~ of ~~which~~operations are ~~beyond our control. Our forward-looking statements~~substantially ~~are~~exposed ~~based~~to on the ~~information~~volatility ~~currently available to us and speak only as~~ of ~~the~~jet ~~date~~fuel ~~on which this report was filed with the SEC~~prices. WeIncreases ~~expressly disclaim any obligation to issue any updates or revisions to our forward-looking statements, even if subsequent events cause our expectations to change regarding the matters discussed~~ in ~~those~~jet ~~statements.~~fuel ~~Over~~costs ~~time, our actual results, performance or achievements will likely differ from the anticipated results, performance or achievements that are~~would ~~expressed~~harm ~~or implied by~~ our ~~forward-looking statements, and such differences might be significant and materially adverse to our shareholders~~business. ~~For a discussion of these and other risk factors in this Form 10-K, see “Item 1A: Risk Factors.” Please consider our forward-looking statements in light of those risks as you read this report.~~

4Fuel costs constitute a significant portion of our total operating expenses, accounting for 20% and 35% of total operating expenses for the years ended December 31, 2009 and 2008, respectively. Significant increases in average fuel costs during the past several years have negatively affected our results of operations.

~~Table~~Future increases in the price of ~~Contents~~jet fuel will harm our financial condition and results of operations, unless we are able to increase fares or add additional ancillary fees to attempt to recover increasing fuel costs.

~~PART~~Our indebtedness Iand other fixed obligations could increase the volatility of earnings and otherwise restrict our activities and potentially lead to liquidity constraints.

~~ITEM~~We 1have, and will continue to have for the foreseeable future, a significant amount of debt. ~~OUR~~Due ~~BUSINESS~~to our high fixed costs, including aircraft lease commitments and debt service, a decrease in revenues results in a disproportionately greater decrease in earnings.

~~Alaska Airlines, Inc., an Alaska corporation, is a~~Our ~~wholly~~outstanding ~~owned~~long-term ~~subsidiary~~debt ~~of Alaska Air Group, Inc. (Air Group), a Delaware corporation. Air Group is also the parent company of Horizon Air Industries, Inc. (Horizon)~~ and ~~Alaska~~other ~~Air~~fixed ~~Group~~obligations ~~Leasing.~~could Wehave ~~are a major airline organized in 1932 and~~important ~~incorporated in the state of Alaska in 1937~~consequences. WeFor ~~became a wholly owned subsidiary of Air Group in 1985 pursuant to reorganization into a holding company structure. We operate an all-jet fleet with an average passenger trip length of 1~~example,~~113~~ ~~miles~~they ~~in 2008. Horizon is a regional airline that operates both turboprop and jet aircraft.~~ could:

We• ~~endeavor~~limit toour ~~distinguish~~ability ~~ourselves~~to ~~from~~obtain ~~competitors~~additional byfinancing providing a higher level of customer service and differentiating amenities. Our outstanding employees and excellent service in the form of advance seat assignments, expedited check-in, web check-in, flight alerts, attention to ~~customer~~fund ~~needs,~~our anfuture ~~award-winning frequent~~capital ~~flyer program~~expenditures, ~~well-maintained aircraft~~acquisitions, aworking ~~first-class~~capital ~~section~~or ~~aboard our aircraft, and~~ other amenities are regularly recognized by independent studies, awards, and surveys of air travelers. For example, we received the J.D. Power and Associates “Highest Customer Satisfaction” award in 2008 among North America Airlines in a tie with Continental Airlines and won the “Program of the Year” Freddie award for 2007 for our Mileage Plan program. We are very proud of these awards and we continue to strive to have the best customer service in the industry. purposes;

~~WHERE~~• ~~YOU~~require ~~CAN~~us ~~FIND~~to ~~MORE~~dedicate ~~INFORMATION~~ a material portion of our operating cash flow to fund lease payments and interest payments on indebtedness, thereby reducing funds available for other purposes; and

We• ~~maintain~~limit anour ~~Internet~~ability ~~website~~to atwithstand ~~www.alaskaair.com.~~competitive ~~Our~~pressures ~~filings with the Securities~~ and ~~Exchange~~reduce ~~Commission, including~~ our ~~annual~~flexibility ~~report~~in ~~on Form~~responding ~~10-K,~~to ~~quarterly~~changing ~~reports~~business onand ~~Form~~economic ~~10-Q~~conditions, ~~current~~including ~~reports~~reacting ~~on Form 8-K and amendments~~ to ~~those reports filed or furnished pursuant to Sections 13(a) or 15(d) of~~ the ~~Securities~~current ~~Exchange~~economic ~~Act of 1934, as amended, are available on our website at www~~slowdown.alaskaair.com, free of charge, as soon as reasonably practicable after the electronic filing of these reports with the Securities and Exchange Commission. The information contained on our website is not a part of this annual report on Form 10-K.

~~OUR~~Although we ~~OPERATIONS~~have historically been able to generate sufficient cash flow from our operations to pay our debt and other fixed obligations as they become due, we cannot ensure we will be able to do so in the future. If we fail to do so, our business could be harmed.

We are ~~offer~~required ~~extensive~~to ~~north/south~~comply ~~service~~with ~~within~~specific ~~the~~financial ~~western~~covenants ~~U.S.,~~in ~~Canada~~certain ~~and Mexico, and passenger and dedicated cargo services to and within the state of Alaska~~agreements. We ~~also provide long-haul east/west service to Hawaii and nine cities in the continental~~ ~~U.S.,~~cannot ~~primarily~~be ~~from~~certain ~~Seattle,~~that ~~where~~ we ~~have~~will ~~our~~be ~~largest~~able ~~concentration of departures; although we do offer long-haul departures from Anchorage, Los Angeles, and Portland, Oregon. During 2008, we initiated service~~ to ~~Maui~~comply with ~~non-stops~~these ~~from~~covenants ~~Seattle~~or ~~and~~provisions ~~Anchorage,~~or tothat ~~the~~these ~~Big~~requirements ~~Island~~will ofnot ~~Hawaii~~limit ~~with~~our ~~non-stops~~ability ~~from Seattle, and non-stop service from Seattle~~ to ~~Minneapolis.~~finance Weour future ~~also~~operations ~~recently~~or ~~announced~~capital ~~non-stop service from Seattle to Austin, TX and Portland to Maui, both beginning in August 2009~~needs.

In 2008, we carried 16.8 million revenue passengers in our mainline operations, and in each year since 1973, we have carried more passengers between Alaska and the U.S. mainland than any other airline. Based on the number of passengers, our leading airports are Seattle, Los Angeles, Anchorage and Portland. Based on 2008 revenues, the leading nonstop routes are Seattle-~~Anchorage, Seattle~~5-~~Los Angeles, and Seattle-San Diego. At December 31, 2008, our operating fleet consisted of 110 jet aircraft, compared to 115 aircraft as of December 31, 2007.~~

~~Our~~Table ~~passenger~~of ~~traffic by market is presented below:~~ Contents

	2008		2007
West Coast	41	%	46	%
Within Alaska and between Alaska and the U.S. mainland	23	%	21	%
Transcontinental	20	%	17	%
Mexico	8	%	11	%
Hawaii	5	%	1	%
Canada	3	%	4	%
Total	100	%	100	%

Our continuing obligation to fund our traditional defined-benefit pension plans could negatively affect our ability to compete in the marketplace.

5Our defined-benefit pension plan assets are subject to market risk. If market returns are poor in the future, as they were in 2008, any future obligation to make additional cash contributions in accordance with the Pension Protection Act of 2006 could increase and harm our liquidity. Poor market returns also lead to higher pension expense in our statement of operations.

~~Table~~Increases in insurance costs or reductions in insurance coverage would harm our business, financial condition and results of ~~Contents~~operations.

~~Alaska~~Aviation insurers ~~and~~could ~~Horizon~~increase ~~integrate~~ their ~~flight~~premiums ~~schedules~~in tothe ~~provide~~event ~~convenient~~of additional terrorist attacks, ~~competitive~~hijackings, ~~connections~~airline ~~between~~accidents ~~most~~or ~~points~~other events adversely affecting the ~~served~~airline industry. Furthermore, the full hull and liability war risk insurance provided by ~~their~~the ~~systems~~government is currently mandated through August 31, 2010. Although Inthe ~~2008~~government ~~and~~may ~~2007~~again extend the deadline for providing such coverage, ~~approximately~~we ~~23%~~cannot ~~and~~be ~~22%~~certain that any extension will occur, ~~respectively~~or if it does, offor how ~~Horizon’s~~long ~~passengers~~the ~~connected~~extension will last. It is expected that, should the government stop providing such coverage to ~~flights~~the ~~operated~~airline industry, the premiums charged by aviation ~~Alaska~~insurers for this coverage will be substantially higher than the premiums currently charged by the government and the coverage will be much more limited, including smaller aggregate limits and shorter cancellation periods. Significant increases in insurance premiums would adversely affect our business, financial condition and results of operations.

~~For a more in-depth discussion of our business~~SAFETY, COMPLIANCE ~~the~~AND ~~industry,~~OPERATIONAL ~~regulatory environment, and other important matters, please see Air Group’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 19, 2009.~~ EXCELLENCE

~~ITEM~~Our reputation ~~1A.~~and ~~RISK~~financial ~~FACTORS~~results could be harmed in the event of an airline accident or incident.

WeAn accident ~~have~~or ~~established~~incident aninvolving ~~ongoing~~one ~~Risk~~of ~~Analysis~~our ~~and Oversight~~aircraft ~~Program~~could toinvolve ~~identify~~a significant loss of life and ~~assign~~result ~~responsibility~~in ~~for~~a loss of confidence in our airlines by the ~~most~~flying public. We could experience significant ~~risks~~potential ~~facing~~claims ~~our~~from ~~company.~~injured ~~The~~passengers and ~~results~~surviving ofrelatives, ~~this~~as ~~program~~well ~~are~~as ~~routinely~~costs ~~shared~~for ~~with~~the ~~our~~repair ~~Board~~or replacement of ~~Directors.~~a damaged Inaircraft ~~this~~and ~~section,~~its weconsequential ~~discuss~~temporary ~~the~~or ~~highest~~permanent ~~priority~~loss ~~issues~~from service. ~~identified~~We inmaintain ~~our~~liability ~~risk~~insurance ~~analysis.~~in Ifamounts ~~any~~and of the ~~following~~type ~~occurs,~~generally ~~our~~consistent with ~~business,~~industry ~~financial~~practice. ~~condition~~However, ~~and~~the ~~results~~amount of ~~operations~~such ~~could~~coverage ~~suffer.~~may ~~These~~not ~~risk~~be ~~factors~~adequate to ~~may~~fully ~~not~~cover all claims and we may be ~~exhaustive~~forced to bear substantial losses from an accident. WeSubstantial ~~operate~~claims inresulting afrom ~~continually~~an ~~changing~~accident ~~business~~in ~~environment~~excess ~~and~~of ~~new~~our ~~risk~~related ~~factors~~insurance ~~emerge~~coverage ~~from~~would ~~time~~harm toour ~~time~~business and financial results. Moreover, ~~Management~~any ~~cannot~~aircraft ~~predict~~accident ~~such~~or ~~developments~~incident, ~~nor~~even ~~can~~if itfully ~~assess~~insured ~~the~~and ~~impact,~~even if it ~~any~~does not involve one of our airlines, oncould cause a public perception that our ~~business~~airlines ofor ~~such~~the ~~new~~equipment ~~risk~~they ~~factors~~fly is less safe or ofreliable ~~events~~than ~~described~~other transportation inalternatives, ~~any~~which ~~forward-looking~~would ~~statements.~~harm our business.

~~The~~Changes in ~~current~~government ~~economic~~regulation ~~recession~~imposing ~~will~~additional ~~impact~~requirements ~~demand~~and ~~for~~restrictions on our ~~product~~operations ~~and~~or on the airports at which we operate could ~~harm~~increase our operating ~~financial~~costs ~~condition~~ and ~~results~~result ofin ~~operations.~~service delays and disruptions.

~~The~~Airlines are ~~current~~subject ~~economic~~to ~~recession~~extensive regulatory and ~~outlook~~legal ~~has~~requirements, ~~resulted~~both indomestically and ainternationally, ~~decline~~that ininvolve ~~demand~~significant ~~for~~compliance ~~air travel~~costs. ~~Our~~In ~~passenger count and traffic declined in~~ the ~~fourth quarter when~~last ~~compared~~several toyears, ~~the~~Congress ~~prior~~has ~~year~~passed ~~periods~~laws, and wethe ~~anticipate~~U.S. ~~declines~~DOT, ~~into~~the ~~2009.~~TSA Weand ~~plan~~the toFAA have ~~reduce~~issued ~~2009~~regulations ~~capacity~~that byhave 7%required assignificant ~~compared~~expenditures torelating ~~2008~~ to the ~~help~~maintenance ~~offset~~and ~~this~~operation ~~anticipated~~of ~~decline~~airlines. ~~in passenger traffic~~Similarly, ~~which~~many ~~will~~aspects ~~likely~~of ~~result in a decline in operating~~an ~~revenues.~~airline’s Ifoperations ~~demand~~are ~~declines~~subject ~~further~~to ~~than~~increasingly ~~expected,~~stringent ~~it will harm our business~~federal, ~~financial~~state ~~condition~~ and local ~~results~~laws ofprotecting ~~operations.~~the environment.

~~Our~~Because of ~~indebtedness~~significantly higher security and other ~~fixed~~costs ~~obligations~~incurred by airports since September 11, 2001, many airports have increased their rates and charges to air carriers. Additional laws, regulations, taxes, and airport rates and charges have been proposed from time to time that could significantly increase the ~~volatility~~ cost of ~~earnings~~airline operations or reduce the demand for air travel. Although lawmakers may impose these additional fees and ~~otherwise~~view ~~restrict~~them ~~our~~as ~~activities~~“pass-through” costs, we believe that a higher total ticket price will influence consumer purchase and travel ~~potentially~~decisions ~~lead~~and tomay ~~liquidity~~result ~~constraints.~~in an overall decline in passenger traffic, which would harm our business.

WeIf we ~~have,~~do ~~and~~not ~~will~~maintain ~~continue to have for~~ the ~~foreseeable~~privacy ~~future, a significant amount of debt. Due to our high fixed costs, including aircraft lease commitments~~ and ~~debt~~security ~~service, a decrease in revenues results in a disproportionately greater decrease in earnings. As~~ of ~~December 31, 2008 and 2007, we had approximately $1.6 billion and $1.2 billion of long~~customer-~~term~~related ~~debt outstanding~~information, ~~respectively, all of which is secured by flight equipment, aircraft purchase rights and real property. In~~we ~~addition~~could todamage ~~long-term debt, we have significant other fixed obligations under operating leases related to~~ our ~~aircraft~~reputation, ~~airport~~incur ~~terminal~~substantial ~~space,~~additional ~~other~~costs ~~airport facilities~~ and ~~office space. As of December 31, 2008, future minimum lease payments~~become ~~under~~subject ~~noncancelable~~to ~~operating leases with initial or remaining terms in excess of one year were $601~~litigation.~~2 million for 2009 through 2013 and an aggregate of $208.4 million for the years thereafter.~~

~~At December 31~~We receive, ~~2008~~retain, weand ~~had~~transmit ~~firm~~certain ~~orders~~personal toinformation ~~purchase~~about 20our customers. In ~~aircraft~~addition, ~~requiring~~our ~~future~~online ~~aggregate~~operations ~~payments~~at ~~of $553~~alaskaair.1com ~~million~~depend on ~~through~~the ~~2011.~~secure Wetransmission ~~have~~of ~~not~~confidential ~~secured~~information ~~financing~~over public networks, ~~for~~including ~~these~~credit ~~aircraft~~card ~~commitments~~information. A ~~and~~compromise ~~there~~of isour nosecurity systems ~~guarantee~~or those of other business partners that ~~financing~~results ~~will~~in beour ~~available~~customers’ personal ~~when~~information ~~required~~being orobtained atby ~~terms~~unauthorized ~~that~~persons ~~will~~could beadversely affect ~~acceptable~~our toreputation ~~us.~~with ~~The~~our ~~current~~customers ~~market~~and ~~conditions~~others, as well as our operations, results of operations, financial position and liquidity, and could result in litigation aagainst ~~lack~~us or the imposition of ~~availability~~penalties. In oraddition, ~~higher~~a security ~~interest~~breach ~~rates~~could ~~for~~require that we expend significant additional resources ~~financing~~related to the security of ~~aircraft~~information ~~purchases,~~systems ~~which~~and ~~would~~could ~~harm~~result in a disruption of our ~~business~~operations, ~~financial~~particularly ~~condition~~our ~~and~~online ~~results~~sales of operations.

~~Our outstanding long~~-~~term debt and other fixed obligations could have important consequences. For example, they could:~~ 6-

•Table ~~limit~~of ~~our ability to obtain additional financing to fund our future capital expenditures, acquisitions, working capital or other purposes;~~Contents

•Additionally, the ~~require~~use usof toindividually ~~dedicate~~identifiable adata ~~material~~by ~~portion~~our ofbusiness and our ~~operating~~business partners ~~cash~~is ~~flow~~regulated toat ~~fund~~the ~~lease~~international, ~~payments~~federal and ~~interest~~state levels. Privacy ~~payments~~and oninformation ~~indebtedness~~security laws and regulations change, and ~~thereby~~compliance ~~reducing~~with ~~funds~~them ~~available~~may ~~for~~result ~~other~~in ~~purposes;~~cost increases due to necessary systems changes and the development of new administrative processes.

•The airline ~~limit~~industry ~~our~~continues ~~ability~~ to ~~withstand~~face ~~competitive~~potential ~~pressures~~security ~~and~~concerns ~~reduce our flexibility in responding to changing business~~ and ~~economic conditions, including reacting to the current economic slowdown~~related costs.

6The terrorist attacks of September 11, 2001 and their aftermath negatively affected the airline industry, including our company. Additional terrorist attacks, the fear of such attacks or other hostilities involving the U.S. could have a further significant negative effect on the airline industry, including us, and could:

~~Table~~• significantly reduce passenger traffic and yields as a result of ~~Contents~~a potentially dramatic drop in demand for air travel;

We• ~~cannot~~significantly ~~ensure~~increase ~~that~~security ~~we will be able to generate sufficient cash flow from our operations to pay our debt~~ and ~~other fixed~~insurance ~~obligations as they become due. If we fail to do so, our business could be harmed.~~ costs;

We• ~~are~~make ~~required~~war torisk ~~comply with specific financial covenants in certain agreements. We cannot be certain now that we will be able to comply with these covenants~~ or ~~provisions~~other orinsurance ~~that~~unavailable ~~these requirements will not limit our ability to finance our future operations~~ or ~~capital~~extremely ~~needs.~~ expensive;

~~Our~~• ~~failure~~increase tofuel ~~successfully reduce unit~~ costs ~~could~~and ~~harm~~the ~~our~~volatility ~~business.~~of fuel prices;

We• ~~continue~~increase tocosts ~~strive~~from ~~toward~~airport aggressive cost-reduction goals that are an important part of our business strategy of offering the best value to passengers through competitive fares while achieving acceptable profit margins and return on capital. We believe having a lower cost structure better positions us to be able to fund future growth and take advantage of market opportunitiesshutdowns, ifflight ~~economic~~cancellations conditions allow. However, with our planned capacity reductions, we will see upward pressure on unit costs, at least in the near term. If we are unable to further reduce our non-fuel unit costs over the long-term and ~~achieve~~delays ~~targeted~~resulting ~~profitability,~~from wesecurity ~~will~~breaches ~~likely not be able to grow our business in the future~~ and ~~therefore~~ ~~our~~perceived ~~financial~~safety ~~results~~threats; ~~may suffer.~~ and

~~Our~~• ~~business,~~result ~~financial~~in ~~condition,~~a ~~and~~grounding ~~results~~ of ~~operations~~commercial ~~are~~air ~~substantially~~traffic ~~exposed~~by to the ~~volatility of jet fuel prices~~FAA. ~~Increases in jet fuel costs would harm our business.~~

~~Fuel costs constitute a significant portion of our total operating~~The ~~expenses,~~occurrence ~~accounting for 35% and 26%~~ of ~~total~~any ~~operating expenses for the years ended December 31, 2008 and 2007, respectively. Significant increases in average fuel costs during the past several years have negatively affected our results~~ of ~~operations.~~ ~~Although~~these ~~prices~~events ~~have~~would ~~declined sharply over the past six months, prices are still substantially higher than they were earlier in this decade. Future increases in the price of jet fuel will~~ harm our business, financial condition and results of ~~operations,~~ ~~unless we are able to increase fares or add additional ancillary fees to attempt to recover increasing fuel costs~~operations.

~~Historically, fuel costs~~Our ~~and~~operations ~~availability~~are ~~have been unpredictable and subject to wide price fluctuations based on geopolitical issues and supply and demand. It is~~ often ~~difficult~~affected toby ~~increase~~factors ~~fares~~beyond toour ~~offset~~control, ~~increases~~including indelays, cancellations, ~~the price of fuel~~ and ~~although~~other ~~we had some success recently~~conditions, wewhich ~~may~~could ~~not~~harm beour ~~able~~financial tocondition and doresults soof ~~in the future~~operations.

~~We utilize fuel hedges as a form of insurance against the volatility of fuel prices. To manage the~~Like ~~risk~~other ~~of fuel price increases~~airlines, weour ~~primarily~~operations ~~purchase~~often ~~call options that~~ are ~~designed~~affected toby ~~cap a portion of our fuel costs at designated per-barrel oil prices. Even with hedges~~delays, wecancellations ~~are substantially~~ and ~~increasingly exposed to increases in jet fuel costs~~ asother ~~the~~conditions ~~average~~caused ~~price~~by atfactors ~~which~~largely webeyond ~~are~~our ~~hedged in future periods is higher than it has historically been~~control.

~~The~~A ~~airline~~local dam ~~industry~~in the Kent Valley near the Seattle-Tacoma International Airport is ~~highly~~partly compromised. Many ~~competitive~~of the services necessary for our operations are ~~and~~located ~~subject~~in tothe ~~rapid~~valley, ~~change~~e.g., Wefuel ~~may~~supply, bepower, ~~unable~~catering, toreservations ~~compete~~call centers, ~~effectively~~etc. If ~~against~~the ~~other~~area ~~airlines~~experiences ~~with~~heavy ~~greater~~rains, ~~financial~~flooding ~~resources~~could occur orand ~~lower~~our ~~operating~~operations ~~costs,~~could orbe todisrupted. The ~~adjust~~Army ~~rapidly~~Corps ~~enough~~of Engineers inestimates that the ~~event~~dam ~~the~~will ~~nature~~be ofrepaired ~~competition~~within three to five years. We have contingency plans in ~~our~~place ~~markets~~and ~~changes.~~are continuing to monitor the situation.

~~The airline industry is highly competitive as to fares, flight frequency, frequent flyer benefits, routes and service. The industry is~~Other ~~particularly~~conditions ~~susceptible~~that tomight ~~price~~impact discounting because airlines incur only nominal costs to provide service to passengers occupying otherwise unsold seats. Over the past few years, airlines have reduced domestic routes and the number of planes available, which has resulted in reduced domestic industry capacity and a trend towards increased fares. Although capacity has declined based on a nationwide average, capacity on the West Coast has not declined to the same degree due to increased competition from new market entrants. If airlines decide to increase their capacity in the future, this could cause fares to decline, which may adversely affect our ~~business and results of~~ operations. Many of our competitors are larger than we are and therefore, may have significantly greater financial resources and name recognition or lower operating costs than we do. In addition, competitors who have successfully reorganized out of bankruptcy have lowered their operating costs as a result of renegotiated labor, supply and financing agreements. From time to time in the past, some of these competitors have chosen to add service, reduce their fares, or take other competitive steps in our key markets. We may be unable to compete effectively against other airlines that introduce service or discounted fares in the markets that we serve. include:

7• air traffic congestion at airports or other air traffic control problems;

~~Table~~• ofadverse ~~Contents~~weather conditions;

~~The~~• ~~airline~~increased ~~industry~~security ~~also~~measures ~~faces competition from ground transportation alternatives, such as buses, trains~~ or ~~automobiles.~~ ~~Increased~~breaches ~~use of technology such as video conferencing and internet-based meeting tools have also resulted~~ in ~~a change in business travel, especially in short-haul markets.~~ security;

A• ~~significant~~international ~~increase~~or indomestic ~~labor~~conflicts ~~costs~~ or ~~change~~terrorist inactivity; ~~key personnel could adversely affect our business~~ and ~~results of operations.~~

We• ~~compete against the major U.S. airlines and~~ other ~~businesses~~changes ~~for labor~~ in ~~many highly skilled positions. If we are unable to hire, train and retain qualified employees at a reasonable cost, or if we lose the services of key personnel, we may be unable to grow or sustain our~~ business. ~~In such case, our operating results and business prospects could be harmed~~conditions. ~~We may also have difficulty replacing management or other key personnel who leave and, therefore, the loss of any of these individuals could harm our business.~~

~~Labor~~Due ~~costs~~to our ~~are~~geographic aarea ~~significant component~~ of ~~our total expenses~~operations, ~~accounting~~we ~~for approximately~~believe ~~23%~~a ~~and~~large ~~27%~~portion of our ~~total~~operation is ~~operating~~more ~~expenses~~susceptible into ~~2008~~adverse ~~and~~weather ~~2007,~~conditions ~~respectively.~~than Asthat of ~~December 31,~~many ~~2008, labor unions represented approximately 84%~~ of our ~~employees~~ competitors. ~~Each~~A ofgeneral ~~our~~reduction ~~represented~~in ~~employee~~airline ~~groups~~passenger ~~has~~traffic as a ~~separate~~result ~~collective~~of any ~~bargaining~~of ~~agreement,~~the ~~and~~above-mentioned ~~could~~factors ~~make demands that would increase our operating expenses and adversely affect our financial performance if we agree to them. Uncertainty around open contracts~~ could beharm ~~a distraction to many employees, reduce employee engagement in~~ our business, ~~and~~financial ~~divert~~condition ~~management’s attention from other projects~~ and results ~~issues.~~of ~~Disengaged employees could prevent us from achieving the operational improvements in completion rate and on-time performance that we seek~~operations.

In 2005, Alaska and the Air Line Pilots Association (ALPA) were unable to reach a new agreement, and therefore, pursuant to the terms of the collective bargaining agreement that existed at the time, the parties submitted the agreement to binding arbitration. That arbitration decision, which was effective May 1, 2005, resulted in an average pilot wage reduction of 26%. That contract became amendable on May 1, 2007, and Alaska has been in negotiations with ALPA. In 2008, ALPA requested mediation from the National Mediation Board (NMB) in order to assist with contract negotiations. We have begun meeting with the NMB and hope to reach a negotiated contract that recognizes the important contributions that our pilots make while not harming our competitive position. Factoring in pay rates, productivity measures, and pension and postretirement medical benefits, we believe our pilot unit costs are among the highest in the industry for the size of aircraft we operate. STRATEGY

~~Our continuing obligation to fund our traditional defined-benefit~~We ~~pension~~depend ~~plans~~on ~~could~~a ~~negatively~~few ~~affect~~key ~~our~~markets ~~ability~~ to ~~compete~~be ~~in the marketplace~~successful. This is because most of our competitors either have eliminated such obligations through bankruptcy or have never had traditional pension plans in place. Currently, all of our defined-benefit pension plans are closed to new entrants, with the exception of the plan covering our pilots.

Our ~~defined-benefit pension plan~~ ~~assets~~strategy ~~are~~is ~~subject~~ to ~~market~~focus ~~risk.~~on Ifserving ~~market~~a ~~returns~~few ~~are~~key ~~poor~~markets, inincluding ~~the future~~Seattle, ~~as they were in 2008~~Portland, Los ~~our~~Angeles ~~obligation~~and toAnchorage. ~~make~~A ~~additional~~significant ~~cash~~portion ~~contributions in accordance with the Pension Plan Act~~ of ~~2006 could increase and harm~~ our ~~liquidity.~~flights ~~Poor market~~occurs ~~returns also lead~~ to ~~higher~~and from ~~pension expense in~~ our ~~statement~~Seattle ~~of operations~~hub. ~~The~~In ~~calculation~~2009, ofpassengers ~~pension~~to ~~expense~~and isfrom ~~dependent~~Seattle onaccounted ~~many~~for ~~assumptions~~64% of ~~that~~Air ~~are~~Group’s ~~more~~total ~~fully described in Note 8 to our consolidated financial statements~~passengers.

~~Finally,~~We believe that concentrating our service offerings in this way allows us to maximize ~~the~~our ~~extent~~investment wein ~~are~~personnel, ~~unable~~aircraft, and ground facilities, as well as to ~~maintain~~gain ~~the~~greater ~~outsourcing~~advantage orfrom ~~subcontracting~~sales ofand ~~certain~~marketing ~~services~~efforts ~~for~~in ~~our~~those ~~business~~regions. As a result, we ~~would~~remain ~~incur~~highly ~~substantial~~dependent ~~costs,~~on ~~including~~our key markets. Our business could ~~costs~~be ~~associated~~harmed ~~with~~by ~~hiring~~any ~~new~~circumstances ~~employees,~~causing a reduction in ~~order~~demand tofor ~~perform~~air transportation ~~these~~in ~~services~~our key markets. An increase in~~-house~~ competition in our key markets could also cause us to reduce fares or take other competitive measures that could harm our business, financial condition and results of operations.

~~Our operations are often affected by factors beyond our control, including delays, cancellations and other conditions, which could harm our financial condition and results of operations.~~ -7-

~~Like~~Table ~~other airlines,~~of ~~our operations often are affected by delays, cancellations and other conditions caused by factors largely beyond our control, including:~~ Contents

•Our failure ~~air~~to ~~traffic~~successfully ~~congestion~~meet atcost ~~airports~~reduction orgoals ~~other~~at ~~air~~could ~~traffic~~harm ~~control problems;~~our business.

•We continue ~~adverse~~to ~~weather~~strive ~~conditions;~~toward aggressive cost-reduction goals that are an important part of our business strategy of offering the best value to passengers through competitive fares while achieving acceptable profit margins and return on capital. However, with our capacity reductions in 2009 and increased costs in areas such as wages and benefits, we experienced a 10% increase in non-fuel unit cost. If we are unable to reduce our non-fuel unit costs over the long-term and achieve targeted profitability, we will likely not be able to grow our business in the future and therefore our financial results may suffer.

•We rely ~~increased~~on ~~security~~third-party ~~measures~~vendors orfor ~~breaches~~certain incritical ~~security; and~~activities.

8We have historically relied on outside vendors for a variety of services and functions critical to our business, including airframe and engine maintenance, ground handling, fueling, computer reservation system hosting and software maintenance. As part of our cost-reduction efforts, our reliance on outside vendors has increased and may continue to do so in the future. In recent years, Alaska has subcontracted its heavy aircraft maintenance, fleet service, facilities maintenance, and ground handling services at certain airports, including Seattle-Tacoma International Airport, to outside vendors.

~~Table~~Our use of ~~Contents~~outside vendors increases our exposure to several risks. In the event that one or more vendors goes into bankruptcy, ceases operation or fails to perform as promised, replacement services may not be readily available at competitive rates, or at all. Although we believe that our vendor oversight and quality control is among the best in the industry, if one of our vendors fails to perform adequately we may experience increased costs, delays, maintenance issues, safety issues or negative public perception of our airline. Vendor bankruptcies, unionization, regulatory compliance issues or significant changes in the competitive marketplace among suppliers could adversely affect vendor services or force Alaska to renegotiate existing agreements on less favorable terms. These events could result in disruptions in Alaska’s operations or increases in its cost structure.

•We are ~~international~~dependent oron ~~domestic~~a ~~conflicts,~~limited ~~terrorist~~number ~~activity,~~of orsuppliers ~~other~~for ~~changes~~aircraft ~~in business conditions~~and parts.

~~Delays~~We ~~and~~are dependent ~~cancellations~~on ~~frustrate~~Boeing ~~passengers,~~as ~~reduce~~our ~~aircraft~~sole ~~utilization~~supplier ~~and~~for ~~increase~~aircraft ~~costs,~~and ~~all~~many of ~~which~~its ~~affect~~aircraft parts. ~~our~~Additionally, ~~profitability.~~we ~~Due~~are todependent ~~our~~on ~~geographic~~a ~~area~~sole ofsupplier for aircraft engines. ~~operations~~As a result, we ~~believe~~are amore ~~significant~~vulnerable ~~portion~~to ofany ~~our~~problems ~~operation~~associated iswith ~~more~~the ~~susceptible~~supply of tothose ~~adverse~~aircraft ~~weather~~and ~~conditions~~parts, ~~than~~including ~~that~~design ofdefects, ~~many~~mechanical ofproblems, contractual ~~our~~performance ~~competitors.~~by Athe ~~general~~manufacturers, ~~reduction~~or inadverse ~~airline~~perception ~~passenger~~by ~~traffic~~the public asthat awould result ofin ~~any~~customer ofavoidance ~~the~~or ~~above-mentioned~~in ~~factors could~~actions ~~harm~~by ~~our~~the ~~business,~~FAA resulting ~~financial~~in ~~condition~~an ~~and~~inability ~~results~~to ofoperate ~~operations.~~our aircraft.

~~We depend on a few key markets to be successful.~~ INFORMATION TECHNOLOGY

~~Our~~We rely ~~strategy~~heavily ~~is to focus~~ on ~~serving~~automated asystems ~~few~~to ~~key~~operate ~~markets,~~our ~~including Seattle~~business, ~~Portland, Los Angeles~~ and ~~Anchorage.~~a Afailure ~~significant portion~~ of ~~our flights occurs to and from~~ ~~our~~these ~~Seattle~~systems ~~hub.~~or Inby ~~2008,~~their ~~passengers~~operators tocould ~~and~~harm ~~from~~our ~~Seattle accounted for 62% of Air Group’s total passengers~~business.

We ~~believe~~depend on ~~that~~automated ~~concentrating~~systems to operate our ~~service offerings~~business, inincluding ~~this~~our ~~way~~airline ~~allows~~reservation system, usour totelecommunication ~~maximize~~systems, our ~~investment~~website, inour ~~personnel~~maintenance systems, ~~aircraft~~our kiosk check-in terminals, and ~~ground~~other ~~facilities,~~systems. asSubstantially ~~well~~all asof toour ~~gain~~tickets are ~~greater~~issued ~~advantage~~to ~~from~~passengers ~~sales~~as electronic tickets and ~~marketing~~the ~~efforts~~majority of our customers check in ~~those~~using ~~regions.~~our Aswebsite aor ~~result,~~our weairport ~~remain~~kiosks. ~~highly~~We ~~dependent~~depend on our ~~key~~reservation ~~markets~~system to be able to issue, track and accept these electronic tickets. ~~Our~~In ~~business~~order for ~~could~~our beoperations ~~harmed~~to bywork ~~any~~efficiently, ~~circumstances~~our ~~causing~~website, areservation ~~reduction~~system, and check-in ~~demand~~systems ~~for~~must ~~air~~be ~~transportation~~able into ~~our~~accommodate ~~key~~a ~~markets~~high volume of traffic, maintain secure information, and deliver important flight information. AnSubstantial ~~increase~~or repeated inwebsite, ~~competition~~reservations insystem ~~our~~or ~~key~~telecommunication ~~markets~~systems failures could ~~also~~reduce the attractiveness of our services and cause usour customers to purchase ~~reduce~~tickets ~~fares~~from oranother ~~take~~airline. In addition, we rely on other ~~competitive~~automated systems ~~measures~~for crew scheduling, flight dispatch, and other operational needs. ~~that~~Disruption in, changes to, or a breach of these systems could ~~harm~~result ~~our~~in ~~business~~the loss of important data, ~~financial~~an ~~condition~~increase of our expenses and ~~results~~a possible temporary cessation of our operations.

~~The airline industry continues to face potential security concerns and~~BRAND ~~related~~AND ~~costs.~~ REPUTATION

~~The terrorist attacks of September 11, 2001 and their aftermath negatively affected the airline industry, including our~~A ~~company.~~significant ~~These~~increase ~~attacks and other foiled terror plots since then have resulted~~ in ~~new~~labor ~~security~~costs ~~measures that also impacted our company. Additional terrorist attacks, the fear of such attacks~~ or ~~other~~change ~~hostilities~~in ~~involving~~key ~~the~~personnel ~~U.S.~~ could ~~have a~~adversely ~~further~~affect ~~significant~~our ~~negative~~business ~~effect on the airline industry, including us,~~ and ~~could:~~results of operations.

•We compete ~~significantly~~against ~~reduce~~the ~~passenger~~major ~~traffic~~U.S. airlines and ~~yields~~other asbusinesses for labor in many highly skilled positions. If we are unable to hire, train and retain qualified employees at a ~~result~~reasonable cost, or if we lose the services of akey ~~potentially~~personnel, ~~dramatic~~we may ~~drop~~be inunable ~~demand~~to ~~for~~grow ~~air~~or ~~travel;~~sustain our business. In such case, our operating results and business prospects could be harmed. We may also have difficulty replacing management or other key personnel who leave and, therefore, the loss of any of these individuals could harm our business.

•Labor costs ~~significantly~~are a significant component of our total expenses, accounting for approximately 31% and 23% of our total operating expenses in 2009 and 2008, respectively. As of December 31, 2009, labor unions represented approximately 82% of our employees. Each of our represented employee groups has a separate collective bargaining agreement, and could make demands that would increase ~~security~~our operating expenses and ~~insurance~~adversely ~~costs;~~affect our financial performance if we agree to them.

~~• make war risk or other insurance unavailable or extremely expensive;~~-8-

•Table ~~increase fuel costs and the volatility~~ of ~~fuel prices;~~Contents

•Although we ~~increase~~have ~~costs~~been ~~from~~successful ~~airport~~in ~~shutdowns~~negotiating new contracts or extending existing contracts with a number of workgroups recently, ~~flight~~future ~~cancellations~~uncertainty ~~and~~around ~~delays~~open contracts ~~resulting~~could ~~from~~be ~~security~~a ~~breaches~~distraction to many employees, reduce employee engagement in our business and ~~perceived~~divert ~~safety~~management’s ~~threats;~~attention from other projects and issues.

•We rely ~~result~~on inpartner aairlines ~~grounding~~for ofcodeshare ~~commercial~~and ~~air~~frequent ~~traffic~~flyer ~~by the FAA~~marketing arrangements.

~~The~~We ~~occurrence~~are ofa party ~~any~~to marketing agreements with a number of ~~these~~domestic ~~events~~and ~~would~~international ~~harm~~air carriers, ~~our~~or ~~business~~“partners,” ~~financial~~including, ~~condition~~but not limited to, American Airlines and Delta ~~results~~Air Lines. These agreements provide that certain flight segments operated by us are held out as partner “codeshare” flights and that certain partner flights are held out for sale as Alaska codeshare flights. In addition, the agreements generally provide that members of ~~operations~~our Mileage Plan program can earn miles on or redeem miles for partner flights and vice versa. We receive a significant amount of revenue from flights sold under codeshare arrangements. In addition, we believe that the frequent flyer arrangements are an important part of our Mileage Plan program. The loss of a significant partner or certain partner flights could have a negative effect on our revenues or the attractiveness of our Mileage Plan, which we believe is a source of competitive advantage.

~~Increases~~ITEM in1B. ~~insurance~~UNRESOLVED ~~costs or~~STAFF ~~reductions in insurance coverage would harm our business, financial condition and results of operations.~~ COMMENTS

With respect to the availability of commercial War and Allied Perils Insurance, world events or events involving our company could result in sudden market volatility resulting in cancellation and/or a material change in the availability or cost of the coverage which could adversely affect ongoing operations or results. Further, commercial War and Allied Perils Insurance now excludes certain catastrophic perils not previously excluded for weapons of mass destruction (such as chemical, biological or nuclear devices). The commercial policies also contain low aggregate sublimits, which do not adequately address potential catastrophic third-party war and allied perils exposures. In the event we were to be required to rely on the commercial insurance market, expensive excess limits would likely need to be explored in an equally volatile excess specialty market. It remains, therefore, our position to retain our coverage for this aspect of the insurance program directly through the U.S. government's FAA premium war risk insurance program, rather than procure it from the commercial market. None

~~Although~~ITEM our insurance costs have declined significantly, aviation insurers could increase their premiums again in the event of additional terrorist attacks, hijackings, airline accidents or other events adversely affecting the airline industry2. Furthermore, the full hull and liability war risk insurance provided by the government is currently mandated through March 31, 2009. Although the government may extend the deadline for providing such coverage, we cannot be certain that any extension will occur, or if it does, for how long the extension will last. It is expected that, should the government stop providing such coverage to the airline industry, the premiums charged by aviation insurers for this coverage will be substantially higher than the premiums currently charged by the government and the coverage will be much more limited, including smaller aggregate limits and shorter cancellation periods. Significant increases in insurance premiums would adversely affect our business, financial condition and results of operations. PROPERTIES

9 AIRCRAFT

~~Table~~The following oftables ~~Contents~~describe the aircraft we operate and their average age at December 31, 2009:

Our reputation and financial results could be harmed in the event of an airline accident or incident.

Aircraft Type		Passenger Capacity		Owned		Leased		Total		Average Age in Years
Boeing:
737-400			144		3		24		27		14.1
	737-400C*		72		5		—		5		17.3
	737-400F*		—		1		—		1		10.8
	737-700		124		17		2		19		9.1
	737-800		157		41		10		51		2.3
	737-900		172		12		—		12		7.4
Total					79		36		115		7.5

An* ~~accident~~C=Combination orfreighter/passenger; incident involving one of our aircraft could involve a significant loss of life and result in a loss of confidence in our airline by the flying public. In addition, we could experience significant potential claims from injured passengers and surviving relatives, as well as costs for the repair or replacement of a damaged aircraft and its consequential temporary or permanent loss from service. Although we strive to maintain the highest standards of safety and reliability, should an accident or incident nevertheless occur, we maintain liability insurance in amounts and of the type generally consistent with industry practice. However, the amount of such coverage may not be adequate and we may be forced to bear substantial losses from an accident. Substantial claims resulting from an accident in excess of our related insurance coverage would harm our business and financial results. Moreover, any aircraft accident or incident, even if fully insured and even if it does not involve our airline, could cause a public perception that our airline or the equipment we fly is less safe or reliable than other transportation alternatives, which would harm our business. F=Freighter

WePart ~~rely~~II, Item 7, ~~heavily~~“Management’s onDiscussion ~~automated~~and ~~systems~~Analysis toof ~~operate~~Financial ~~our~~Condition ~~business,~~ and Results ~~a failure~~ of ~~these systems~~Operations,” ordiscusses byfuture ~~their~~orders ~~operators~~and ~~could~~options ~~harm~~for ~~our business~~additional aircraft.

WeMost depend on automated systems to operate our business, including our computerized airline reservation system, our telecommunication systems, our website, our maintenance systems, and other systems. Substantially all of ~~our tickets are issued to passengers as electronic tickets. We depend on our computerized reservation system to be able~~ ~~to issue, track and accept these electronic tickets. In order for~~ our ~~operations~~owned toaircraft ~~work efficiently, our website and reservation system must be able to accommodate a high volume of traffic, maintain~~ secure ~~information,~~long-term ~~and~~debt ~~deliver~~arrangements ~~important flight information. Substantial~~ or ~~repeated~~collateralize ~~website, reservations system or telecommunication systems failures could reduce the attractiveness of~~ our ~~services and cause our customers to purchase tickets from another airline. In addition, we rely on other~~ ~~automated~~revolving ~~systems~~credit ~~for crew scheduling, flight dispatch, and other operational needs~~facility. ~~Disruption in, changes to, or a breach of these systems could result in the loss of important data, an increase of our expenses and a possible temporary cessation of our operations.~~

Our leased 737-400, 737-700, and 737-800 aircraft have lease expiration dates between 2010 and 2016, in 2010, and between 2015 and 2021, respectively. We ~~rely~~have the onoption ~~partner~~to ~~airlines~~extend most of the leases for ~~codeshare~~additional periods, or the right to purchase the aircraft at the end of the lease term, usually at the then-fair-market value of the aircraft. We have four MD-80 aircraft, one owned and ~~frequent~~three ~~flyer~~under ~~marketing~~long-term lease arrangements. through 2012, currently in temporary storage.

We ~~are a party to marketing agreements with a number of domestic and international air carriers, or “partners,” including but not limited to American Airlines,~~ ~~Continental~~completed Airlines, Delta Air Lines and Northwest Airlines. These agreements provide that certain flight segments operated by us are held out as partner “codeshare” flights and that certain partner flights are held out for sale as Alaska codeshare flights. In addition, the agreements generally provide that members of our ~~Mileage~~transition ~~Plan~~to program can earn miles on or redeem miles for partner flights and vice versa. We receive a significant amount of revenue from flights sold under codeshare arrangements. In addition, we believe that the frequent flyer arrangements are an ~~important~~all-Boeing ~~part~~operating offleet ~~our Mileage Plan program. The loss of a significant partner or certain partner flights could have a negative effect on our revenues or the~~during ~~attractiveness of our Mileage Plan, which we believe is a source of competitive advantage~~2008.

~~We rely on third~~-~~party vendors for certain critical activities.~~ 9-

WeTable ~~have historically relied on outside vendors for a variety~~ of services and functions critical to our business, including airframe and engine maintenance, ground handling, fueling, computer reservation system hosting and software maintenance. As part of our cost-reduction efforts, our reliance on outside vendors has increased and may continue to do so in the future. In recent years, we have subcontracted its heavy aircraft maintenance, fleet service, facilities maintenance, and ground handling services at certain airports, including Seattle-Tacoma International Airport, to outside vendors. Contents

~~Our~~The following ~~use~~table ofdisplays ~~outside vendors increases our exposure to several risks. In~~ the ~~event~~currently ~~that~~anticipated ~~one~~fleet orcounts ~~more~~for ~~vendors~~Alaska ~~goes into bankruptcy, ceases operation or fails to perform~~ as ~~promised,~~ ~~replacement services may not be readily available at competitive rates, or at all. Although we believe that our vendor oversight and quality control is among the best in the industry, if one~~ of ~~our vendors fails to perform adequately we~~ ~~may~~the ~~experience~~end ~~increased costs, delays, maintenance issues, safety issues or negative public perception~~ of ~~our~~each ~~airline.~~quarter ~~Vendor bankruptcies, unionization, regulatory compliance issues or significant changes~~ in ~~the competitive marketplace among suppliers could adversely affect vendor services or force us to renegotiate existing agreements on less favorable terms~~2010. ~~These events could result in disruptions in our operations or increases in its cost structure.~~

		31-Mar-10		30-Jun-10		30-Sep-10		31-Dec-10
	737-400		24		24		24		23
	737-400C*		5		5		5		5
	737-400F*		1		1		1		1
	737-700		19		19		18		17
	737-800		51		55		55		55
	737-900		12		12		12		12
Totals			112		116		115		113

~~Table~~* ofC=Combination ~~Contents~~freighter/passenger; F=Freighter

WeGROUND ~~are~~FACILITIES ~~dependent~~AND ~~on a limited number of suppliers for aircraft and parts.~~ SERVICES

We ~~are~~lease ticket ~~dependent~~counters, ongates, ~~Boeing~~cargo ~~as our sole supplier for aircraft~~ and ~~many~~baggage ~~aircraft~~space, ~~parts.~~office ~~We are also dependent on a sole supplier for aircraft engines. As a result~~space, weand ~~are~~other support ~~more~~areas ~~vulnerable~~at ~~to any problems associated with~~ the ~~supply~~majority of ~~those aircraft and parts, including design defects, mechanical problems, contractual performance by~~ the ~~manufacturers,~~airports orthey ~~adverse~~serve. ~~perception~~We byalso ~~the~~own ~~public~~terminal ~~that would result~~ buildings in ~~customer avoidance~~various orcities in ~~actions by~~ the ~~FAA~~state ~~resulting~~of ~~in an inability to operate our aircraft~~Alaska.

~~Changes~~We have centralized operations in ~~government~~several ~~regulation~~buildings ~~imposing~~located ~~additional~~at or near Seattle-Tacoma ~~requirements~~International Airport (Sea-Tac) near Seattle, Wash. These include a five-bay hangar and ~~restrictions~~shops oncomplex ~~our~~(used primarily for line maintenance), a flight operations orand ontraining ~~the~~center, ~~airports~~an atair ~~which~~cargo wefacility, ~~operate~~an ~~could~~information ~~increase~~technology office ~~our~~and ~~operating~~datacenter, ~~costs~~an office building, and ~~result~~corporate inheadquarters complex. We also lease a stores warehouse, and office space for a customer service ~~delays~~and reservation facility in Kent, Wash. Our major facilities outside of Seattle include a regional headquarters building, an air cargo facility and ~~disruptions~~a hangar/office facility in Anchorage, as well as leased reservations facilities in Phoenix, Ariz. and Boise, Idaho. We use our own employees for ground handling services at most of our airports in the state of Alaska. At other airports throughout our system, those services are contracted to various third-party vendors.

~~Airlines~~ITEM ~~are subject to extensive regulatory and legal requirements, both domestically and internationally, that involve significant compliance costs~~3. InLEGAL the last several years, Congress has passed laws, and the U.S. Department of Transportation, the Transportation Security Administration and the Federal Aviation Administration (the “FAA”) have issued regulations that have required significant expenditures relating to the maintenance and operation of airlines. For example, the FAA has issued regulations covering, among other things, security measures, collision avoidance systems, noise abatement, environmental restrictions, safety procedures and maintenance regulations. Similarly, many aspects of an airline’s operations are subject to increasingly stringent federal, state and local laws protecting the environment. PROCEEDINGS

~~Because of significantly~~Grievance ~~higher~~with ~~security~~International ~~and~~Association other costs incurred by airports since September 11, 2001, many airports have increased their rates and charges to air carriers. Additional laws, regulations, taxes, and airport rates and charges have been proposed from time to time that could significantly increase the cost of airline operations or reduce the demand for air travel. Although lawmakers may impose these additional fees and view them as “pass-through” costs, we believe that a higher total ticket price will influence consumer purchase and travel decisions and may result in an overall decline in passenger traffic, which would harm our business. Machinists

~~ITEM~~In 1BJune 2005, the International Association of Machinists (IAM) filed a grievance under its Collective Bargaining Agreement (CBA) alleging that we violated the CBA by, among other things, subcontracting the ramp service operation in Seattle. ~~UNRESOLVED~~The dispute ~~STAFF~~was ~~COMMENTS~~referred to an arbitrator and hearings on the grievance commenced in January 2007, with a final hearing date in August 2007. In February 2010, the arbitrator issued a final decision. The decision does not require us to alter the existing subcontracting arrangements for ramp service in Seattle. The award sustains the right to subcontract other operations in the future so long as the requirements of the CBA are met. The award imposes monetary remedies which have not been fully calculated, but are not expected to be material.

~~None~~ Other items

~~ITEM~~We 2.are ~~PROPERTIES~~a party to routine litigation matters incidental to our business and with respect to which no material liability is expected.

~~AIRCRAFT~~Management believes the ultimate disposition of these matters is not likely to materially affect our financial position or results of operations. This forward-looking statement is based on management’s current understanding of the relevant law and facts, and it is subject to various contingencies, including the potential costs and risks associated with litigation and the actions of judges and juries.

~~The~~PART ~~following tables describe the aircraft we operate and their average age at December 31, 2008:~~ II

Aircraft Type	PassengerCapacity	Owned	Leased	Total	Average Agein Years
Boeing 737-400	144	3	28	31	13.3
Boeing 737-400C*	72	5	—	5	16.3
Boeing 737-400F*	—	1	—	1	9.8
Boeing 737-700	124	17	3	20	8.0
Boeing 737-800	157	37	4	41	1.7
Boeing 737-900	172	12	—	12	6.4
Total		75	35	110	7.3

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

*All ~~C=Combination~~of our ~~freighter/passenger;~~outstanding ~~F=Freighter~~shares are owned by Air Group. As of February 15, 2010, we had 500 shares of common stock, $1.00 par value per share, issued and outstanding. There is no established public trading market for our stock.

~~Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” discusses future orders and options for additional aircraft.~~ -10-

AsTable of December 31, 2008, 59 of our 75 owned aircraft were subject to liens securing long-term debt, and the majority of the other owned aircraft serve as collateral for our $185 million line-of-credit facility. Our leased 737-400, 737-700, and 737-800 aircraft have lease expiration dates between 2009 and 2016, between 2009 and 2010, and between 2015 and 2018, respectively. Additionally, we have four MD-80 aircraft under long-term lease arrangements through 2012 that are currently in temporary storage. We have the option to extend most of the leases for additional periods, or the right to purchase the aircraft at the end of the lease term, usually at the then-fair-market value of the aircraft. Contents

11ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

~~Table~~As permitted by General Instruction I(2)(a), the following section contains management’s narrative analysis of ~~Contents~~our results of operations as of and for the year ended December 31, 2009. See Air Group’s Annual Report on Form 10-K filed February 19, 2010 for further discussion and analysis.

We plan to sell up to four B737-700 aircraft in 2009 to help in our capacity reduction plans. Given this plan and our expected deliveries, the following table displays the currently anticipated fleet counts as of the end of each quarter in 2009. OVERVIEW

	31-Mar-09	30-Jun-09	30-Sep-09	31-Dec-09
737-400	28	28	28	28
737-400C*	5	5	5	5
737-400F*	1	1	1	1
737-700	18	15	15	15
737-800	47	51	51	51
737-900	12	12	12	12
Totals	111	112	112	112

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help the reader understand the Company, our operations and our present business environment. MD&A is provided as a supplement to – and should be read in conjunction with – our financial statements and the accompanying notes. All statements in the following discussion that are not statements of historical information or descriptions of current accounting policy are forward-looking statements. Please consider our forward-looking statements in light of the risks referred to in this report’s introductory cautionary note and the risks mentioned in Part I, “Item 1A. Risk Factors.” This overview summarizes the MD&A, which includes the following sections:

*• ~~C=Combination~~Year ~~freighter/passenger;~~in ~~F=Freighter~~Review—highlights from 2009 outlining some of the major events that happened during the year and how they affected our financial performance.

~~GROUND~~• ~~FACILITIES~~Results ~~AND~~of ~~SERVICES~~Operations—an in-depth analysis of the results of our operations for 2009 compared to 2008. We believe this analysis will help the reader better understand our statements of operations. Financial and statistical data are also included here. This section includes forward-looking statements regarding our view of 2010.

WeYEAR ~~lease~~IN ticket counters, gates, cargo and baggage space, office space, and other support areas at the majority of the airports they serve. We also own terminal buildings in various cities in the state of Alaska. REVIEW

WeIn ~~have centralized~~2009, ~~operations~~we inreported ~~several~~net ~~buildings~~income ~~located~~of at$109.7 ormillion ~~near~~compared ~~Seattle-Tacoma~~to ~~International~~a ~~Airport~~net ~~(Sea-Tac)~~loss ~~near~~of ~~Seattle, Washington~~$96.4 ~~These~~million in ~~include~~2008. aThe ~~five-bay~~$206.1 ~~hangar~~million ~~and~~improvement ~~shops~~was ~~complex (used~~ primarily ~~for~~due ~~line~~to ~~maintenance),~~the ~~a flight operations and training center, an air cargo facility, an information technology office and mainframe computer facility, an office building, and corporate headquarters complex~~$613.4 ~~We also lease a stores warehouse, and office spaces for a reservation facility and for various~~million ~~administrative~~decline ~~functions~~ in ~~Kent,~~aircraft ~~Washington.~~fuel ~~Our major facilities outside of Seattle include a regional headquarters building~~costs, anpartially ~~air~~offset ~~cargo~~by ~~facility and~~ a ~~hangar/office~~$215.3 ~~facility~~million indecline ~~Anchorage, as well as leased reservations facilities~~ in ~~Phoenix,~~ ~~Arizona~~operating ~~and Boise, Idaho~~revenues. The Wedecline ~~use~~in ~~our~~fuel ~~own~~cost ~~employees~~was ~~for~~substantially ~~ground~~driven by ~~handling~~the ~~services~~43% atreduction ~~most of our airports~~ in the ~~state~~raw cost of ~~Alaska.~~fuel Atper ~~other~~gallon. The ~~airports~~6.7% decline ~~throughout~~in ~~our~~operating ~~system,~~revenues ~~those~~can ~~services~~be ~~are~~attributed ~~contracted~~ to ~~various~~the ~~third-party vendors.~~ following:

~~ITEM~~• 3a 7.8% ~~LEGAL~~decline ~~PROCEEDINGS~~in mainline passenger revenue because of demand weakness stemming from the economic recession; and

~~Grievance~~• ~~with~~a ~~International~~one-time ~~Association~~ benefit of ~~Machinists~~$42.3 million recorded in 2008 associated with a change in our Mileage Plan terms.

~~In June 2005, the International Association of Machinists (IAM) filed a grievance under its Collective Bargaining Agreement (CBA)~~These ~~with~~declines ~~Alaska~~were ~~alleging~~offset ~~that we violated the CBA~~ by, among other things, subcontracting the ramp service operation in Seattle. The dispute was referred to an arbitrator and hearings on the grievance commenced in January 2007, with a final hearing date in August 2007. In August 2008, the arbitrator issued a ruling in the matter. In that ruling, the arbitrator found that we had violated the CBA and instructed us and the IAM to negotiate a remedy. The parties have met, but the matter has not yet been resolved. Another arbitration hearing has been tentatively set for June 2009. Management currently does not believe that any final remedy will materially impact our financial position or results of operations. :

~~Other~~• ~~items~~our new $15 first bag service charge, which went into effect on July 7, 2009. In 2009, the fee generated $39.7 million of incremental revenue.

~~The~~• ~~Company is~~ a ~~party~~$39.7 tomillion ~~routine~~improvement ~~litigation matters~~in ~~incidental~~Mileage toPlan ~~its~~commission ~~business~~revenues ~~and~~included ~~with~~in ~~respect to which no material liability is expected~~“Other-net. ”

~~Management believes the ultimate disposition of any of the~~See ~~matters~~“Results ~~discussed above is not likely to materially affect the Company’s financial position or results~~ of ~~operations.~~Operations” ~~This~~below ~~forward-looking~~for ~~statement~~further isdiscussion ~~based on management’s current understanding~~ of ~~the~~changes ~~relevant~~in ~~law~~revenues and ~~facts, and it is~~ ~~subject~~operating ~~to various contingencies, including the potential costs and risks associated with litigation and the actions of arbitrators, judges and juries~~expenses.

12Accomplishments and Highlights

~~Table~~Accomplishments and ofhighlights ~~Contents~~from 2009 include:

~~PART~~• IIWe improved our operational performance again in 2009 as measured by on-time arrivals and completion rate as reported to the Department of Transportation (DOT). We led the ten largest carriers in on-time performance for eight months of the year.

~~ITEM~~• 5.For ~~MARKET~~the ~~FOR~~second ~~THE~~year ~~REGISTRANT'S~~in ~~COMMON~~a ~~EQUITY~~row, ~~RELATED~~we ~~STOCKHOLDER~~ranked ~~MATTERS,~~“Highest ~~AND~~in ~~ISSUER~~Customer ~~PURCHASES~~Satisfaction OFamong ~~EQUITY~~Traditional ~~SECURITIES~~Network Carriers” in 2009 by J.D. Power and Associates.

~~All~~• We won the 2008 “Program of ~~our~~the ~~outstanding~~Year” ~~shares~~Freddie ~~are~~award ~~owned~~for byour ~~Air~~Mileage ~~Group~~Plan program in 2009. AsThis ofis ~~February 15,~~the ~~2009,~~fifth ~~Alaska~~time ~~had~~that ~~500~~we ~~shares~~have ofwon ~~common~~this ~~stock,~~highest ~~$1.00~~award ~~par~~and ~~value~~the ~~per~~second ~~share,~~year ~~issued~~in ~~and outstanding~~a row. ~~There~~We isalso nowon ~~established~~top ~~public~~honors ~~trading~~for ~~market~~“Best ~~for~~Web ~~our~~Site,” ~~common~~“Best ~~stock.~~Elite-Level Program,” and “Best Member Communications.”

~~ITEM~~• 7.During ~~MANAGEMENT'S~~the ~~DISCUSSION~~year, ~~AND~~we ~~ANALYSIS~~reached OFagreements ~~FINANCIAL~~with ~~CONDITION~~several ~~AND~~of ~~RESULTS~~our OFlabor ~~OPERATIONS~~groups that provide for improved productivity and a common gain-sharing formula. See “Update on Labor Negotiations” below for further discussion.

~~As permitted by General Instruction I(2)(a), the following section contains management’s narrative analysis of our results of operations as of and for the year ended December 31, 2008.~~ -11-

~~OVERVIEW~~Table of Contents

~~The~~• ~~following~~For ~~Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help~~ the ~~reader understand our company~~year, our ~~operations~~employees ~~and~~earned ~~our present business environment~~$61.6 ~~MD&A~~million isin ~~provided~~incentive aspay afor ~~supplement~~meeting tocertain –operational and ~~should be read in conjunction with – our~~ financial ~~statements and the accompanying notes~~goals. ~~All~~We ~~statements~~also incontributed ~~the~~nearly ~~following~~$150 ~~discussion~~million ~~that~~to ~~are not statements of historical information or descriptions of current accounting policy are forward-looking statements. Please consider~~ our ~~forward-looking~~defined ~~statements~~benefit inpension ~~light of the risks referred to in this report’s introductory cautionary note and the risks mentioned in Part I, “Item 1A~~plans. ~~Risk Factors.” This overview summarizes the MD&A, which includes the following sections:~~

•Update on ~~Year~~Labor ~~in Review – highlights from 2008 outlining some of the major events that happened during the year and how they affected our financial performance.~~Negotiations

•We ~~Results~~have had ofsuccess ~~Operations~~recently –with annew ~~in-depth~~bargaining ~~analysis~~agreements ofor ~~our~~contract ~~results~~extensions with a number of ~~operations~~represented ~~for~~employees. All ~~2008~~of ~~compared~~the tonew ~~2007.~~agreements Weor extensions ~~believe~~ratified ~~this~~in ~~analysis~~2009 ~~will~~include ~~help~~participation by the ~~reader~~represented ~~better~~employees in ~~understand~~Air ~~our~~Group’s ~~statements~~Performance-Based Pay (PBP) incentive plan as approved by the Compensation Committee of ~~operations~~the Board of Directors. PBP ~~Financial~~is ~~and~~described ~~statistical~~in Note ~~data~~8 ~~are~~to ~~also~~the ~~included~~financial ~~here~~statements. ~~This~~Our ~~section~~ultimate ~~includes~~goal ~~forward-looking~~is ~~statements~~to ~~regarding~~include ~~our~~all employees ~~view~~in ofPBP ~~2009~~in order to have common goals and targets that everyone is working together to achieve.

~~YEAR~~New ~~IN REVIEW~~ Pilot Contract

InOn ~~2008~~May 19, we2009, ~~reported~~our apilots, ~~net loss~~represented ofby ~~$96.4 million compared to net income of $134.8 million in 2007. The largest driver of~~ the ~~decline~~Air inLine ~~results~~Pilots ~~was fuel expense. Our fuel expense increased by $424.9 million over 2007~~Association, ~~primarily~~ratified ~~due to significantly higher average fuel prices~~a innew ~~2008~~four-year contract. This ~~Oil~~negotiated ~~prices~~agreement ~~reached~~replaces ~~record levels during~~ the contract ~~summer~~that ~~months,~~had ~~but~~been ~~declined sharply~~ in ~~the~~place ~~last~~since ~~few~~May ~~months~~1, ~~of 2008~~2005. The ~~Even~~terms ~~with~~of the 2005 ~~benefit~~contract ofwere ~~$101.8~~the ~~million~~result of ~~net~~an ~~cash~~arbitrator’s ~~settlements~~decision ~~from~~and ~~our~~included ~~fuel hedge program during the year, our~~immediate ~~“economic”~~wage ~~fuel~~reductions ~~cost~~that ~~(as~~averaged ~~defined~~approximately on26% ~~page~~across ~~21)~~the ~~increased~~pilot ~~$221.2 million~~group, orwork rule ~~28.3%~~changes, onand ahigher ~~5.8%~~employee ~~decline~~health incare ~~fuel gallons consumed~~contributions. ~~This increase in fuel expense far exceeded the $151.4 million increase in total operating revenues. We also had the following notable items during 2008:~~

•The significant ~~revenue~~terms of ~~$42.3 million associated with~~ the ~~change~~new incontract ~~Mileage~~are ~~Plan~~as ~~terms to delete accounts that have had no activity for two or more years. Previously, accounts could remain inactive for three years prior to deletion.~~follows:

• ~~fleet~~Average ~~transition~~pilot ~~costs~~wages increased approximately 14% effective April 1, 2009. The contract also provides for step increases of ~~$47~~1.5% ~~million~~on inthe ~~2008~~first two anniversary dates of the contract and 1.8% on the third anniversary.

• ~~restructuring~~Participation ~~charges of $12.9 million associated with reductions~~ in ~~work force~~PBP.

• The ~~revenue~~defined-benefit ~~environment~~pension inplan ~~2008~~for ~~was~~pilots ~~characterized~~is bynow ~~increased~~closed ~~competition~~to innew ~~our~~entrants. ~~West~~Newly ~~Coast~~hired ~~market~~pilots ~~and~~will ~~softer~~participate ~~demand~~ in ~~the~~a ~~last~~defined-contribution ~~half~~plan ofthat ~~the~~includes ~~year~~a ~~due~~company tocontribution ~~the~~equal ~~current~~to ~~economic recession~~13.5% ~~Yield~~of ~~improved~~eligible ~~over~~wages. ~~2007~~Incumbents ashad ~~we and~~the ~~other~~option ~~carriers~~of ~~added~~(1) orremaining ~~increased~~in ~~ancillary~~the ~~fees~~defined-benefit ~~and~~pension ~~raised~~plan, ~~fares~~(2) moving to ~~cover~~a ~~higher~~new ~~fuel~~blended ~~costs.~~option Wewith ~~posted~~lower ~~slightly~~service ~~higher~~credit ~~passenger~~under ~~traffic for~~ the ~~full~~defined ~~year.~~benefit ~~All~~plan ofand ~~these~~higher ~~factors,~~401(k) ~~along~~contribution ~~with~~or ~~a one-time $42.~~(3) ~~million~~voluntarily ~~benefit~~freezing ~~from~~service ~~changes~~credit in ~~our Mileage~~the ~~Plan~~existing ~~program,~~defined ~~resulted~~benefit inplan ~~an increase~~ in ~~total~~exchange ~~operating~~for ~~revenues~~a ofhigher ~~$151.4~~401(k) ~~million~~contribution.

13• Upon retirement, pilots are now allowed to receive a cash payment of an amount equivalent to 25% of their accrued sick leave balance multiplied by their hourly rate.

~~Table~~• ofThe ~~Contents~~new contract provides for better productivity and flexibility. We expect to realize savings from these productivity enhancements when we resume capacity growth.

~~Our~~Pilots received ~~total~~a ~~operating~~one-time ~~expenses~~bonus ~~increased~~of by $~~494~~20.13 million ~~during~~in ~~2008~~the ~~compared~~aggregate tofollowing ratification ~~2007,~~of ~~primarily~~the ascontract. The atransition ~~result~~expense ofassociated ~~the~~with ~~significant~~establishing ~~increase~~the insick-leave ~~fuel~~payout ~~costs~~program ~~along~~described ~~with~~above anwas ~~increase~~$15.5 million. These initems ~~fleet~~have ~~transition~~been ~~costs~~combined and ~~restructuring~~reported ~~charges.~~in ~~See~~2009 as “~~Results~~New pilot ofcontract ~~Operations~~transition costs” ~~below~~in ~~for~~the ~~further~~statements ~~discussion~~ of ~~changes in revenues and operating expenses~~operations.

~~Accomplishments and Highlights~~ Contract Extensions

~~Accomplishments~~In March 2009, our flight attendants, represented by the AFA, ratified a two-year contract extension. The contract will become amendable in April 2012. As part of the contract, flight attendants will receive a 1.5% pay increase on May 1, 2010 and ~~highlights~~May 1, 2011 and will participate in ~~from~~PBP. The ~~2008~~flight ~~include:~~attendants received a bonus upon ratification of the contract totaling $2.0 million in the aggregate.

•In WeAugust 2009, ~~improved~~we ~~our~~reached ~~operational~~an ~~performance~~agreement inon ~~2008~~a ~~as measured by on~~two-~~time~~year ~~arrivals~~contract ~~and~~extension ~~completion~~with ~~rate~~our aircraft technicians. The ~~For~~extended ~~the full year~~contract, wewhich ~~reported~~becomes anamendable on~~-time~~ October ~~performance~~17, ~~and~~2011, ~~completion~~provides ~~rate~~technicians ofwith 781.35% pay scale increases in October 2009 and 992010.~~2%,~~ ~~respectively,~~Technicians ~~compared~~now toalso 72participate in PBP.4% ~~and~~The 99technicians received a bonus upon ratification of the contract totaling $1.~~0%,~~3 ~~respectively,~~million ~~for~~in ~~2007~~the aggregate.

•In December We2009, ~~received~~our ramp service and stores agents, represented by the ~~J.D.~~IAM, ratified ~~Power~~a ~~and~~two-year ~~Associates~~extension ~~“Highest~~of ~~Customer~~their ~~Satisfaction”~~collective ~~award~~bargaining agreement, which will now become amendable on July 19, 2012. This agreement includes participation in ~~2008~~PBP, ~~among~~a ~~North~~1.5% ~~America~~pay ~~Airlines~~increase in June 2010 and 2011, and a ~~tie~~signing bonus ~~with~~of ~~Continental~~approximately ~~Airlines~~$0.5 million in the aggregate.

•Our clerical, Weoffice ~~won~~and passenger service employees (COPS), also represented by the IAM, ~~2007~~rejected ~~“Program~~a two-year extension proposal nearly identical to the terms of the proposal ~~Year”~~ratified ~~Freddie~~by ~~award~~the ~~for~~ramp ~~our~~service ~~Mileage~~employees ~~Plan~~and ~~program~~stores agents. As a result, COPS employees are the only remaining work group, besides station personnel in ~~2008~~Mexico, that participate in a profit-sharing plan other than PBP.

~~• We reached an enhanced long~~-term agreement with Delta that will benefit our customers as it makes us Delta’s preferred partner on the West Coast. Other benefits include enhanced frequent flyer and lounge reciprocity agreements.12-

•Table ~~We completed our “Airport~~ of ~~the Future” at Seattle-Tacoma International Airport, reducing customer wait times significantly.~~Contents

~~Fleet~~New Mileage ~~Transition~~Plan Affinity Card Agreement

WeIn June ~~completed~~2009, we revised our ~~transition~~Mileage toPlan anaffinity ~~all-B737~~credit ~~fleet~~card inagreement ~~2008~~with asBank of America. This revised agreement enhances the economics of our ~~final~~Mileage Plan ~~MD-80~~program ~~aircraft~~and ~~were~~provides ~~removed~~for, ~~from~~among ~~service~~other ~~during~~things, an increase in the ~~year.~~rate Weat which ~~now~~we ~~have~~sell ~~one~~miles ofto the ~~youngest~~bank. This revised agreement was effective January 1, ~~most~~2009 ~~fuel-efficient~~and ~~fleets~~expires inon ~~the~~December ~~industry.~~31, 2014.

~~We have four MD-80 aircraft under long-term lease arrangements that were retired prior to the end of their lease terms and placed in temporary storage at an aircraft~~First ~~storage~~Bag ~~facility.~~Service ~~As a result of their grounding, we recorded a $47.5 million charge during 2008 associated with these aircraft representing the remaining obligation under the existing lease contracts.~~ Charge

~~Fuel~~In ~~Hedging~~2009, we joined nearly all major domestic carriers in charging for a first checked bag. The $15 service charge began July 7, 2009. This fee does not apply to our MVP or MVP Gold Mileage Plan members, for those traveling solely with the state of Alaska, or for certain other passengers. This service charge generated $39.7 million of incremental revenue in the last six months of 2009.

~~We utilize primarily crude oil call options to~~New ~~decrease~~Baggage ~~our~~Service exposure to the volatility of jet fuel prices, although we do have some collar structures that are scheduled to settle in 2009. The total outstanding liability for the collar contracts at December 31, 2008 is approximately $20 million, and we currently do not have any collateral on deposit with counterparties to these agreements. With call option contracts, we benefit from the decline in crude oil prices, as there is no future cash exposure above the premiums that we pay to enter into the contracts. Guarantee

InConcurrent with the ~~fourth~~first ~~quarter~~bag ofservice ~~2008~~charge, we ~~restructured~~introduced ~~our~~a ~~hedge~~guarantee ~~portfolio~~ to ~~take~~compensate passengers ~~advantage~~if oftheir ~~lower~~bags ~~fuel~~are ~~prices.~~not Weat ~~were~~the ~~able~~baggage ~~to reduce~~claim ~~our~~within ~~2009~~25 ~~average~~minutes ~~strike~~after their ~~price~~flight ~~from~~parks ~~$103~~at ~~per~~the ~~barrel~~gate. Passengers athave the ~~end~~choice of ~~the~~2,500 Mileage ~~third~~Plan ~~quarter~~miles ofor ~~2008~~a to $7625 ~~per~~voucher ~~barrel~~that ~~for~~can ~~50%~~be ofused ~~the~~on ~~planned~~a ~~2009 consumption~~future flight. This Asguarantee ~~part~~is offor ~~this~~all ~~restructuring~~passengers ~~effort~~with luggage, weincluding those ~~terminated~~not ~~some~~subject ofto the ~~previously~~bag ~~held~~service ~~contracts~~charge. We ~~realized~~believe ~~losses~~that onwe are the ~~termination~~only ofairline ~~these~~that ~~contracts~~offers ofthis ~~$41.5~~guarantee ~~million representing the difference between the original premiums paid~~ to ~~purchase~~customers. ~~those~~To ~~contracts~~date, ~~and~~ the ~~cash~~cost ~~received from the counterparty upon termination. We believe that~~of ~~restructuring~~providing ~~the~~this ~~hedge~~guarantee ~~portfolio~~has ~~was~~been aminimal ~~wise~~as ~~use of~~ our ~~resources~~baggage ~~and~~performance ~~consistent~~has ~~with our stated objective of managing volatility~~been excellent.

~~Operational~~New ~~Performance~~ Markets

~~Our~~In ~~core promise to our customers is to get them and their bags to their destinations safely and on time. Operational performance was a~~2009, ~~top initiative in 2008 and~~ we ~~believe~~added weseveral ~~made~~new ~~significant~~cities ~~progress during the year. For 2008, we exceeded our prior-year performance in on-time arrivals~~ and ~~in schedule completion rates. As a result of the current~~non-~~year~~stop ~~performance,~~routes to our ~~employees~~overall ~~received~~network. Those ~~higher~~new ~~payouts~~routes ~~under our Operational Performance Rewards program.~~ are:

New Non-Stop Route	Frequency	Start Date
Between Bellingham, Wash. and Las Vegas	4 x weekly	6/25/2009
Between Portland, Ore. and Maui	Daily	7/3/2009
Between Seattle and Austin, Tex.	Daily	8/3/2009
Between San Jose and Austin	Daily	9/2/2009
Between Seattle and Houston	Daily	9/23/2009
Between Seattle and Atlanta	Daily	10/23/2009
Between Oakland, Calif. and Maui	4 x weekly	11/9/2009
Between Oakland and Kona	3 x weekly	11/10/2009
Service between Portland and Chicago	Daily	11/16/2009

~~Table of Contents~~Outlook

~~Fees~~Our primary focus every year is to run safe, compliant and ~~Mileage~~reliable operations. In ~~Plan~~addition ~~Changes~~to our primary objective, in 2010 our key initiative is to maintain our focus on optimizing revenue. Our specific focus will be on the way we merchandise fares and ancillary products and services, as well as broader employee involvement in our marketing efforts. In addition to the focus on revenue, both of our airlines have initiatives under way designed to reduce costs. We are focused on improving productivity and controlling overhead.

~~Like~~Our fourth ~~many~~quarter of2009 ~~our~~revenue ~~competitors,~~performance wemarked ~~have~~the ~~increased~~first ~~existing~~quarter-over-quarter improvement ~~fees~~in orthe ~~implemented~~top ~~new~~line ~~fees~~ in an2009, ~~effort~~providing toa ~~increase~~solid ~~our~~outlook ~~revenues.~~as ~~Examples~~we ~~include:~~move into 2010.

•For ~~increasing~~the first quarter, our advance booked load factors are up significantly, although we expect the ~~charge~~higher ~~for~~load ~~booking~~factors, ~~through~~which ~~reservations~~were ~~and~~driven ~~airport~~by ~~sales~~deep ~~agents~~price ~~from~~discounting, will ~~$10~~be tooffset ~~$15~~by a decline in yields, resulting in only modest unit revenue increases in the first quarter.

~~• raising the fee for overweight baggage from $25 to $50,~~-13-

•Table ~~increasing~~of ~~the charge for transporting pets in the cabin from $75 to $100 one-way, and~~Contents

•RESULTS ~~raising~~OF ~~the unaccompanied minor fee from $30 to $75 for one-way nonstop flights and from $60 to $75 for connecting flights.~~OPERATIONS

~~The~~2009 ~~increases~~COMPARED ~~above~~WITH ~~were effective May 21,~~ 2008. We also began charging $25 for a second checked bag effective July 1, 2008. First class and top-tier Mileage Plan members and customers on flights within the state of Alaska are exempt from the new fee.

OnOur pretax ~~July 24,~~income ~~2008 we announced a $25 fee~~ for ~~booking Mileage~~2009 ~~Plan~~was ~~award travel on partner airlines~~$183.8 Wemillion ~~also~~compared ~~announced that our domestic round-trip “Coach Saver” award will increase~~ to ~~25,000~~a ~~miles~~pretax ~~from~~loss ~~20,000~~of ~~miles, and we have expanded our 15,000-mile “Intra-Alaska” award levels~~$153.3 million in ~~coach to an “Intra-State” award~~2008. Items ~~This~~that ~~award~~impact ~~offers travel wholly within one state for 15,000 award miles. Other changes include an increase in~~ the ~~award~~comparability ~~miles~~between ~~needed for “Peak” awards and~~ the ~~introduction of a three-tier award~~ ~~level~~periods ~~structure. All of these changes~~ are ~~effective~~as ~~for awards redeemed on or after November 19, 2008.~~ follows:

~~Additionally,~~• ~~beginning~~Both inperiods ~~August~~include ~~2008,~~adjustments ~~we reduced from three years~~ to ~~two~~reflect ~~years~~timing ~~the length~~ of ~~time~~gain ~~that~~and aloss ~~Mileage~~recognition ~~Plan~~resulting ~~account~~from ~~could~~mark-to-market befuel ~~inactive~~hedge ~~before~~accounting. ~~the~~For ~~account~~2009, iswe ~~deleted.~~recognized Asnet amark-to-market ~~result~~gains of ~~this~~$73.7 ~~change in terms~~million, ~~our~~compared ~~Mileage~~to ~~Plan~~net ~~liability~~losses ~~was~~of ~~reduced by~~ $42118.39 million. ~~This benefit is recorded separately~~ in ~~operating revenues as “Change in Mileage Plan terms~~2008.”

~~Update~~• on2009 ~~Labor~~included ~~Negotiations~~the new pilot contract transition costs of $35.8 million.

We• ~~are~~2008 ~~currently~~included infleet ~~negotiations~~transition ~~with~~costs ~~its~~of ~~pilots and have been since early 2007~~$47.5 ~~The~~million ~~contract~~related ~~with our pilots became amendable on May 1, 2007. The Air Line Pilots Association (ALPA) has requested mediation from the National Mediation Board (NMB) in order~~ to ~~assist with contract negotiations. We have begun meeting with~~ the ~~NMB~~transition ~~and~~out ~~hope~~of ~~to reach a negotiated contract that recognizes~~ the ~~important contributions that our pilots make while not harming our competitive position. Factoring in pay rates, productivity measures, pension, and post~~MD-~~retirement~~80 ~~medical benefits, we believe our pilot unit costs are among the highest in the industry for the size of aircraft operated~~fleet.

We• ~~have~~2008 ~~reached~~included arealized ~~tentative~~losses ~~agreement~~on ~~with~~ the ~~Association~~early termination of ~~Flight~~fuel-hedge ~~Attendants~~contracts tooriginally ~~extend~~scheduled ~~the~~to ~~current~~settle ~~contract~~in ~~with~~2009 ~~our~~and ~~flight attendants~~2010 byof ~~two years~~$41.5 ~~The current agreement becomes amendable on May 1, 2010~~million.

We• do2008 ~~not~~included ~~know~~a ~~what the final outcome of these negotiations will be or when an agreement will be reached~~$42.3 ~~However,~~million ~~uncertainty~~benefit ~~around~~related ~~open~~to ~~contracts~~a ~~could~~change ~~distract some employees, reduce employee engagement~~ in ~~our business, and prevent us from achieving~~ the ~~operational~~terms ~~goals~~of ~~(such~~our asMileage ~~on-time~~Plan ~~and completion-rate targets) that we have set~~program.

~~Line~~• 2008 included restructuring charges of ~~Credit~~$12.9 ~~Modification~~million related to the reduction in work force.

We have a $185 million variable-rate credit facility that expires in March 2010. In the fourth quarter we borrowed $75 million from this facility and that amount was outstanding at December 31, 2008. On September 24, 2008, weADJUSTED ~~entered into the Fourth Amendment to our $185 million variable~~(NON-~~rate~~GAAP) ~~credit facility that eliminated all previous financial covenants and replaced them with a requirement to maintain a minimum unrestricted cash and marketable securities balance of $500 million.~~ RESULTS

~~Outlook~~We believe disclosure of earnings excluding the impact of these individual charges is useful information to readers of this report because:

As• weIt ~~look~~is ~~forward~~consistent ~~to 2009,~~with ~~the~~how ~~two~~we ~~primary~~present ~~uncertainties~~information ~~are the demand environment and fuel prices. Although fuel prices have declined significantly since their record high~~ in ~~July~~our ~~2008,~~quarterly ~~the~~earnings ~~global~~press ~~financial instability and economic recession have put downward pressure on demand for air travel.~~ releases;

15• We believe it is the basis by which we are evaluated by industry analysts;

~~Table~~• ofOur ~~Contents~~results excluding these items are most often used in internal management and board reporting and decision-making;

~~Traffic~~• ~~was~~Our ~~down~~results byexcluding ~~4.4%~~these inadjustments ~~the~~serve ~~fourth quarter~~ as the ~~economic~~basis ~~recession~~for ~~began to take its toll on travel behaviors of~~ our ~~customers.~~various Inemployee ~~anticipation~~incentive ~~of this decline in demand~~plans, wethus ~~reduced capacity by 7.1% in~~ the ~~fourth~~information ~~quarter.~~allows Weinvestors ~~currently anticipate further capacity reductions of 8% in 2009 compared with 2008. We believe the actions we are taking~~ to ~~reduce capacity~~better ~~are~~understand ~~necessary and appropriate given~~ the ~~uncertainty~~changes in ~~the~~variable ~~demand~~incentive ~~outlook,~~pay ~~although~~expense wein ~~do have the flexibility to adjust~~ our ~~capacity~~statements ~~throughout~~of ~~the~~operations; ~~year to stay aligned with demand.~~ and

~~Oil~~• ~~prices~~It ~~have~~is ~~declined~~useful ~~from a record $147 per barrel in July~~ to ~~approximately~~monitor ~~$40~~performance towithout ~~$45~~these ~~per~~items ~~barrel~~as ~~recently.~~it ~~That~~improves ~~translates to~~ a ~~significant~~reader’s ~~reduction~~ability in fuel cost for us, although prices are still above historical levels. In July 2008, our average raw, unhedged price of jet fuel per gallon was $4.19 and is currently around $1.60 per gallon. Oil prices continue to becompare ~~volatile, however, and prices could rise again. We continue to execute~~ our ~~hedging~~results ~~strategy~~ to ~~help~~those ~~remove some~~ of ~~the~~other ~~impact of that volatility on our financial results~~airlines.

~~RESULTS~~Although we OFare ~~OPERATIONS~~presenting these non-GAAP amounts for the reasons above, investors and other readers should not necessarily conclude that these amounts are non-recurring, infrequent, or unusual in nature.

~~2008~~Excluding the ~~COMPARED~~items ~~WITH~~noted ~~2007~~above, and as shown in the following table, our pretax income for 2009 was $145.9 million, compared to $25.2 million in 2008.

Our net loss for 2008 was $96.4 million compared to net income of $134.8 million in 2007. Both periods include gains and losses arising from fuel-hedging activities. In 2008, there were several other items, as noted below, that affect the comparability between the two years:

	Years Ended December 31
(in millions)	2009			2008
Income before income taxes, excluding items below	$	145.9		$	25.2
Change in Mileage Plan terms		--			42.3
New pilot contract transition costs		(35.8	)		--
Restructuring charges		--			(12.9	)
Fleet transition costs – MD-80		--			(47.5	)
Mark-to-market fuel hedge adjustments		73.7			(118.9	)
Realized losses on hedge portfolio restructuring		--			(41.5	)

Income (loss) before income taxes as reported	$	183.8		$	(153.3	)

~~• restructuring charges of $12.9 million ($8.1 million after tax) related to the reduction in work force;~~-14-

•Table ~~fleet transition charges~~ of ~~$47.5 million ($29.7 million after tax) related to the final transition out of the MD-80 fleet; and~~Contents

• a $42.3 million benefit ($26.5 million after tax) related to a change in the terms of our Mileage Plan program.

FINANCIAL AND STATISTICAL DATA

	Three Months Ended December 31									Year Ended December 31
Financial Data (in millions):	2009			2008			% Change			2009			2008			% Change			2007			% Change
Operating Revenues:
Passenger	$	594.5		$	602.5			(1.3	)	$	2,438.8		$	2,643.7			(7.8	)	$	2,547.2			3.8
Freight and mail		22.5			22.2			1.4			91.5			99.3			(7.9	)		94.2			5.4
Other - net		50.8			34.0			49.4			187.3			135.2			38.5			147.1			(8.1	)
Change in Mileage Plan terms		-			-		NM				-			42.3		NM				-		NM
Total mainline operating revenues		667.8			658.7			1.4			2,717.6			2,920.5			(6.9	)		2,788.5			4.7
Passenger - purchased capacity		77.0			66.9			15.1			288.4			300.8			(4.1	)		281.4			6.9
Total Operating Revenues		744.8			725.6			2.6			3,006.0			3,221.3			(6.7	)		3,069.9			4.9

Operating Expenses:
Wages and benefits		197.7			183.8			7.6			792.6			742.7			6.7			753.9			(1.5	)
Variable incentive pay		17.6			5.0			252.0			61.6			15.8			289.9			13.5			17.0
Aircraft fuel, including hedging gains and losses		143.1			298.4			(52.0	)		549.0			1,162.4			(52.8	)		737.5			57.6
Aircraft maintenance		40.5			38.5			5.2			169.9			150.6			12.8			149.8			0.5
Aircraft rent		27.2			23.8			14.3			109.0			106.2			2.6			112.8			(5.9	)
Landing fees and other rentals		42.4			40.8			3.9			166.8			167.7			(0.5	)		170.1			(1.4	)
Contracted services		30.3			29.7			2.0			118.9			130.2			(8.7	)		124.1			4.9
Selling expenses		27.9			20.4			36.8			104.7			116.0			(9.7	)		129.3			(10.3	)
Depreciation and amortization		45.9			42.7			7.5			178.5			165.9			7.6			142.3			16.6
Food and beverage service		12.8			11.2			14.3			47.7			48.3			(1.2	)		46.9			3.0
Other		41.9			40.1			4.5			161.2			170.3			(5.3	)		173.1			(1.6	)
New pilot contract transition costs		-			-		NM				35.8			-		NM				-		NM
Restructuring charges		-			9.2		NM				-			12.9		NM				-		NM
Fleet transition costs - MD-80		-			-		NM				-			47.5		NM				-		NM
Total mainline operating expenses		627.3			743.6			(15.6	)		2,495.7			3,036.5			(17.8	)		2,553.3			18.9
Purchased capacity costs		75.2			66.9			12.4			281.5			313.7			(10.3	)		302.8			3.6
Total Operating Expenses		702.5			810.5			(13.3	)		2,777.2			3,350.2			(17.1	)		2,856.1			17.3

Operating Income (Loss)		42.3			(84.9	)	NM				228.8			(128.9	)	NM				213.8		NM

Interest income		9.4			13.1						38.6			51.3						64.8
Interest expense		(20.6	)		(25.0	)					(88.1	)		(92.5	)					(86.2	)
Interest capitalized		1.6			4.1						7.3			20.2						25.7
Other - net		2.5			(0.7	)					(2.8	)		(3.4	)					(3.1	)
		(7.1	)		(8.5	)					(45.0	)		(24.4	)					1.2

Income (Loss) Before Income Tax	$	35.2		$	(93.4	)	NM			$	183.8		$	(153.3	)	NM			$	215.0		NM

Mainline Operating Statistics:
Revenue passengers (000)		3,765			3,772			(0.2	)		15,561			16,809			(7.4	)		17,558			(4.3	)
RPMs (000,000) "traffic"		4,550			4,302			5.8			18,362			18,712			(1.9	)		18,451			1.4
ASMs (000,000) "capacity"		5,675			5,590			1.5			23,144			24,218			(4.4	)		24,208			0.0
Passenger load factor		80.2	%		77.0	%	3.2		pts		79.3	%		77.3	%	2.0		pts		76.2	%	1.1		pts
Yield per passenger mile		13.07	¢		14.01	¢		(6.7	)		13.28	¢		14.13	¢		(6.0	)		13.81	¢		2.3
Operating revenues per ASM "RASM"		11.77	¢		11.78	¢		(0.1	)		11.74	¢		12.06	¢		(2.7	)		11.52	¢		4.7
Change in Mileage Plan terms per ASM		-			-		NM				-			0.17	¢	NM				-		NM
Passenger revenue per ASM “PRASM”		10.48	¢		10.78	¢		(2.8	)		10.54	¢		10.92	¢		(3.5	)		10.52	¢		3.7
Operating expenses per ASM		11.05	¢		13.30	¢		(16.9	)		10.78	¢		12.54	¢		(14.0	)		10.55	¢		18.9
Operating expenses per ASM, excluding fuel, new pilot contract transition costs, restructuring charges and fleet transition costs		8.53	¢		7.80	¢		9.4			8.26	¢		7.49	¢		10.2			7.50	¢		(0.1	)
Aircraft fuel cost per gallon	$	1.91		$	3.95			(51.6	)	$	1.81		$	3.48			(48.0	)	$	2.08			67.3
Economic fuel cost per gallon	$	2.26		$	2.52			(10.3	)	$	2.05		$	3.00			(31.7	)	$	2.20			36.4
Fuel gallons (000,000)		75.0			75.5			(0.7	)		304.9			333.8			(8.7	)		354.3			(5.8	)
Average number of full-time equivalent employees		8,701			9,156			(5.0	)		8,915			9,628			(7.4	)		9,679			(0.5	)
Aircraft utilization (blk hrs/day)		9.3			10.0			(7.0	)		9.8			10.6			(7.5	)		10.9			(2.8	)
Average aircraft stage length (miles)		1,058			995			6.3			1,034			979			5.6			926			5.7
Operating fleet at period-end		115			110			5 a/c			115			110			5 a/c			115			(5	) a/c
Purchased Capacity Operating Statistics:
RPMs (000,000)		276			227			21.6			1,053			1,100			(4.3	)		1,099			0.1
ASMs (000,000)		373			316			18.0			1,431			1,469			(2.6	)		1,453			1.1
Passenger load factor		74.0	%		71.8	%	2.2		pts		73.6	%		74.9	%	(1.3		)pts		75.6	%	(0.7		)pts
Yield per passenger mile		27.90	¢		29.47	¢		(5.3	)		27.39	¢		27.35	¢		0.1			25.61	¢		6.8
RASM		20.64	¢		21.17	¢		(2.5	)		20.15	¢		20.48	¢		(1.6	)		19.37	¢		5.7
Operating expenses per ASM		20.16	¢		21.17	¢		(4.8	)		19.67	¢		21.35	¢		(7.9	)		20.84	¢		2.4


NM = Not Meaningful

~~We believe disclosure of the impact of these individual charges is useful information to investors because:~~ -15-

•Table itof ~~is useful to monitor performance without these items as it improves a reader’s ability to compare our results to other airlines;~~Contents

• our results excluding these adjustments related to fuel hedge accounting and other items serve as the basis for our various employee incentive plans, thus the information allows investors to better understand the changes in variable incentive pay expense in our statements of operations;REVENUES

•Total operating ~~our~~revenues ~~results~~declined ~~excluding~~$215.3 ~~these~~million, ~~items~~or ~~are~~6.7%, ~~most~~during ~~often~~2009 ~~used~~compared into 2008. The ~~internal~~changes ~~management~~are ~~and~~summarized ~~board~~in ~~reporting~~the ~~and~~following ~~decision-making; and~~table:

• we believe it is the basis by which we are evaluated by industry analysts.

	Years Ended December 31
(in millions)	2009		2008		% Change
Passenger revenue—mainline	$	2,438.8	$	2,643.7		(7.8	)
Freight and mail		91.5		99.3		(7.9	)
Other—net		187.3		135.2		38.5
Change in Mileage Plan terms		----		42.3	NM

Total mainline operating revenues	$	2,717.6	$	2,920.5		(6.9	)

Passenger revenue—purchased capacity		288.4		300.8		(4.1	)

Total operating revenues	$	3,006.0	$	3,221.3		(6.7	)

~~Financial~~NM ~~and~~= ~~statistical data are shown on page 17. An in-depth discussion of our results begins on page 18.~~ Not Meaningful

16Operating Revenues – Mainline

~~Table~~Mainline passenger ofrevenue ~~Contents~~in 2009 fell by 7.8% on a 4.4% reduction in capacity. There was a 3.5% decline in PRASM, which was driven by a 6.0% drop in ticket yield compared to 2008, partially offset by a two-point increase in load factor.

~~FINANCIAL~~Passenger revenues ~~AND~~were ~~STATISTICAL~~also ~~DATA~~bolstered by the implementation of our first-checked-bag fee in the third quarter of 2009 ($34.5 million) and the full-year impact of our second-checked-bag fee implemented in the third quarter of 2008, partially offset by a decline in other fees that resulted from fewer passengers.

	Three Months Ended December 31								Year Ended December 31
Financial Data (in millions):	2008			2007			% Change		2008			2007			% Change		2006			% Change
Operating Revenues:
Passenger	$	602.5		$	612.8		(1.7	)	$	2,643.7		$	2,547.2		3.8		$	2,453.1		3.8
Freight and mail		22.2			21.3		4.2			99.3			94.2		5.4			93.4		0.9
Other - net		34.0			41.3		(17.7	)		135.2			147.1		(8.1	)		129.6		13.5
Change in Mileage Plan terms		—			—		NM			42.3			—		NM			—		NM
Total mainline operating revenues		658.7			675.4		(2.5	)		2,920.5			2,788.5		4.7			2,676.1		4.2
Passenger - purchased capacity		66.9			71.9		(7.0	)		300.8			281.4		6.9			16.4		NM
Total Operating Revenues		725.6			747.3		(2.9	)		3,221.3			3,069.9		4.9			2,692.5		14.0
Operating Expenses:
Wages and benefits		183.8			191.0		(3.8	)		742.7			753.9		(1.5	)		745.8		1.1
Variable incentive pay		5.0			2.3		117.4			15.8			13.5		17.0			27.7		(51.3	)
Aircraft fuel, including hedging gains and losses		298.4			182.2		63.8			1,162.4			737.5		57.6			757.0		(2.6	)
Aircraft maintenance		38.5			42.0		(8.3	)		150.6			149.8		0.5			156.8		(4.5	)
Aircraft rent		23.8			29.5		(19.3	)		106.2			112.8		(5.9	)		110.9		1.7
Landing fees and other rentals		40.8			42.8		(4.7	)		167.7			170.1		(1.4	)		158.2		7.5
Contracted services		29.7			32.9		(9.7	)		130.2			124.1		4.9			117.5		5.6
Selling expenses		20.4			30.0		(32.0	)		116.0			129.3		(10.3	)		141.5		(8.6	)
Depreciation and amortization		42.7			36.2		18.0			165.9			142.3		16.6			137.8		3.3
Food and beverage service		11.2			12.1		(7.4	)		48.3			46.9		3.0			48.3		(2.9	)
Other		40.1			48.1		(16.6	)		170.3			173.1		(1.6	)		161.1		7.4
Restructuring charges and adjustments		9.2			—		NM			12.9			—		NM			24.8		NM
Fleet transition costs - MD-80		—			—		NM			47.5			—		NM			189.5		NM
Total mainline operating expenses		743.6			649.1		14.6			3,036.5			2,553.3		18.9			2,776.9		(8.1	)
Purchased capacity costs		66.9			80.7		(17.1	)		313.7			302.8		3.6			14.3		NM
Total Operating Expenses		810.5			729.8		11.1			3,350.2			2,856.1		17.3			2,791.2		2.3
Operating Income (Loss)		(84.9	)		17.5		NM			(128.9	)		213.8		NM			(98.7	)	NM
Interest income		13.1			15.1					51.3			64.8					56.3
Interest expense		(25.0	)		(21.3	)				(92.5	)		(86.2	)				(73.3	)
Interest capitalized		4.1			6.6					20.2			25.7					21.5
Other - net		(0.7	)		(2.7	)				(3.4	)		(3.1	)				(0.5	)
		(8.5	)		(2.3	)				(24.4	)		1.2					4.0
Income (Loss) Before Income Tax	$	(93.4	)	$	15.2		NM		$	(153.3	)	$	215.0		NM		$	(94.7	)	NM
Mainline Operating Statistics:
Revenue passengers (000)		3,772			4,191		(10.0	)		16,809			17,558		(4.3	)		17,165		2.3
RPMs (000,000) “traffic”		4,302			4,498		(4.4	)		18,712			18,451		1.4			17,822		3.5
ASMs (000,000) “capacity”		5,590			6,020		(7.1	)		24,218			24,208		0.0			23,278		4.0
Passenger load factor		77.0	%		74.7	%	2.3pts			77.3	%		76.2	%	1.1pts			76.6	%	(0.4	)pts
Yield per passenger mile		14.01	¢		13.62	¢	2.8			14.13	¢		13.81	¢	2.3			13.76	¢	0.3
Operating revenues per ASM “RASM”		11.78	¢		11.22	¢	5.0			12.06	¢		11.52	¢	4.7			11.50	¢	0.2
Impact of change in Mileage Plan terms per ASM		—			—		NM			0.17	¢		—		NM			—		NM
Passenger revenue per ASM		10.78	¢		10.18	¢	5.9			10.92	¢		10.52	¢	3.7			10.54	¢	(0.2	)
Operating expenses per ASM		13.30	¢		10.78	¢	23.4			12.54	¢		10.55	¢	18.9			11.93	¢	(11.6	)
Aircraft fuel cost per ASM		5.34	¢		3.02	¢	76.4			4.80	¢		3.05	¢	57.4			3.25	¢	(6.2	)
Restructuring charges per ASM		0.16	¢		—		NM			0.05	¢		—		NM			0.11	¢	NM
Fleet transition costs per ASM		—			—		NM			0.20	¢		—		NM			0.81	¢	NM
Aircraft fuel cost per gallon	$	3.95		$	2.09		89.0		$	3.48		$	2.08		67.3		$	2.14		(2.8	)
Economic fuel cost per gallon	$	2.52		$	2.48		1.6		$	3.00		$	2.20		36.4		$	1.92		14.6
Fuel gallons (000,000)		75.5			87.2		(13.4	)		333.8			354.3		(5.8	)		354.3		0.0
Average number of full-time equivalent employees		9,156			9,672		(5.3	)		9,628			9,679		(0.5	)		9,322		3.8
Aircraft utilization (blk hrs/day)		10.0			10.7		(6.5	)		10.6			10.9		(2.8	)		11.0		(0.9	)
Average aircraft stage length (miles)		995			946		5.2			979			926		5.7			919		0.8
Operating fleet at period-end		110			115		(5	) a/c		110			115		(5	) a/c		114		1	a/c
Purchased Capacity Operating Statistics:
RPMs (000,000)		227			287		(20.9	)		1,100			1,099		0.1			41		NM
ASMs (000,000)		316			386		(18.1	)		1,469			1,453		1.1			67		NM
Passenger load factor		71.8	%		74.4	%	(2.6	)pts		74.9	%		75.6	%	(0.7	)pts		61.2	%	NM
Yield per passenger mile		29.47	¢		25.05	¢	17.6			27.35	¢		25.61	¢	6.8			40.00	¢	NM
Operating revenue per ASM		21.17	¢		18.63	¢	13.7			20.48	¢		19.37	¢	5.7			24.48	¢	NM
Operating expenses per ASM		21.17	¢		20.91	¢	1.3			21.35	¢		20.84	¢	2.5			21.34	¢	NM

Freight and mail revenue decreased $7.8 million, or 7.9%, primarily as a result of lower mail volumes and yield and lower freight fuel surcharges because of the decline in fuel prices in 2009, partially offset by higher freight volumes and better freight pricing.

NMOther--net revenue =increased ~~Not~~$52.1 ~~Meaningful~~million, or 38.5%, from 2008. Mileage Plan revenue increased by $50.0 million primarily because of an increase in the rate paid to us by our credit card partner under the affinity card agreement and an increase in the number of miles needed to redeem a travel award. This change reduces our estimate of the fair value of a mile and results in a lower amount deferred as a liability for future travel and increases the amount of commission revenue we record when miles are sold.

17Passenger Revenue– Purchased Capacity

~~Table~~Passenger revenue--purchased capacity flying fell by $12.4 million over the same period of last ~~Contents~~year because of a 2.6% decline in capacity combined with a 1.6% decrease in unit revenue compared to the prior year. Unit revenue dropped as a result of a 1.3-point decline in load factor on flat ticket yield.

~~REVENUES~~ EXPENSES

~~Total~~For 2009, total operating ~~revenues~~expenses ~~increased~~decreased $~~151~~573.40 million, or 417.91%, incompared to 2008 as ~~compared~~a result toof ~~2007.~~lower ~~The~~mainline ~~components~~operating ofcosts, ~~Alaska’s~~most ~~revenue~~notably ~~are~~aircraft ~~summarized~~fuel inand ~~the~~fleet transition ~~following~~charges, ~~table:~~partially offset by higher wages and benefits and new pilot contract transition costs.

	Years Ended December 31
(in millions)	2008		2007		% Change
Passenger revenue - mainline	$	2,643.7	$	2,547.2	3.8
Freight and mail		99.3		94.2	5.4
Other - net		135.2		147.1	(8.1	)
Change in Mileage Plan terms		42.3		—	NM
Total mainline operating revenues	$	2,920.5	$	2,788.5	4.7
Passenger revenue - purchased capacity		300.8		281.4	6.9
Total operating revenues	$	3,221.3	$	3,069.9	4.9

-16-

NMTable =of ~~Not Meaningful~~ Contents

~~Operating~~We believe ~~Revenue~~it -is ~~Mainline~~useful to summarize operating expenses as follows, which is consistent with the way expenses are reported internally and evaluated by management:

Mainline passenger revenue for the full year increased 3.8% on flat capacity and a 3.7% increase in passenger revenues per available seat mile (PRASM). The increase in mainline PRASM was the result of a 2.3% increase in yields and a 1.1-point increase in load factor compared to the prior-year period. An increase in Mileage Plan redemption revenue and higher ancillary fee revenue contributed significantly to the increase in yields compared to 2007. Although capacity and traffic were relatively flat, traffic declined in the third and fourth quarters as the economic recession deepened. In response, we reduced capacity, with the most significant reductions taking place in the fourth quarter.

	Years Ended December 31
(in millions)	2009		2008		% Change
Mainline fuel expense	$	549.0	$	1,162.4		(52.8	)
Mainline non-fuel expenses		1,946.7		1,874.1		3.9

Mainline operating expenses	$	2,495.7	$	3,036.5		(17.8	)
Purchased capacity costs		281.5		313.7		(10.3	)

Total Operating Expenses	$	2,777.2	$	3,350.2		(17.1	)

~~Our advance bookings currently suggest that load factors will be relatively flat in the first quarter of 2009 compared to the~~Mainline ~~same~~Operating ~~period in 2008, although that is with a 10% to 11% decline in capacity.~~ Expenses

18Total mainline operating expenses declined $540.8 million or 17.8% during 2009 compared to the prior year. Significant operating expense variances from 2008 are more fully described below.

~~Table~~Wages and ~~of Contents~~Benefits

~~Freight~~Wages and benefits ~~mail~~were ~~revenues~~up ~~increased~~ $549.19 million, or 56.47%, ~~over~~compared ~~2007.~~to 2008. The primary ~~increase~~components isof ~~due~~wages ~~to increased yields for freight~~ and ~~mail~~benefits ~~and~~are ~~freight~~shown ~~fuel surcharges, partially offset by a decline~~ in ~~freight volumes compared to~~ the ~~prior year. As fuel prices decline, fuel surcharge revenue is also expected to decline in 2009.~~ following table:

Other - net revenues declined $11.9 million, or 8.1%, primarily as a result of lower commission revenue on the sale of Mileage Plan miles to our non-airline partners. We anticipate lower sales of miles to our affinity card partner in 2009 as general consumer credit card spending declines due to the economic recession.

	Years Ended December 31
(in millions)	2009		2008		% Change
Wages	$	540.4	$	547.1		(1.2	)
Pension and defined-contribution retirement benefits		114.8		68.7		67.1
Medical benefits		83.3		72.3		15.2
Other benefits and payroll taxes		54.1		54.6		(0.9	)

Total wages and benefits	$	792.6	$	742.7		6.7

~~Change~~Wages declined 1.2% on a 7.4% reduction in ~~Mileage~~FTEs ~~Plan~~compared ~~Terms~~to 2008. Wages have not declined in step with the FTE reduction because of higher wage rates for the pilot group in connection with their new contract and increased average wages for certain other employees stemming from higher average seniority.

~~Beginning~~The 67.1% increase in ~~August~~pension ~~2008,~~and weother ~~reduced~~retirement-related ~~the~~benefits ~~length~~is ofprimarily ~~time~~due ~~that~~to a ~~Mileage Plan account could be inactive~~ ~~from three years to two years before the account is deleted~~$45.0 Asmillion aincrease ~~result of this change~~ in ~~terms,~~ our ~~Mileage~~defined-benefit ~~Plan~~pension ~~liability~~cost ~~was~~driven ~~reduced~~ by ~~$42.3~~the significant ~~million.~~decline ~~This~~in ~~benefit~~the ismarket ~~recorded~~value ~~separately~~of inpension ~~operating~~assets ~~revenues~~at asthe ~~“Change~~end ~~in Mileage Plan~~of ~~terms~~2008.”

~~Passenger~~Medical benefits ~~Revenue~~increased —15.2% ~~Purchased~~from ~~Capacity~~the prior year primarily as a result of an increase in the post-retirement medical expense for the pilot group in connection with their new contract and an increase in overall medical costs.

~~Passenger~~We ~~revenue~~expect wages —and ~~purchased~~benefits ~~capacity~~to ~~increased~~decline byin ~~$19.4~~2010 ~~million~~as ~~over~~compared ~~the~~to ~~same~~2009 ~~period~~because of a significant decline in ~~2007~~our ~~because~~defined-benefit ofpension acost, ~~5.7%~~and ~~increase~~productivity inand overhead ~~unit~~reduction ~~revenues~~initiatives onthat ~~relatively~~should ~~flat~~reduce ~~capacity~~the average number of full-time equivalent employees. These ~~Unit~~declines ~~revenues~~will ~~have~~likely be partially offset by increased ~~due~~pilot towage arates ~~6.8%~~stemming from the full year ~~increase~~impact inof ~~yields~~the 2009 contract, ~~offset~~normal bystep aand ~~0.7-point~~scale ~~decline~~wage increases in ~~load~~other represented ~~factors~~employee ~~compared~~groups, toand ~~2007.~~higher employee and retiree medical costs.

~~EXPENSES~~Variable Incentive Pay

~~For~~Variable incentive ~~the~~pay ~~year,~~expense ~~total operating expenses~~ increased from $~~494~~15.18 million, orin ~~17.3%,~~2008 ~~compared~~ to ~~2007~~$61.6 asmillion ain 2009. ~~result~~The ofincrease ~~higher~~is ~~mainline~~partially ~~operating~~due ~~costs,~~to ~~most~~the ~~notably~~fact ~~aircraft~~that ~~fuel expense~~in ~~(including~~2009, ~~hedging~~our ~~gains~~financial and operational ~~losses),~~results ~~fleet~~exceeded ~~transition~~targets ~~charges~~established ~~and~~by ~~restructuring~~our ~~charges~~Board. WeIn ~~believe~~2008, itour performance isfell ~~useful~~short toof ~~summarize~~targets. The ~~operating~~increase ~~expenses~~can asalso ~~follows,~~be attributed ~~which~~to ~~is consistent with~~ the ~~way~~addition ~~expenses~~of ~~are~~pilots, ~~reported~~flight ~~internally~~attendants and ~~evaluated~~mechanics byto the PBP ~~management.~~incentive plan.

	Years Ended December 31
Operating Expenses (in millions)	2008		2007		% Change
Mainline operating expenses	$	3,036.5	$	2,553.3	18.9
Purchased capacity costs		313.7		302.8	3.6
Total Operating Expenses	$	3,350.2	$	2,856.1	17.3

-17-

19Table of Contents

~~Table~~Over ofthe long ~~Contents~~term, our plan is designed to pay at target, although we may or may not meet those targets in any single year. At target, we estimate the PBP expense would be $30 million and aggregate incentive pay for all plans would be approximately $40 million to $45 million for 2010, which would be lower than in 2009.

~~Mainline Operating Expenses~~ Aircraft Fuel

~~Significant~~Aircraft fuel ~~mainline~~expense ~~operating~~includes both raw fuel expense ~~variances~~(as defined below) plus the effect of mark-to-market adjustments to our fuel hedge portfolio included in our statement of operations as the value of that portfolio increases and decreases. Our aircraft fuel expense is very volatile, even between quarters, because it includes these gains or losses in the value of the underlying instrument as crude oil prices and refining margins increase or decrease. Raw fuel expense is defined as the price that we generally pay at the airport, or the “into-plane” price, including taxes and fees. Raw fuel prices are ~~described~~impacted ~~below~~by world oil prices and refining costs, which can vary by region in the U.S. Raw fuel expense approximates cash paid to suppliers and does not reflect the effect of our fuel hedges.

~~Along~~Aircraft fuel ~~with~~expense ~~our~~declined ~~financial~~$613.4 ~~and~~million, ~~statistical~~or ~~data on page 17~~52.8%, wecompared ~~are~~to ~~presenting here our line-item expenses on a per-ASM basis (in cents)~~2008. WeThe ~~believe~~elements of ~~this~~the ~~information~~change isare ~~useful~~illustrated ~~because it highlights areas~~ in ~~which~~the ~~costs~~following ~~have increased or decreased either more or less than capacity~~table:

	Years Ended December 31,					CASM Change
	Years Ended December 31
	2008		2007	2006		2008 vs.2007			2007 vs.2006
(in millions, except per-gallon amounts)	2009			2008				% Change
Wages and benefits	3.06		3.11	3.20		(0.05	)		(0.09	)
Fuel gallons consumed		304.9			333.8				(8.7	)
Variable incentive pay	0.07		0.06	0.12		0.01			(0.06	)
Raw price per gallon	$	1.88		$	3.31				(43.2	)
Aircraft fuel, including hedging gains and losses	4.80		3.05	3.25		1.75			(0.20	)
Total raw fuel expense	$	572.3		$	1,103.8				(48.2	)
Aircraft maintenance	0.62		0.62	0.67		—			(0.05	)
Net impact on fuel expense from (gains) and losses arising from fuel-hedging activities		(23.3	)		58.6			NM
Aircraft rent	0.44		0.47	0.48		(0.03	)		(0.01	)
Aircraft fuel expense	$	549.0		$	1,162.4				(52.8	)
Landing fees and other rentals	0.69		0.70	0.68		(0.01	)		0.02
Contracted services	0.54		0.51	0.50		0.03			0.01
Selling expenses	0.48		0.53	0.61		(0.05	)		(0.08	)
Depreciation and amortization	0.69		0.59	0.59		0.10			—
Food and beverage service	0.20		0.19	0.21		0.01			(0.02	)
Other	0.70		0.72	0.70		(0.02	)		0.02
Restructuring charges and adjustments	0.05		—	0.11		0.05			(0.11	)
Fleet transition charges	0.20		—	0.81		0.20			(0.81	)
Total Mainline Operating Expenses per ASM	12.54		10.55	11.93		1.99			(1.38	)

~~Additional~~NM ~~line~~= ~~item~~Not ~~information is provided below.~~ meaningful

~~Wages~~Fuel gallons consumed declined 8.7%, primarily as a result of a 6.6% reduction in aircraft flight hours and ~~Benefits~~the improved fuel efficiency of our fleet as we completed the transition to newer, more fuel-efficient B737-800 aircraft in the second half of 2008.

~~Wages~~The ~~and~~raw fuel ~~benefits~~price ~~decreased~~per ~~during~~gallon ~~the~~declined ~~full year of 2008 by $11~~43.2 ~~million, or 1.5~~%~~, primarily~~ as a result of lower ~~defined-benefit~~West ~~pension~~Coast ~~costs,~~jet ~~overtime,~~fuel prices ~~and~~driven aby ~~0.5%~~lower ~~decrease~~crude inoil ~~full-time~~costs ~~equivalent~~and ~~employees~~refining ~~compared to 2007~~margins.

We also ~~currently~~evaluate ~~expect~~economic ~~wages~~fuel ~~and~~expense, ~~benefits~~which towe bedefine ~~flat~~as inraw ~~2009~~fuel ~~but~~expense toless ~~increase~~the cash onwe areceive ~~per-ASM~~from ~~basis.~~hedge ~~Although~~counterparties for hedges that settle during the period, offset by the premium expense that we ~~expect~~paid afor ~~significant~~those ~~decline~~contracts. inA ~~full-time~~key difference ~~equivalent~~between ~~employees~~aircraft ~~resulting~~fuel ~~from~~expense and economic fuel expense is the ~~recent~~timing of ~~reduction~~gain inor ~~work~~loss ~~force,~~recognition on our ~~defined-benefit~~hedge ~~pension~~portfolio. When we refer to economic ~~costs~~fuel ~~are~~expense, ~~increasing~~we ~~substantially~~include ~~from~~gains ~~$48~~and ~~million~~losses inonly ~~2008~~when tothey anare ~~estimated~~realized ~~$93~~for ~~million~~those contracts ~~next~~that ~~year~~were ~~because~~settled ofduring ~~poor~~the ~~market~~period ~~returns~~based inon ~~2008~~their original contract terms. We ~~This~~believe ~~expectation~~this is ~~exclusive~~the ofbest ~~any~~measure ~~potential~~of ~~change~~the ineffect ~~pilot~~that ~~wages~~fuel prices ~~that~~are ~~may~~currently ~~result~~having ~~from~~on our ~~current~~business ~~contract~~because it most closely approximates ~~negotiations~~the net cash outflow associated with purchasing fuel for our operations. Accordingly, many industry analysts evaluate our results using this measure, and it is the basis for most internal management reporting and incentive pay plans.

~~Variable Incentive Pay~~ -18-

~~Variable incentive~~Table pay for 2008 increased $2.3 million or 17.0%, compared to 2007. The increase is primarily due to higher payouts under our Operational Performance Reward program, offset by lower overall payouts in our profit-sharing plans due to the decline in profitability from 2007. For our incentive pay plans, profit is generally defined as results excluding fleet transition costs, restructuring charges, and other amounts specified in the various incentive plan documents and with fuel stated on an economic basis. Air Group maintains several incentive plans that collectively cover all of our employees and create alignment for employees, customers and shareholders. These plans include both operational and financial performance metrics that, to a large extent, are based on certain annual financial targets. Contents

~~Aircraft~~Our ~~Fuel~~economic fuel expense is calculated as follows:

Aircraft fuel expense includes both raw fuel expense (as defined below) plus the effect of mark-to-market adjustments to our portfolio of hedges included in our income statement as the value of that portfolio increases and decreases. Our aircraft fuel expense is very volatile, even between quarters, because it includes these gains or losses in the value of the underlying instruments as crude oil prices increase or decrease. Raw fuel expense is defined as the price that we generally pay at the airport, or the “into-plane” price, including taxes and fees. Raw fuel prices are impacted by world oil prices and refining costs, which can vary by region in the U.S. Raw fuel expense approximates cash paid to suppliers and does not reflect the effect of our fuel hedges.

	Years Ended December 31
(in millions, except per-gallon amounts)	2009		2008			% Change
Raw fuel expense	$	572.3	$	1,103.8			(48.2	)
Plus or minus: net of cash received from settled hedges and premium expense recognized		50.4		(101.8	)	NM

Economic fuel expense	$	622.7	$	1,002.0			(37.9	)

Fuel gallons consumed		304.9		333.8			(8.7	)

Economic fuel cost per gallon	$	2.05	$	3.00			(31.7	)

20NM = Not meaningful

~~Table~~As noted above, the total net expense recognized for hedges that settled during the period was $50.4 million in 2009, compared to a net cash benefit of ~~Contents~~$101.8 million in 2008. These amounts represent the net of the premium expense recognized for those hedges and any cash received or paid upon settlement. The decrease is primarily due to the significant drop in crude oil prices over the past year.

~~Aircraft~~We currently ~~fuel~~expect ~~expense~~our ~~increased~~raw ~~$424.9~~and ~~million,~~economic orfuel ~~57.6%,~~price ~~compared~~per gallon to ~~2007~~be approximately $2.24 ~~The~~in ~~elements~~the first quarter of ~~the~~2010. As ~~change~~oil prices are ~~illustrated~~volatile, inwe are unable to forecast the ~~following~~full ~~table:~~year cost with any certainty.

	Years Ended December 31
(in millions, except per-gallon amounts)	2008		2007			% Change
Fuel gallons consumed		333.8		354.3		(5.8	)
Raw price per gallon	$	3.31	$	2.33		42.1
Total raw fuel expense	$	1,103.8	$	825.7		33.7
Net impact on fuel expense from (gains) and losses arising from fuel-hedging activities		58.6		(88.2	)	NM
Aircraft fuel expense	$	1,162.4	$	737.5		57.6

Aircraft Maintenance

NMAircraft maintenance =increased ~~Not~~by ~~meaningful~~$19.3 million, or 12.8%, compared to the prior year primarily because of a higher average cost of airframe maintenance events and a new power-by-the-hour (PBH) maintenance agreement on our B737-700 and B737-900 aircraft engines, partially offset by the benefits of our fleet transition, as we have replaced all of our aging MD-80s with newer B737-800s, and lower PBH costs associated with our 747-400 aircraft engines that resulted from a decline in flight hours.

~~Fuel~~We ~~gallons~~expect aircraft ~~consumed~~maintenance ~~decreased 5.8% due~~ to ~~the~~be ~~decrease in capacity and the improved fuel efficiency of our fleet as we completed the fleet transition out of the less-efficient MD-80 aircraft to newer, more-efficient B737-800 aircraft on~~ relatively flat ~~capacity for the year. Because the B737-800 aircraft are larger than the MD-80s, the flat capacity came on a 2.6% decline~~ in ~~revenue block hours~~2010.

The raw fuel price per gallon increased by 42.1% as a result of higher West Coast jet fuel prices driven by higher crude oil costs for much of the year. Crude oil prices have declined dramatically since the record high set in July 2008.Contracted ~~Based on the current price of jet fuel, we expect that the raw fuel price per gallon in the first quarter of 2009 will be significantly lower than in the same period of 2008.~~ Services

~~During~~Contracted services ~~2008~~declined by $11.3 million, weor ~~recorded~~8.7%, ~~significant~~compared ~~mark-~~to~~-market~~ ~~losses~~2008 ~~reflecting~~as a ~~steep~~result ~~decline in the value~~ of ~~our fuel hedge portfolio as fuel prices declined sharply late in~~ the ~~year. During 2007, we recorded mark-to-market~~ ~~gains~~reduction ~~reflecting an increase~~ in the ~~value~~number of ~~our~~flights ~~fuel~~operated ~~hedge~~throughout ~~portfolio~~our ~~between~~system ~~December 31,~~to ~~2006~~ports ~~and~~where vendors ~~December 31, 2007. Our hedge portfolio consists primarily of call options that~~ are ~~based~~used onand ~~the~~a ~~price~~reduction ofin ~~crude~~project ~~oil.~~contract labor.

We ~~also~~expect contracted ~~evaluate~~services ~~economic~~to ~~fuel~~increase ~~expense,~~in ~~which~~2010 ~~we define~~ as ~~raw fuel expense less the cash~~ we ~~receive~~provide ~~from~~a ~~hedge~~full ~~counterparties~~year for hedges that settle during the period under their original contract expiration terms, offset by the premium expense that we paid for those contracts. A key difference between aircraft fuel expense and economic fuel expense is the timing of ~~gain~~service ~~or loss recognition on our hedge portfolio. When we refer~~ to ~~economic fuel expense, we include gains only when they are realized through a cash receipt from our hedge contract counterparties for those contracts that were settled during the period~~ ~~based~~some ~~on their original contract settlement terms. We believe this is the best measure~~ of ~~the effect that fuel prices are currently having on~~ our ~~business~~new ~~because~~destinations itrequiring ~~most~~vendor ~~closely approximates the net cash outflow associated with purchasing fuel for our operations~~support. ~~Accordingly, many industry analysts evaluate our results using this measure, and it is the basis for most internal management reporting and incentive pay plans.~~

~~Our economic fuel expense is calculated as follows:~~ Selling Expenses

	Years Ended December 31
(in millions, except per-gallon amounts)	2008			2007			% Change
Raw fuel expense	$	1,103.8		$	825.7		33.7
Less: cash received from settled hedges, net of premium expense recognized		(101.8	)		(44.9	)	NM
Economic fuel expense	$	1,002.0		$	780.8		28.3
Fuel gallons consumed		333.8			354.3		(5.8	)
Economic fuel cost per gallon	$	3.00		$	2.20		36.4

Selling expenses declined by $11.3 million, or 9.7%, compared to 2008 as a result of lower revenue-related expenses such as credit card costs, travel agency commissions and ticket distribution costs that resulted from the decline in passenger traffic. Mileage Plan expenses were also lower because the estimated incremental cost of providing free travel was lower because of the decline in fuel costs. These declines were partially offset by higher advertising costs.

NMWe =expect selling ~~Not~~expenses ~~meaningful~~will be slightly higher in 2010 as compared to 2009, primarily due to higher revenue-related expenses.

21Depreciation and Amortization

~~Table~~Depreciation and amortization increased $12.6 million, or 7.6%, compared to 2008. This is primarily due to the ten B737-800 aircraft delivered in 2009, partially offset by the sale-leaseback of ~~Contents~~six B737-800 aircraft in the first quarter of 2009.

~~The~~We ~~total~~expect depreciation ~~net~~and ~~cash~~amortization ~~benefit~~to ~~from~~be ~~hedges~~higher ~~that~~in ~~settled~~2010 ~~during~~due ~~2008,~~to ~~excluding~~the ~~hedges~~full-year ~~that were terminated early, increased~~impact byof ~~$56.9~~aircraft ~~million~~that towere ~~$101.8~~delivered ~~million~~in ~~compared~~2009 toand ~~2007.~~are ~~This~~expected ~~increase was primarily due~~ to ~~the~~be ~~record~~delivered ~~high crude oil prices during the year~~in 2010.

~~As part of our effort to restructure our fuel~~-hedge portfolio as noted earlier, we terminated a number of contracts originally scheduled to settle in 2009 and 2010 and replaced them with new positions having lower average strike prices. As a result, we realized losses of approximately $41.5 million, representing the difference between the original premiums paid for those contracts when purchased and the amount of cash received from the counterparty on termination of the contracts. We do not anticipate further restructuring of the portfolio at this time. Based on current jet fuel prices, we expect our economic fuel expense to be lower in 2009 than in 2008 because of lower crude oil prices. 19-

~~Aircraft~~Table ~~Rent~~of Contents

~~Aircraft rent declined by $6.6 million, or 5.9%~~Other ~~during~~Operating 2008, because of the retirement of all remaining leased MD-80 aircraft, offset by one additional leased B737-800 aircraft since 2007. We expect aircraft rent will be flat to slightly higher in 2009 as the elimination of the MD-80 rent is offset by lease expense on B737-800 aircraft as we have agreements to finance six aircraft with sale-leaseback transactions. Expenses

~~Landing~~Other operating ~~Fees~~expenses ~~and~~declined ~~Other~~$9.1 million, or 5.3%, compared to the prior ~~Rents~~year. The decline is primarily driven by a reduction in outside professional services costs and flight crew-related costs such as hotels and per-diems.

~~Landing fees and other rents declined by $2.4 million, or 1.4%, compared to 2007. The decline is primarily attributable to the decline in~~New ~~departures~~Pilot ~~resulting~~Contract inTransition lower landing fees across the system. However, looking forward into 2009, even though we are expecting capacity and departure declines, airport costs may not decline ratably. Airport costs are generally spread across the airlines based on passenger counts and departures. As the industry cuts capacity, airport costs on a per-passenger or per-departure basis will likely increase. Costs

~~Contracted~~As mentioned ~~Services~~previously, we recorded $35.8 million in connection with the new four-year contract ratified by Alaska’s pilots in the second quarter.

~~During 2008, contracted services increased by $6.1 million, or 4.9%, compared to 2007. This is primarily due to~~Restructuring ~~efforts~~Charges ~~to improve our operational performance~~ and ~~the~~Fleet ~~introduction~~Transition of new stations in our route system where we contract airport services. We expect contracted services to decline approximately 5% in 2009 as we decrease our departures across the system and require less handling at airports. Costs

~~Selling~~In ~~Expenses~~the third quarter of 2008, we announced work force reductions among union and non-union employees. The affected non-union employees were terminated in the third quarter, resulting in a $1.6 million severance charge. For union personnel, we recorded an $11.3 million charge in 2008.

~~Selling~~During 2008, ~~expenses~~we ~~declined~~retired ~~$13.3~~four ~~million,~~MD-80 oraircraft ~~10.3%,~~that ~~compared~~were tounder ~~2007.~~long-term ~~The~~lease arrangements ~~decline~~and isplaced ~~driven~~them byin ~~lower~~temporary ~~ticket~~storage ~~distribution~~at ~~fees~~an ~~and~~aircraft ~~lower~~storage facility. ~~expenses~~The ~~associated~~$47.5 ~~with~~million ~~our~~charge ~~Mileage~~in ~~Plan~~2008 ~~program.~~represented Wethe ~~expect~~remaining ~~selling~~discounted lease ~~expenses~~payments ~~to increase~~under ~~slightly~~the inlease ~~2009~~contracts ~~primarily~~and ~~driven~~our byestimate ~~increases~~of inmaintenance ~~our~~costs that ~~advertising~~will ~~and~~be ~~marketing~~incurred ~~efforts~~in ~~tied~~the future to ~~our~~meet ~~initiative~~the tominimum ~~increase~~return ~~unit~~conditions ~~revenues.~~under the lease requirements.

~~Depreciation~~Mainline Operating ~~and~~Costs ~~Amortization~~per Available Seat Mile (CASM)

~~Depreciation~~Our ~~and~~mainline ~~amortization~~operating ~~increased~~costs ~~$23.6 million, or 16.6%, compared to 2007 as a result of the~~per ~~delivery~~mainline ofASM 11are ~~B737-800~~summarized ~~aircraft~~below: delivered in 2008. We expect depreciation and amortization to be about flat in 2009. Although we took delivery of 11 new aircraft in 2008 and expect ten more in 2009, we expect to sell up to four B737-700 aircraft and complete sale-leaseback transactions for six B737-800s.

Other Operating Expenses

	Years Ended December 31
	2009			2008			% Change
Total mainline operating expenses per ASM (CASM)		10.78	¢		12.54	¢		(14.0	)
Less the following components:
Aircraft fuel costs per ASM		2.37	¢		4.80	¢		(50.6	)
New pilot contract transition costs per ASM		0.15	¢		---		NM
Restructuring costs per ASM		---			0.05	¢	NM
Fleet transition charges per ASM		---			0.20	¢	NM
CASM, excluding fuel and noted items		8.26	¢		7.49	¢		10.2

~~Other~~NM ~~operating~~= ~~expenses~~Not increased primarily because of higher personnel and crew costs, property taxes, and legal fees, partially offset by a decline in passenger remuneration costs stemming from our improved operational performance. meaningful

~~Restructuring~~CASM, excluding ~~Charges~~fuel and ~~Fleet~~noted ~~Transition~~items ~~Costs~~increased from the prior-year period because of the increase in wages and benefits and other expenses as discussed above, partially offset by a 4.4% reduction in capacity.

InWe ~~the~~have listed ~~third~~separately ~~quarter of 2008, we announced reductions~~ in ~~work force among union and non-union employees. The non-union employees that were affected by~~ the ~~reduction~~above ~~were terminated~~table inour ~~the~~fuel ~~third quarter~~costs, ~~resulting~~new inpilot acontract transition ~~$1.6 million severance charge. For union personnel~~costs, wefleet ~~offered~~transition ~~extended~~charges ~~leaves,~~and arestructuring ~~voluntary~~charges ~~furlough~~per ~~program,~~ASM and our anunit ~~early-out~~cost ~~package~~excluding ~~with~~these aitems. ~~lump-sum~~These ~~payment~~amounts ~~based~~are ~~on years of service that~~ included ~~continuation~~ ofin ~~medical~~CASM, ~~coverage~~but ~~and travel privileges~~ for internal apurposes ~~specified~~we ~~period.~~consistently Inuse ~~addition~~unit tocost ~~the~~metrics ~~voluntary~~that ~~offers,~~exclude ~~there~~fuel ~~have~~and certain ~~been~~special ~~involuntary~~items ~~furloughs~~ to ~~achieve~~measure ~~the~~our ~~target~~ cost-reduction ~~in work force~~progress. We ~~recorded~~believe anthat such ~~$11.3~~analysis ~~million~~may ~~charge~~be inimportant ~~2008 representing~~to ~~the~~investors ~~severance payments~~ and ~~estimated~~other ~~medical~~readers ~~coverage~~of ~~obligation~~these financial statements for the ~~affected~~following ~~union employees.~~ reasons:

22• By eliminating fuel expense and certain special items from our unit cost metrics, we believe that we have better visibility into the results of our non-fuel cost-reduction initiatives. Our industry is highly competitive and is characterized by high fixed costs, so even a small reduction in non-fuel operating costs can result in a significant improvement in operating results. In addition, we believe that all domestic carriers are similarly impacted by changes in jet fuel costs over the long run, so it is important for management (and thus investors) to understand the impact of (and trends in) company-specific cost drivers such as labor rates and productivity, airport costs, maintenance costs, etc., which are more controllable by management.

~~Table~~• Cost per ASM excluding fuel and certain special items is one of ~~Contents~~the most important measures used by managements of both Alaska and Horizon and by our Board of Directors in assessing quarterly and annual cost performance. For Alaska Airlines, these decision-makers evaluate operating results of the “mainline” operation, which includes the operation of the B737 fleet branded in Alaska Airlines livery. The revenue and expenses associated with purchased capacity are evaluated separately.

~~During 2008, we retired four MD~~-~~80 aircraft that were under long~~20-term lease arrangements and placed them in temporary storage at an aircraft storage facility. The $47.5 million charge in the period represents the remaining lease payments under the lease contract and our estimate of maintenance costs that will be incurred in the future to meet the minimum return conditions under the lease requirements.

~~Mainline~~Table ~~Operating~~of ~~Costs per Available Seat Mile (CASM)~~ Contents

~~Operating~~• ~~costs~~Cost per ASM ~~(CASM)~~excluding isfuel ~~an important metric in the industry,~~ (and weother ~~use~~items itas tospecified ~~gauge~~in ~~the effectiveness of~~ our ~~cost-reduction~~plan ~~efforts.~~documents) ~~Our~~is ~~effort~~an toimportant ~~reduce~~metric ~~unit costs~~for ~~focuses not only on controlling~~ the ~~actual~~PBP ~~dollars~~incentive weplan ~~spend,~~that ~~but~~covers ~~also~~the onmajority ~~increasing~~of our ~~capacity without adding a commensurate amount of cost~~employees.

~~Our mainline~~• ~~operating~~Cost ~~costs~~ per ~~mainline~~ ASM ~~are~~excluding ~~summarized~~fuel ~~below:~~and certain special items is a measure commonly used by industry analysts, and we believe it is the basis by which they compare our airlines to others in the industry. The measure is also the subject of frequent questions from investors.

	Years Ended December 31
	2008		2007		% Change
Total mainline operating expenses per ASM (CASM)	12.54	¢	10.55	¢	18.9
CASM includes the following components:
Aircraft fuel costs per ASM	4.80	¢	3.05	¢	57.4
Restructuring costs per ASM	0.05	¢	—		NM
Fleet transition charges per ASM	0.20	¢	—		NM

•

Disclosure of the individual impact of certain noted items provides investors the ability to measure and monitor performance both with and without these special items. We believe that disclosing the impact of certain items such as fleet transition costs, new pilot contract transition costs, and restructuring charges is important because it provides information on significant items that are not necessarily indicative of future performance. Industry analysts and investors consistently measure our performance without these items for better comparability between periods and among other airlines.

NM• =Although ~~Not~~we ~~meaningful~~disclose our “mainline” passenger unit revenue for Alaska, we do not (nor are we able to) evaluate mainline unit revenue excluding the impact that changes in fuel costs have had on ticket prices. Fuel expense represents a large percentage of our total mainline operating expenses. Fluctuations in fuel prices often drive changes in unit revenue in the mid-to-long term. Although we believe it is useful to evaluate non-fuel unit costs for the reasons noted above, we would caution readers of these financial statements not to place undue reliance on unit costs excluding fuel as a measure or predictor of future profitability because of the significant impact of fuel costs on our business.

We currently ~~have~~forecast ~~separately listed in the above table~~ our ~~fuel~~mainline costs, ~~restructuring charges and fleet transition costs~~ per ASM. excluding ~~These~~fuel ~~amounts~~and ~~are~~other ~~included~~special initems ~~CASM, but~~ for ~~internal~~the ~~purposes~~first wequarter ~~consistently~~and ~~use~~full ~~unit~~year ~~cost~~of 2010 ~~metrics~~to ~~that~~be ~~exclude~~flat ~~fuel~~ and ~~certain~~ ~~special~~down ~~items~~3%, torespectively, ~~measure~~compared ~~our~~to ~~cost-reduction progress~~2009. WeThe ~~believe~~expected decline ~~that~~in ~~such~~unit ~~analysis~~cost ~~may~~stems befrom ~~important~~lower topension ~~investors~~costs and ~~other~~lower ~~readers~~projected incentive ofpayments ~~these~~offset ~~financial~~by ~~statements~~modest ~~for~~increases ~~the~~in ~~following~~other ~~reasons:~~ expense areas.

•Purchased Capacity By eliminating fuel expense and other special items from our unit cost metrics, we believe that we have better visibility into the results of our non-fuel cost-reduction initiatives. Our industry is highly competitive and is characterized by high fixed costs, so even a small reduction in non-fuel operating costs can result in a significant improvement in operating results. In addition, we believe that all domestic carriers are similarly impacted by changes in jet fuel costs over the long run, so it is important for management (and thus investors) to understand the impact of (and trends in) company-specific cost drivers such as labor rates and productivity, airport costs, maintenance costs, etc., which are more controllable by management.Costs

•Purchased capacity ~~Mainline~~costs ~~cost~~decreased ~~per~~$32.2 ~~ASM~~million ~~excluding~~compared ~~fuel~~to ~~and~~2008. Of ~~certain special items is one of~~ the total, ~~most important measures used by our management and by our Board of Directors in assessing quarterly and annual cost performance~~$261.7 ~~These~~million ~~decision-makers~~was ~~evaluate~~paid ~~operating~~to ~~results~~Horizon ofunder the ~~“mainline”~~CPA ~~operation,~~for ~~which includes the operation of the B737 fleet branded in Alaska Airlines livery~~1.4 ~~The revenues and expenses associated with purchased capacity are evaluated separately~~billion ASMs.

•NONOPERATING ~~Mainline~~INCOME ~~cost per ASM excluding fuel, fleet transition charges and restructuring charges~~ (~~and other items as specified in our plan documents~~EXPENSE) ~~is an important metric for the employee incentive plan that covers company management and executives.~~

•Net nonoperating ~~Mainline~~expense ~~cost~~was ~~per~~$45.0 ~~ASM~~million ~~excluding~~in ~~fuel~~2009 ~~and~~compared ~~other~~to ~~special~~$24.4 ~~items~~million isin 2008. Interest income declined $12.7 million compared to 2008 primarily as a ~~measure~~result ~~commonly~~of ~~used~~lower byinterest ~~industry~~income ~~analysts,~~from the receivable from Horizon and welower ~~believe~~average itportfolio isreturns, ~~the~~partially ~~basis~~offset by ~~which~~a ~~they~~higher ~~compare~~average balance of cash and marketable securities. Interest expense declined $4.4 million on lower average interest rates on our ~~airline~~variable-rate todebt ~~others~~on ina relatively ~~the~~stable ~~industry~~average debt balance. Capitalized ~~The~~interest ~~measure~~was is$12.9 million ~~also~~lower ~~the~~than ~~subject~~in 2008 because of ~~frequent~~lower ~~questions~~advance ~~from~~aircraft ~~investors~~purchase deposits and the deferred future aircraft deliveries.

•INCOME ~~Disclosure~~TAX ofEXPENSE the individual impact of certain noted items provides investors the ability to measure and monitor performance both with and without these special items. We believe that disclosing the impact of certain items, such as fleet transition costs and restructuring charges, is important because it provides information on significant items that are not necessarily indicative of future performance. Industry analysts and investors consistently measure our performance without these items for better comparability between periods and among other airlines.(BENEFIT)

23We file a consolidated tax return with Air Group and other Air Group subsidiaries. Each member of the consolidated group calculates its tax provision and tax liability, if applicable, on a separate basis. Our effective income tax rate on pretax income or loss for 2009 was 40.3%, compared to 37.1% for 2008. The difference between the effective tax rates for both periods and our marginal tax rate of approximately 37.8% is primarily the magnitude of nondeductible expenses, such as employee per-diem costs and stock-based compensation expense recorded for certain stock awards.

~~Table~~Our effective tax rate can vary significantly between quarters and for the full year, depending on the magnitude of ~~Contents~~non-deductible expenses in proportion to pretax results.

•ITEM Although we disclose our “mainline” passenger unit revenues for Alaska, we do not (nor are we able to) evaluate mainline unit revenues excluding the impact that rising fuel costs have had on ticket prices7A. ~~Economic~~QUANTITATIVE ~~fuel~~AND ~~cost~~QUALITATIVE ~~represents~~DISCLOSURE ~~approximately~~ABOUT ~~35%~~MARKET of our total mainline operating expenses, excluding fleet transition and restructuring charges and with fuel stated on an economic basis. Fluctuations in our fuel prices often drive changes in unit revenues in the mid-to-long term. Although we believe it is useful to evaluate non-fuel unit costs for the reasons noted above, we would caution readers of these financial statements not to place undue reliance on unit costs excluding fuel as a measure or predictor of future profitability because of the significant impact of fuel costs on our business.RISK

We ~~currently~~have interest-rate ~~forecast~~risk on our ~~mainline~~variable-rate ~~costs~~debt ~~per~~obligations ~~ASM~~and ~~excluding~~our available-for-sale marketable investment portfolio, and commodity-price risk in jet fuel ~~for~~required ~~the~~to ~~first~~operate ~~quarter~~our ~~and~~aircraft ~~the~~fleet. ~~full~~We ~~year~~purchase the majority of ~~2009~~our jet tofuel beat upprevailing ~~11%~~market prices and seek to ~~12%~~manage market risk through execution of our hedging strategy and upother 7%means. toWe ~~8%,~~have ~~respectively~~market-sensitive instruments in the form of fixed-rate debt instruments, ~~compared~~and financial derivative instruments used to ~~2008.~~hedge ~~The~~our ~~increase~~exposure into ~~unit~~jet-fuel ~~costs~~price onincreases aand ~~full~~interest-~~year~~rate ~~basis~~increases. isWe ~~primarily~~do ~~due~~not topurchase ~~the~~or ~~following:~~hold any derivative financial instruments for trading purposes.

~~• Expected capacity reductions of 8% for 2009;~~-21-

•Table Aof ~~$45 million increase in defined-benefit pension costs from $48 million in 2008 to an estimated $93 million in 2009;~~Contents

•Market AnRisk ~~increase~~– ofAircraft $10 million in maintenance expense due to the timing of planned maintenance events and the start of a power-by-the-hour agreement on our B737-700 and B737-900 aircraft, which is expected to provide cost savings over the life of the agreement, but will result in higher expense in 2009;Fuel

•Currently, our ~~Approximately~~fuel-hedging ~~$10~~portfolio ~~million~~consists inof ~~additional~~crude ~~aircraft~~oil ~~rent~~call ~~that~~options ~~would~~and ~~have~~jet ~~been~~fuel refining ~~reported~~margin swap contracts. We utilize the contracts in our portfolio as hedges ~~interest~~to ~~expense~~decrease ~~because~~our exposure to the volatility of ~~our~~jet ~~decision~~fuel prices. Call options are designed to ~~complete~~effectively ~~sale-leaseback~~cap ~~transactions~~our oncost ~~six~~of ~~B737-800~~the ~~aircraft;~~crude ~~and~~oil component of fuel prices, allowing us to limit our exposure to increasing fuel prices.

•With these Ancall ~~approximate~~option ~~$15~~contracts, ~~million~~we ~~increase~~still benefit from the decline in ~~our~~crude ~~expected~~oil prices, ~~incentive~~as ~~payouts~~there inis ~~2009~~no ~~compared~~downward exposure other than the premiums that we pay to enter ~~2008~~into the contracts. ~~Our~~We ~~current~~believe ~~expectation~~there is ~~that~~risk ~~our~~in ~~results~~not ~~will~~hedging beagainst ~~better~~the possibility inof ~~2009~~fuel ~~compared~~price toincreases. ~~those~~We inestimate ~~2008.~~that ~~However,~~a ~~actual~~10% ~~results~~increase ~~can~~or ~~differ~~decrease in ~~significantly~~crude oil prices as of December 31, 2009 would increase or decrease the fair ~~revenue~~value ~~environment~~of isour ~~uncertain~~crude ~~and~~oil ~~fuel~~hedge isportfolio ~~volatile~~by approximately $33.7 million and $25.7 million, respectively.

~~Purchased~~Our portfolio ~~Capacity~~of ~~Costs~~fuel hedge contracts was worth $96.2 million at December 31, 2009, for which we have paid $73.8 million of premiums to counterparties, compared to a portfolio value of $23.5 million at December 31, 2008. We do not have any collateral held by counterparties to these agreements as of December 31, 2009.

~~Purchased~~We continue ~~capacity~~to ~~costs~~believe ~~increased~~that ~~$10.9~~our ~~million~~fuel tohedge ~~$313.7~~program ~~million~~is ~~during~~an ~~2008~~important ~~compared~~part of our strategy to ~~$302.8~~reduce ~~million in~~our ~~2007.~~exposure Ofto ~~the~~volatile ~~total,~~fuel ~~$293~~prices.7 ~~million~~We ~~was~~expect ~~paid~~to continue to ~~Horizon~~enter ~~under~~into ~~the~~these ~~capacity~~types ~~purchase~~of ~~arrangement~~contracts ~~(CPA)~~prospectively, ~~for~~although ~~1.4~~significant changes ~~billion~~in ~~ASMs~~market conditions could affect our decisions. ~~This~~For ~~expense~~more isdiscussion, see ~~eliminated~~Note in3 ~~consolidation.~~to our financial statements.

~~NONOPERATING~~Financial ~~INCOME~~Market ~~(EXPENSE)~~ Risk

~~Net~~We ~~nonoperating~~have exposure ~~expense~~to ~~was~~market ~~$24.4~~risk ~~million~~associated with changes in ~~2008~~interest ~~compared~~rates related primarily to ~~net~~our ~~nonoperating~~debt ~~income~~obligations ofand $1short-term investment portfolio.2 ~~million~~Our debt obligations include variable-rate instruments, which have exposure to changes in interest ~~2007~~rates. ~~Interest~~This ~~income~~exposure ~~declined~~is bysomewhat ~~$13.5~~mitigated ~~million~~through ~~compared~~our tovariable-rate investment ~~2007,~~portfolio. ~~primarily~~A ashypothetical a10% ~~result~~change ofin ~~lower~~the average ~~portfolio~~interest ~~returns,~~rates incurred ~~partially~~on ~~offset~~variable-rate bydebt aduring ~~higher~~2009 ~~average~~would ~~cash~~correspondingly change our net earnings and ~~marketable~~cash ~~securities~~flows ~~balance. Interest~~associated ~~expense~~with ~~increased~~these items by approximately $61.3 0 million. ~~because~~In oforder ~~new~~to ~~debt~~help ~~arrangements~~mitigate inthe ~~2007~~risk ~~and~~of ~~2008,~~interest ~~partially~~rate ~~offset~~fluctuations, bywe have ~~lower~~fixed the interest rates on ~~our~~certain existing variable-rate debt. ~~Capitalized~~agreements over ~~interest~~the ~~declined~~past $5several years.5 ~~million~~Our ~~from~~variable-rate ~~2007,~~debt ~~resulting~~is ~~from~~approximately a23% ~~decrease~~of inour ~~pre~~total long-~~delivery~~term ~~deposits~~debt inat ~~connection~~December 31, ~~with~~2009 ~~our~~compared ~~orders~~to ~~for~~24% ~~B737-800~~at December 31, ~~aircraft~~2008.

~~INCOME~~We ~~TAX~~also ~~EXPENSE~~have ~~(BENEFIT)~~investments in marketable securities, which are exposed to market risk associated with changes in interest rates. If short-term interest rates were to average 1% more than they did in 2009, interest income would increase by approximately $11.4 million.

WeITEM ~~file a consolidated tax return with Air Group and other Air Group subsidiaries~~8. ~~Each~~FINANCIAL ~~member~~STATEMENTS ofAND ~~the~~SUPPLEMENTARY consolidated group calculates its tax provision and tax liability, if applicable, on a separate-entity basis. Our effective income tax rate on income (loss) before income taxes for 2008 was 37.1% compared to an effective income tax rate of 37.3% in 2007. The effective rate for 2007 was positively impacted by $2.1 million in credits resulting from a favorable outcome of the state income tax matters referred to in Note 11. Excluding this benefit, our effective tax rate would have been 38.3%. The difference between the effective tax rates for both periods and our marginal tax rate of approximately 37.5% is primarily the magnitude of nondeductible expenses, such as employee per-diem costs and stock-based compensation expense recorded for certain stock awards. DATA

24SELECTED QUARTERLY FINANCIAL INFORMATION (unaudited)

(in millions, except per share)	1st Quarter						2nd Quarter				3rd Quarter					4th Quarter
(in millions, except per share)	2009			2008			2009		2008		2009		2008			2009		2008
Operating revenues	$	653.1		$	733.4		$	749.3	$	820.4	$	858.8	$	941.9		$	744.8	$	725.6
Operating income (loss)		(6.3	)		(37.4	)		56.1		91.6		136.7		(98.2	)		42.3		(84.9	)
Net income (loss)		(12.1	)		(25.6	)		25.8		56.2		77.3		(69.3	)		18.7		(57.7	)

~~ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK~~-22-

WeTable have interest-rate risk on our variable-rate debt obligations and our available-for-sale marketable investment portfolio, and commodity-price risk in jet fuel required to operate our aircraft fleet. We purchase the majority of our jet fuel at prevailing market prices and seek to manage market risk through execution of our hedging strategy and other means. We have market-sensitive instruments in the form of fixed-rate debt instruments and financial derivative instruments used to hedge our exposure to jet-fuel price increases. We do not purchase or hold any derivative financial instruments for trading purposes. Contents

~~Market~~REPORT ~~Risk –~~OF ~~Aircraft~~INDEPENDENT ~~Fuel~~REGISTERED PUBLIC ACCOUNTING FIRM

~~Currently,~~The ~~our fuel-hedging portfolio consists almost exclusively of crude oil call options. We utilize the contracts in our~~Board ~~portfolio as hedges to decrease our exposure to the volatility~~ of ~~jet~~Directors fuel prices. Call options are designed to effectively cap our cost of the crude oil component of fuel prices, allowing us to limit our exposure to increasing fuel prices. With these call option contracts, we still benefit from the decline in crude oil prices, as there is no downward exposure other than the premiums that we pay to enter into the contracts. Although to a lesser extent, we also use collar structures for fuel hedging purposes. We believe there is risk in not hedging against the possibility of fuel price increases. We estimate that a 10% increase or decrease in crude oil prices as of December 31, 2008 would increase or decrease the fair value of our hedge portfolio by approximately $11.5 million and ~~$10.3 million, respectively.~~ Shareholder

~~Additionally~~Alaska Airlines, ~~we have entered into fuel purchase contracts that fix the refining margin we pay for approximately 40% of our fuel consumption in the first quarter of 2009~~Inc. :

~~Our~~We ~~portfolio~~have audited ofthe ~~fuel~~accompanying ~~hedge~~balance ~~contracts~~sheets ~~was~~of ~~worth~~Alaska ~~$23~~Airlines, Inc.~~5 million~~ atas of December 31, 2009 and 2008, ~~for~~and ~~which~~the werelated ~~have~~statements ~~paid $73.9~~ of ~~premiums~~operations, shareholders’ ~~to counterparties~~equity, ~~compared~~and tocash aflows ~~portfolio~~for ~~value~~each of ~~$94.5~~the ~~million~~years atin the three-year period ended December 31, ~~2007~~2009. ~~The~~In ~~total~~connection ~~value~~with ofour ~~$23.5~~audits ~~million~~of atthe financial ~~December 31~~statements, ~~2008~~we isalso ~~net~~have ofaudited afinancial ~~$20~~statement schedule II.0 ~~million~~These ~~liability~~financial ~~associated~~statements ~~with~~and ~~collar~~financial ~~structures~~statement ~~that~~schedule ~~would~~are ~~require~~the responsibility ~~future~~of ~~cash outlays if oil prices remained below~~ the ~~strike~~Company’s ~~price~~management. WeOur doresponsibility ~~not~~is ~~have~~to ~~any~~express ~~collateral~~an opinion ~~held~~on bythese ~~counterparties~~financial tostatements ~~these~~and ~~agreements~~financial asstatement ofschedule ~~December 31,~~based ~~2008.~~on our audits.

We conducted ~~continue~~our toaudits ~~believe~~in ~~that~~accordance ~~our~~with ~~fuel~~the ~~hedge~~standards ~~program~~of isthe anPublic ~~important~~Company Accounting ~~part~~Oversight ofBoard ~~our~~(United ~~strategy~~States). toThose ~~reduce~~standards ~~our~~require ~~exposure~~that we plan and perform the audit to ~~volatile~~obtain ~~fuel~~reasonable ~~prices.~~assurance Weabout ~~expect~~whether tothe financial ~~continue~~statements toare ~~enter~~free ~~into~~of ~~these~~material ~~types~~misstatement. ofAn ~~contracts~~audit ~~prospectively~~includes examining, ~~although~~on ~~significant~~a test ~~changes~~basis, inevidence ~~market~~supporting ~~conditions~~the ~~could~~amounts ~~affect~~and ~~our~~disclosures ~~decisions~~in the financial statements. ~~For~~An ~~more~~audit ~~discussion~~also includes assessing the accounting principles used and significant estimates made by management, ~~see~~as ~~Note~~well 3as toevaluating ~~our~~the overall financial ~~statements~~statement presentation. We believe that our audits provide a reasonable basis for our opinion.

~~Financial~~In ~~Market~~our opinion, ~~Risk~~the financial statements referred to above present fairly, in all material respects, the financial position of Alaska Airlines, Inc. as of December 31, 2009 and 2008, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth thereon.

~~We have exposure to~~The ~~market~~Company ~~risk~~adopted ~~associated~~the ~~with~~provisions ~~changes~~of inSFAS ~~interest rates related primarily to our debt obligations and short-term investment portfolio~~No. ~~Our debt obligations include variable-rate instruments~~157, ~~which~~Fair ~~have~~Value ~~exposure to changes in interest rates. This~~Measurements ~~exposure~~(included ~~is somewhat mitigated through our variable-rate investment portfolio. A hypothetical 10% change~~ in ~~the~~FASB ~~average~~ASC ~~interest~~Topic ~~rates~~320, ~~incurred on variable~~Investments-~~rate~~Debt ~~debt during 2008 would correspondingly change our net earnings~~ and ~~cash flows associated~~Equity ~~with~~Securities) ~~these~~and ~~items by approximately $1.7 million. In order to help mitigate~~ the ~~risk~~measurement date provisions of ~~interest rate fluctuations~~SFAS No. 158, weEmployers’ ~~have~~Accounting ~~fixed~~for ~~the interest rates on certain existing variable-rate debt agreements over the past several years. Additionally, several~~Defined ofBenefit ~~our~~Pension ~~new~~and ~~debt~~Other ~~arrangements~~Postretirement ~~entered~~Plans ~~into~~(included ~~during~~in ~~2006~~FASB ~~through~~ASC ~~2007~~Topic ~~are fixed-rate arrangements. Due to the current low interest rate environment~~960, ~~all~~Plan ofAccounting – ~~our 2008 debt arrangements have been fixed-rate arrangements. Our variable-rate debt is~~Defined ~~approximately~~Benefit ~~24%~~Pension ~~of our total long-term debt at December 31~~Plans), ~~2008~~effective January ~~compared to 41% at December 31~~1, ~~2007~~2008.

We/s/ ~~also have investments in marketable~~KPMG securities, which are exposed to market risk associated with changes in interest rates. If short-term interest rates were to average 1% more than they did in 2008, interest income would increase by approximately $9.1 million. LLP

25 Seattle, Washington

~~Table~~February 23, ~~of Contents~~2010

~~ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA~~-23-

~~SELECTED~~Table ~~QUARTERLY~~of ~~FINANCIAL INFORMATION~~ Contents

~~(unaudited)~~ALASKA AIRLINES, INC.

	1st Quarter						2nd Quarter				3rd Quarter					4th Quarter
	2008*			2007*			2008		2007		2008			2007		2008			2007
	(in millions, except per share)
Operating revenues	$	733.4		$	659.8		$	820.4	$	795.1	$	941.9		$	867.7	$	725.6		$	747.3
Operating income (loss)		(37.4	)		(10.4	)		91.6		80.9		(98.2	)		125.8		(84.9	)		17.5
Net income (loss)		(25.6	)		(4.3	)		56.2		50.1		(69.3	)		77.6		(57.7	)		11.4

BALANCE SHEETS

* First quarter results for 2008 and 2007 have been adjusted for an error in our calculation of stock-based compensation expense under SFAS 123R for certain awards granted after January 1, 2006. The error resulted in an understatement of wages and benefits of $1.9 million and $1.0 million in the first quarters of 2008 and 2007, respectively. We have concluded that this item is not material, and in accordance with SEC Staff Accounting Bulletin No. 108, we will make appropriate adjustments to our previously filed financial statements when they are presented in our first quarter 2009 Form 10Q. See Note 14 in the financial statements for further information.

As of December 31 (in millions)	2009		2008
ASSETS
Current Assets
Cash and cash equivalents	$	164.2	$	283.0
Marketable securities		1,027.9		794.3
Total cash and marketable securities		1,192.1		1,077.3
Receivables from related companies		274.6		285.9
Receivables - less allowance for doubtful accounts of $1.5		104.7		98.9
Inventories and supplies - net		27.3		26.7
Deferred income taxes		110.1		146.7
Fuel hedge contracts		54.0		13.7
Prepaid expenses and other current assets		47.7		30.1
Total Current Assets		1,810.5		1,679.3

Property and Equipment
Aircraft and other flight equipment		3,035.6		2,898.5
Other property and equipment		540.1		519.8
Deposits for future flight equipment		169.2		237.6
		3,744.9		3,655.9
Less accumulated depreciation and amortization		1,136.6		1,009.8
Total Property and Equipment - Net		2,608.3		2,646.1

Fuel Hedge Contracts		42.2		29.8

Other Assets		80.3		73.4

Total Assets	$	4,541.3	$	4,428.6

26See accompanying notes to financial statements.

~~Table of Contents~~-24-

~~REPORT~~Table OFof ~~INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM~~ Contents

~~The~~ALASKA ~~Board~~AIRLINES, ~~of Directors and Shareholder~~ INC.

~~Alaska~~BALANCE SHEETS ~~Airlines,~~- ~~Inc.:~~ (continued)

We have audited the accompanying balance sheets of Alaska Airlines, Inc. as of December 31, 2008 and 2007, and the related statements of operations, shareholder’s equity, and cash flows for each of the years in the three-year period ended December 31, 2008. In connection with our audits of the financial statements, we also have audited financial statement schedule II. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.

As of December 31 (in millions except share amounts)	2009			2008
LIABILITIES AND SHAREHOLDER’S EQUITY
Current Liabilities
Accounts payable	$	52.9		$	49.4
Payables to related companies		73.2			53.5
Accrued aircraft rent		50.8			60.2
Accrued wages, vacation and payroll taxes		132.7			101.2
Other accrued liabilities		506.4			510.7
Air traffic liability		365.9			372.2
Fuel hedge contracts liability		-			20.0
Current portion of long-term debt		131.2			225.1
Total Current Liabilities		1,313.1			1,392.3

Long-Term Debt, Net of Current Portion		1,376.6			1,334.1
Other Liabilities and Credits
Deferred income taxes		104.7			2.0
Deferred revenue		410.5			394.1
Obligation for pension and postretirement medical benefits		421.0			584.7
Other liabilities		112.6			126.4
		1,048.8			1,107.2
Commitments and Contingencies
Shareholder’s Equity
Common stock, $1 par value
Authorized: 1,000 shares
Issued and outstanding: 2009 and 2008 - 500 shares		-			-
Capital in excess of par value		649.9			640.1
Accumulated other comprehensive loss		(240.0	)		(328.3	)
Retained earnings		392.9			283.2
		802.8			595.0
Total Liabilities and Shareholder’s Equity	$	4,541.3		$	4,428.6

~~We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and~~See ~~perform~~accompanying ~~the~~notes ~~audit~~ to ~~obtain reasonable assurance about whether the~~ financial statements ~~are free of material misstatement~~. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Alaska Airlines, Inc. as of December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth thereon. 25-

AsTable ~~discussed in the notes to the financial statements, effective January 1, 2008, the Company adopted the provisions~~ of ~~Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements, for financial instruments.~~ Contents

~~/s/~~ALASKA AIRLINES, ~~KPMG LLP~~ INC.

~~Seattle,~~STATEMENTS ~~Washington~~OF OPERATIONS

February 25, 2009

Year Ended December 31 (in millions)	2009			2008			2007
Operating Revenues
Passenger	$	2,438.8		$	2,643.7		$	2,547.2
Freight and mail		91.5			99.3			94.2
Other - net		187.3			135.2			147.1
Change in Mileage Plan terms		-			42.3			-
Total mainline operating revenues		2,717.6			2,920.5			2,788.5
Passenger – purchased capacity		288.4			300.8			281.4
Total Operating Revenues		3,006.0			3,221.3			3,069.9

Operating Expenses
Wages and benefits		792.6			742.7			753.9
Variable incentive pay		61.6			15.8			13.5
Aircraft fuel, including hedging gains and losses		549.0			1,162.4			737.5
Aircraft maintenance		169.9			150.6			149.8
Aircraft rent		109.0			106.2			112.8
Landing fees and other rentals		166.8			167.7			170.1
Contracted services		118.9			130.2			124.1
Selling expenses		104.7			116.0			129.3
Depreciation and amortization		178.5			165.9			142.3
Food and beverage service		47.7			48.3			46.9
Other		161.2			170.3			173.1
New pilot contract transition costs		35.8			-			-
Restructuring charges		-			12.9			-
Fleet transition costs - MD-80		-			47.5			-
Total mainline operating expenses		2,495.7			3,036.5			2,553.3
Purchased capacity costs		281.5			313.7			302.8
Total Operating Expenses		2,777.2			3,350.2			2,856.1
Operating Income (Loss)		228.8			(128.9	)		213.8

Nonoperating Income (Expense)
Interest income		38.6			51.3			64.8
Interest expense		(88.1	)		(92.5	)		(86.2	)
Interest capitalized		7.3			20.2			25.7
Other - net		(2.8	)		(3.4	)		(3.1	)
		(45.0	)		(24.4	)		1.2
Income (loss) before income tax		183.8			(153.3	)		215.0
Income tax expense (benefit)		74.1			(56.9	)		80.2
Net Income (Loss)	$	109.7		$	(96.4	)	$	134.8

27See accompanying notes to financial statements.

~~Table of Contents~~-26-

~~BALANCE~~Table ~~SHEETS~~of Contents

~~Alaska~~ALASKA ~~Airlines~~AIRLINES, ~~Inc~~INC.

	As of December 31
(in millions)	2008		2007
ASSETS
Current Assets
Cash and cash equivalents	$	283.0	$	204.3
Marketable securities (including securities loaned of $109.8 in 2007)		794.3		618.5
Total cash and marketable securities		1,077.3		822.8
Securities lending collateral		—		111.9
Receivables from related companies		285.9		366.0
Receivables - less allowance for doubtful accounts of $1.5 and $1.6		98.9		129.0
Inventories and supplies - net		26.7		18.1
Deferred income taxes		146.7		82.5
Fuel hedge contracts		13.7		84.6
Prepaid expenses and other current assets		30.1		26.7
Total Current Assets		1,679.3		1,641.6
Property and Equipment
Aircraft and other flight equipment		2,898.5		2,488.6
Other property and equipment		519.8		489.5
Deposits for future flight equipment		237.6		389.2
		3,655.9		3,367.3
Less accumulated depreciation and amortization		1,009.8		878.2
Total Property and Equipment - Net		2,646.1		2,489.1
Fuel Hedge Contracts		29.8		9.9
Other Assets		73.4		80.5
Total Assets	$	4,428.6	$	4,221.1

STATEMENTS OF SHAREHOLDER’S EQUITY

See accompanying notes to financial statements.

			Capital in			Accumulated Other
	Common		Excess of			Comprehensive			Retained
(in millions)	Stock		Par Value			Loss			Earnings		Total
Balances at December 31, 2006	$	--	$	620.0		$	(191.4	)	$	244.8	$	673.4
2007 net income									$	134.8		134.8
Other comprehensive income (loss):
Related to marketable securities:
Change in fair value							3.2
Reclassification to earnings							2.0
Income tax effect							(1.9	)
							3.3					3.3
Related to employee benefit plans:
Pension liability adjustment, net of $29.6 tax effect							49.8					49.8
Postretirement medical liability adjustment, net of $2.5 tax effect							4.1					4.1
Officers supplemental retirement plan, net of $0.5 tax effect							0.9					0.9

Total comprehensive income												192.9

Stock-based compensation				10.5								10.5
Impact of issuance of Air Group stock under stock plans				(0.2	)

Filing Compare · ALASKA AIRLINES INC