UNITED STATES ~~SECURITIES AND EXCHANGE COMMISSION~~

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, ~~2004~~ 2008

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

For the transition period from to

Commission File Number 0000-19978

ALASKA AIRLINES, INC.

~~(Exact~~An ~~name~~Alaska ofCorporation ~~registrant as specified in its charter)~~

~~Alaska~~92-0009235 ~~(State~~19300 orInternational ~~other~~Boulevard, ~~jurisdiction~~Seattle, ofWashington ~~incorporation~~98188 orTelephone: ~~organization~~(206) 92392-~~0009235~~5040 (I.R.S. Employer Identification No.)

~~19300~~Securities ~~International~~registered ~~Boulevard,~~pursuant ~~Seattle,~~to ~~Washington 98188~~ Section 12(~~Address~~b) of ~~Principal~~the ~~Executive~~Act: ~~Offices)~~ None

~~Registrant’s~~Securities ~~telephone~~registered ~~number,~~pursuant ~~including~~to ~~area~~Section 12(g) ~~code~~of the Act: ~~(206) 392-5040~~ None

~~Securities~~Indicate ~~registered~~by ~~pursuant~~check tomark ~~Section 12(g)~~if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act: . Yes ¨ No x

~~Title~~Indicate ofby ~~Class Common~~check ~~Stock,~~mark ~~$1.00~~if ~~Par~~the ~~Value~~registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

AsIndicate ofby ~~December~~check mark whether the registrant (1) ~~31,~~has ~~2004~~filed all reports required to be filed by Section 13 or 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), ~~common~~and ~~shares~~(2) has ~~outstanding~~been ~~totaled~~subject ~~500~~to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark ~~whether~~if ~~the~~disclosure of ~~registrant~~delinquent ~~(1) has~~filers ~~filed~~pursuant ~~all reports required~~ to beItem 405 ~~filed~~of ~~by Section 13~~Regulation orS-K ~~15(d)~~is ofnot ~~the~~contained ~~Securities~~herein, ~~Exchange~~and ~~Act~~will ofnot ~~1934~~be ~~during~~contained, to the ~~preceding~~best ~~12 months~~of ~~(or~~registrant’s ~~for such~~knowledge, ~~shorter~~in ~~period~~definitive ~~that~~proxy ~~the~~or ~~registrant~~information ~~was~~statements ~~required~~incorporated toby ~~file~~reference ~~such~~in ~~reports),~~Part ~~and~~III ~~(2) has been~~of ~~subject~~this toForm ~~such~~10-K ~~filing~~or ~~requirements~~any ~~for~~amendment ~~the~~to ~~past~~this ~~90 days~~Form 10-K. x ~~Yes þ No o~~

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, ~~(as~~or ~~defined~~a innon-accelerated ~~Exchange~~filer. ~~Act~~ See definition of “accelerated filer and large accelerated filer” in Rule 12b-2~~) Yes~~ oof Nothe þ Exchange Act (Check one):

~~The~~Large ~~registrant~~accelerated ~~meets~~filer ¨ Accelerated ~~the conditions set forth in General Instructions I of Form 10-K and is~~filer ¨ ~~therefore filing this Form 10~~ Non-Kaccelerated ~~with~~filer x Smaller ~~the~~reporting ~~reduced~~company ¨ ~~disclosure format. Items 4, 6, 10, 11, 12 and 13 have been omitted in accordance with such Instruction I.~~

~~The~~Indicate ~~registrant’s~~by ~~parent,~~check ~~Alaska~~mark ~~Air~~whether ~~Group,~~the ~~Inc.~~registrant ~~(File~~is ~~No. 1-8957),~~a ~~files~~shell ~~reports~~company ~~with~~(as ~~the Commission~~defined ~~pursuant~~in toRule ~~the~~12b-2 ~~Securities Exchange Act~~ of ~~1934,~~the asExchange ~~amended~~Act. ): Yes ¨ No x

~~ALASKA~~The ~~AIRLINES,~~registrant ~~INC.~~meets the conditions specified ~~Annual~~in ~~Report~~General onInstruction ~~Form~~I(1)(a) and (b) of Form 10-K ~~for~~and is therefore filing this Form 10-K with the ~~year~~reduced ~~ended~~disclosure ~~December 31,~~format ~~2004~~ permitted by General Instruction I(2).

~~TABLE~~The OFregistrant ~~CONTENTS~~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, shares of common stock outstanding totaled 500.

PART I		2
ITEM 1.	BUSINESS	2
ITEM 2.	PROPERTIES	14
ITEM 3.	LEGAL PROCEEDINGS	15
PART II		15
ITEM 5.	MARKET FOR THE REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS	15
ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	18
ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK	45
ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	46
ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	46
ITEM 9A.	CONTROLS AND PROCEDURES	46
PART IV		47
ITEM 15.	EXHIBITS, FINANCIAL STATEMENT SCHEDULES	47
SIGNATURES		48
EXHIBIT 3.2
EXHIBIT 10.2
EXHIBIT 10.19
EXHIBIT 12.1
EXHIBIT 23.1
EXHIBIT 23.2
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

Cautionary Note regarding Forward-Looking Statements

In addition to historical information, this Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. 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. All statements in this report regarding our future strategy, future operations, projected financial position, estimated future revenues, projected costs, future prospects, and results that might be obtained by pursuing management’s current plans and objectives are forward-looking statements. 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 which are beyond our control. Our forward-looking statements are based on the information currently available to us and speak only as of the date on which this report was filed with the SEC. We 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 statements. Over time, our actual results, performance or achievements will likely differ from the anticipated results, performance or achievements that are expressed or implied by our forward-looking statements, and such differences might be significant and materially adverse to our stockholders. Many important factors that could cause such a difference are described in this Annual Report under the caption “Risk Factors,” under Item 7 below, which you should review carefully. Please consider our forward-looking statements in light of those risks as you read this report.

~~PART~~ALASKA I AIRLINES, INC.

~~ITEM~~Annual ~~1. BUSINESS~~Report on Form 10-K for the year ended December 31, 2008

~~GENERAL~~TABLE ~~INFORMATION Alaska~~OF ~~Airlines,~~CONTENTS Inc. (Alaska or the Company), an Alaska corporation, is a wholly owned subsidiary of Alaska Air Group, Inc. (Air Group), a Delaware corporation. Air Group is also the parent company of Alaska Air Group Leasing (AAGL) and Horizon Air Industries, Inc. (Horizon). Alaska is a major airline that was organized in 1932 and incorporated in the state of Alaska in 1937. Alaska became a wholly owned subsidiary of Air Group in 1985 pursuant to a reorganization of Alaska into a holding company structure. Air Group is a registrant pursuant to Section 12(b) of the Securities and Exchange Act of 1934 (Commission File No. 1-8957). Air Group’s filings with the Securities and Exchange Commission, including its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports are accessible free of charge at www.alaskaair.com. Alaska’s executive offices are located at 19300 International Boulevard, Seattle, Washington 98188. In 2004, Alaska accounted for 82% of Air Group’s total operating revenues.

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


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

Operations Alaska Airlines, Inc. is an Alaska corporation that was organized in 1932 and incorporated in 1937. Alaska principally serves 39 cities in six western states (Alaska, Washington, Oregon, California, Nevada, and Arizona) and Canada and nine cities in Mexico. Alaska also provides non-stop service between Seattle and five eastern cities (Washington, D.C., Boston, Miami, Orlando, and Newark), between Seattle and Denver, Seattle and Chicago, between Los Angeles and Washington, D.C. and between Anchorage and Chicago. In each year since 1973, Alaska has carried more passengers between Alaska and the U.S. mainland than any other airline. In 2004, Alaska carried 16.3 million revenue passengers. Passenger traffic within Alaska and between Alaska and the U.S. mainland accounted for 20% of Alaska’s 2004 revenue passenger miles, West Coast traffic (including Canada) accounted for 53%, the Mexico markets accounted for 10% and other markets accounted for 17%. Based on passenger enplanements, Alaska’s leading airports are Seattle, Los Angeles, Portland and Anchorage. Based on 2004 revenues, its leading nonstop routes are Seattle-Anchorage, Seattle-Los Angeles, and Seattle-San Diego. At December 31, 2004, Alaska’s operating fleet consisted of 108 jet aircraft.

We believe we distinguish ourselves from competitors by providing a higher level of customer service in the form of attention to customer needs, advance seat assignments, expedited check-in, well-maintained aircraft, a first-class section aboard our aircraft, and other amenities.

Industry Conditions The airline industry is highly competitive. Airline results are sensitive to passenger demand, ticket prices, labor costs and fuel costs. Passenger demand and ticket prices are, to a large measure, influenced by the general state of the economy, current events and industry capacity. Our industry was negatively impacted by weak economic conditions during 2001, 2002 and the first half of 2003, the September 11, 2001 terrorist attacks and continued hostilities in the Middle East. Economic conditions in the second half of 2003 and through 2004 improved somewhat, resulting in stronger demand and higher traffic levels. Due to the industry’s high fixed costs in relation to revenue, a small change in load factors or fare levels has a large impact on profits.


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

Labor costs generally make up 30% to 40% of an airline’s total operating costs. Most major airlines, including ours, have employee groups who are represented by collective bargaining agents. Often, airlines with unionized work forces have higher labor costs than carriers without unionized work forces, and may not have the ability to adjust labor costs downward fast enough to respond to new competition. Our wage and benefit costs increased 3% in 2004, 11% in 2003 and 10% in 2002.

Fuel prices generally make up 15% to 25% of an airline’s operating costs. Fuel prices can be volatile and largely uncontrollable. In 2004, fuel prices increased significantly. Our economic fuel cost per gallon (which is the net price we pay after the benefit of fuel hedges) increased 39% and 14% in 2004 and 2003, respectively, and decreased 10% in 2002.

The industry is currently in a state of flux. So called “Low Cost Carriers” (LCCs) have grown rapidly in recent years and currently enjoy a 30% share of total passengers carried in the United States. Because of their cost advantage, LCCs have contributed to an overall decline in ticket yields. The lower yield environment, coupled with high fuel costs, has been problematic for the higher cost “Legacy Carriers”, a number of which are operating under bankruptcy court protection. Because of the relatively low barriers to entry, we expect the expansion of low cost and low fare carriers to continue. Some legacy carriers, such as Delta and United, have launched their own low fare airlines (Song and Ted). We compete with many of these carriers now, and expect to compete with additional entrants in the future.

Most major US carriers, including Alaska, are working aggressively to cut operating costs, including renegotiation of collective bargaining agreements and vendor agreements.

As discussed in Note 14 to the financial statements, in April 2003, the Emergency Wartime Supplemental Appropriations Act (the Act) was signed into legislation. The Act includes $2.3 billion of one-time cash payments to air carriers, allocated based on each carrier’s share of security fees remitted and carrier fees paid to the Transportation Security Administration (TSA) since its inception in February 2002. Additionally, passenger security fees were not imposed by the TSA and carrier fees were not paid during the period June 1, 2003 through September 30, 2003. In May 2003, we received our share of the one-time cash grant in the amount of $52.8 million.

~~MARKETING~~As ~~AND~~used ~~COMPETITION Alliances~~in ~~with~~this ~~Other~~Form ~~Airlines Alaska~~10-K, ~~has~~the ~~marketing~~terms ~~alliances with other airlines that provide reciprocal frequent flyer mileage accrual and redemption privileges and code sharing on certain flights as set forth below. Alliances enhance~~ “Alaska’s,” ~~revenues by offering~~ “our,” ~~customers~~“we” ~~more travel destinations~~ and ~~better mileage~~the ~~accrual/redemption opportunities, gaining us access to more connecting traffic from other~~“Company” ~~airlines,~~refer ~~and providing members of our alliance partners’ frequent flyer programs an opportunity~~ to ~~travel~~ on Alaska ~~while earning mileage credit in our partners’ programs. Alaska’s marketing agreements have various termination dates and at any time~~Airlines, ~~one or more may be in the process of renegotiation~~Inc. ~~If a significant agreement were terminated~~, itunless ~~could adversely impact revenues and increase~~ the ~~costs~~context ofindicates ~~our other marketing agreements~~otherwise. Most of our code share relationships are free-sell code shares, where the marketing carrier sells seats on the operating carrier’s flights from the operating carrier’s inventory, but takes no inventory risk. The table below identifies our marketing alliances with other airlines as of December 31, 2004.

~~Codesharing~~Cautionary —Note ~~Codesharing~~Regarding —Forward-Looking Frequent Alaska Flight # Other Airline Flight # Flyer on Flights Operated On Flights Operated Agreement by Other Airline by Alaska/Horizon Major U.S. or International Airlines American Airlines/American Eagle British Airways Cathay Pacific Airways Continental Airlines Delta Frontier Airlines Hawaiian Airlines KLM Lan Chile Northwest Airlines Qantas Yes Yes Yes Yes Yes No Yes Yes Yes Yes Yes Yes No No Yes Yes No Yes No No Yes No Yes No No Yes Yes Yes Yes Yes Yes Yes Yes Commuter Airlines Era Aviation PenAir Big Sky Airlines Helijet International Yes* Yes* Yes* Yes* Yes Yes Yes Yes No No No NoStatements

*In ~~This~~addition ~~airline~~to ~~does~~historical ~~not~~information, ~~have~~this ~~its~~Form ~~own~~10-K ~~frequent~~contains ~~flyer~~forward-looking ~~program.~~statements ~~However~~within the meaning of Section 27A of the Securities Act of 1933, ~~Alaska’s~~as ~~Mileage~~amended, ~~Plan~~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 ~~members~~relate solely to historical matters. You can ~~accrue~~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 ~~redeem~~uncertainties ~~miles~~that oncould ~~this~~cause actual ~~airline~~results to differ materially from historical experience or the Company’s ~~route~~present ~~system~~expectations. Some of the things that could cause our actual results to differ from our expectations are:

~~Competition Competition~~• ingeneral ~~the~~economic ~~airline~~conditions, ~~industry~~including ~~is intense. We believe~~ the ~~principal~~impact ~~competitive~~of ~~factors in~~ the ~~industry~~economic ~~that~~recession ~~are~~on ~~important~~customer totravel ~~customers are:~~ behavior;

• ~~safety~~changes ~~record~~in ~~and~~our ~~reputation~~operating costs, including fuel, which can be volatile;

•

the competitive environment in our industry;

•

labor disputes and our ability to attract and retain qualified personnel;

•

our significant indebtedness;

•

compliance with our financial covenants;

•

potential downgrades of our credit ratings and the availability of financing;

•

our ability to meet our cost reduction goals;

•

operational disruptions;

•

the concentration of our revenue from a few key markets;

•

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

•

insurance costs;

•

our inability to achieve or maintain profitability;

•

fluctuations in our quarterly results;

•

an aircraft accident or incident;

•

liability and other claims asserted against us;

•

our reliance on automated systems and the risks associated with changes made to those systems;

•

our reliance on third-party vendors and partners;

•

changes in laws and regulations; and

•

increases in government fees and taxes.

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 which are beyond our control. Our forward-looking statements are based on the information currently available to us and speak only as of the date on which this report was filed with the SEC. We 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 statements. Over time, our actual results, performance or achievements will likely differ from the anticipated results, performance or achievements that are expressed or implied by our forward-looking statements, 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, see “Item 1A: Risk Factors.” Please consider our forward-looking statements in light of those risks as you read this report.

•PART ~~fares;~~I ~~• customer service; • routes served; • flight schedules; • frequent flyer programs; • on-time arrivals; • on-board amenities; • type of aircraft and • code-sharing relationships.~~

~~Any~~ITEM ~~domestic air carrier issued a certificate of public convenience and necessity by the Department of Transportation is allowed to operate scheduled passenger service in the United States~~1. ~~Currently,~~ ~~Alaska~~OUR carries approximately 2.8% of all U.S. domestic passenger traffic. Alaska and Horizon compete with one or more domestic or foreign airlines on most of their routes, including Southwest Airlines, United Airlines, Northwest Airlines, Continental Airlines, American Airlines, Delta Airlines and regional affiliates associated with some of these carriers. Many of our competitors are substantially larger than Alaska, have greater financial resources, and have more extensive route systems. In addition, continuing growth of low-cost carriers, including Southwest Airlines, AirTran Airways, American Trans Air, Frontier Airlines and jetBlue Airways in the United States places significant competitive pressures on us and other network carriers since they have the ability to charge a lower fare for travel between similar cities and thus exert downward pressure on yields. BUSINESS

WeAlaska ~~also~~Airlines, ~~compete~~Inc., ~~with~~an ~~other~~Alaska ~~airlines~~corporation, ~~for~~is ~~skilled~~a wholly ~~employees~~owned ~~such~~subsidiary asof ~~pilots~~Alaska Air Group, ~~flight~~Inc. ~~attendants~~(Air Group), ~~ramp service~~a ~~employees~~Delaware corporation. Air Group is also the parent company of Horizon Air Industries, ~~customer~~Inc. ~~service~~(Horizon) ~~agents~~and Alaska Air Group Leasing. We are a major airline organized in 1932 and incorporated ~~aircraft~~in ~~mechanics~~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 of 1,113 miles in 2008. Horizon is a regional airline that operates both turboprop and jet aircraft.

~~Ticket~~We ~~Distribution~~endeavor to distinguish ourselves from competitors by providing a ~~Airline~~higher ~~tickets~~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 needs, an award-winning frequent flyer program, well-maintained aircraft, a first-class section aboard our aircraft, and other amenities are ~~distributed~~regularly ~~through~~recognized ~~three~~by ~~primary~~independent ~~channels:~~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.

•WHERE ~~Airline~~YOU ~~websites~~CAN ~~such~~FIND asMORE alaskaair.com. It is less expensive for us to sell through these direct channels and, as a result, we continue to invest heavily in its online capabilities. • Telephone reservation call centers. • Traditional and online travel agents. Consumer reliance on traditional travel agencies is shrinking, while usage of online travel agencies is increasing. Both traditional and online travel agencies typically use Global Distribution Systems (GDS), such as Sabre, to obtain their fare and inventory data from airlines. Bookings made through these agencies result in a fee, the “GDS fee”, that is charged to the airline.INFORMATION

We ~~currently~~maintain ~~participate~~an inInternet ~~all~~website ofat ~~these~~www.alaskaair.com. ~~distribution~~Our ~~channels,~~filings ~~but~~with wethe ~~cannot~~Securities ~~predict~~and ~~the~~Exchange ~~terms~~Commission, including our annual report on ~~which~~Form we10-K, ~~may~~quarterly bereports ~~able~~on toForm ~~continue~~10-Q, current reports on Form 8-K and amendments to ~~participate~~those inreports ~~these~~filed or ~~other~~furnished ~~sites,~~pursuant to Sections 13(a) or ~~their~~15(d) ~~effect~~of the Securities Exchange Act of 1934, as amended, are available on our website at ~~ability~~www.alaskaair.com, tofree ~~compete~~of charge, as soon as reasonably practicable after the electronic filing of these reports with ~~other~~the ~~airlines~~Securities and Exchange Commission. The information contained on our website is not a part of this annual report on Form 10-K.

OUR OPERATIONS

We offer extensive north/south service within the western U.S., Canada and Mexico, and passenger and dedicated cargo services to and within the state of Alaska. We also provide long-haul east/west service to Hawaii and nine cities in the continental U.S., primarily from Seattle, where we have our largest concentration of departures; although we do offer long-haul departures from Anchorage, Los Angeles, and Portland, Oregon. During 2008, we initiated service to Maui with non-stops from Seattle and Anchorage, to the Big Island of Hawaii with non-stops from Seattle, and non-stop service from Seattle to Minneapolis. We also recently announced non-stop service from Seattle to Austin, TX and Portland to Maui, both beginning in August 2009.

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-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 passenger traffic by market is presented below:


	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	%

~~EMPLOYEES The~~Alaska ~~airline~~and ~~business~~Horizon isintegrate ~~labor~~their ~~intensive.~~flight ~~Alaska~~schedules ~~had~~to 10provide convenient,~~850~~ ~~active~~competitive ~~full-time~~connections ~~and~~between ~~part-time~~most points ~~employees~~served atby ~~December 31,~~their ~~2004~~systems. ~~Wages,~~In ~~salaries~~2008 and ~~benefits~~2007, ~~represented~~ approximately 3423% and 22%, respectively, of ~~our total~~Horizon’s ~~operating~~passengers ~~expenses~~connected into ~~2004~~flights operated by Alaska.

AtFor ~~December 31,~~a ~~2004,~~more ~~labor~~in-depth ~~unions~~discussion ~~represented 83%~~ of ~~Alaska’s employees. Our relations with~~ our ~~labor~~ ~~organizations are governed by the Railway Labor Act. Under this act~~business, the collective bargaining agreements between the respective airlines and these organizations do not expire but instead become amendable as of a stated date. If either party wishes to modify the terms of any such agreementindustry, itregulatory ~~must notify the other party in the manner described in the agreement. After receipt of such notice~~environment, ~~the parties must meet for direct negotiations,~~ and ifother noimportant ~~agreement is reached~~matters, ~~either~~please ~~party~~see ~~may~~Air ~~request~~Group’s ~~the~~Annual ~~National~~Report ~~Mediation~~on ~~Board~~Form to appoint a federal mediator. If no agreement is reached in mediation, the National Mediation Board may declare that an impasse exists, at which point the National Mediation Board proffers binding arbitration to the parties. Either party may decline to submit to arbitration. If arbitration is rejected by either party, a 3010-~~day~~K ~~“cooling~~filed ~~off”~~with ~~period commences. During that period, a Presidential Emergency Board may be established, which examines~~ the ~~parties’~~Securities ~~positions~~ and ~~recommends~~Exchange aCommission ~~solution.~~on ~~The Presidential Emergency Board process lasts for 30~~February ~~days and is followed by a “cooling off” period of 30 days. At the end of a “cooling off” period~~19, ~~unless an agreement is reached or action is taken by Congress,~~ ~~the labor organization may strike and the airline may resort to “self-help”, including the imposition of any or all of its proposed amendments and the hiring of workers to replace strikers~~2009.

~~Two~~ITEM ~~of Alaska’s collective bargaining agreements contain provisions for interest arbitration~~1A. ~~Under interest~~RISK arbitration, if the parties have not negotiated the contract by a predetermined date, each side may submit a prescribed number of issues to binding arbitration. The arbitrator’s decision on those issues is incorporated into the collective bargaining agreement, and no strike or company “self-help” may occur. FACTORS

We have established an ongoing Risk Analysis and Oversight Program to identify and assign responsibility for the most significant risks facing our company. The ~~collective~~results ~~bargaining~~of ~~agreement~~this program are routinely shared with ~~the~~our ~~dispatchers~~Board isof ~~open~~Directors. ~~for~~In ~~negotiation~~this onsection, ~~wage~~we ~~rates~~discuss inthe highest priority issues ~~March 2005~~identified in our risk analysis. If any of the ~~parties~~following ~~are~~occurs, ~~unable~~our tobusiness, ~~reach~~financial ancondition ~~agreement,~~and ~~there~~results isof anoperations ~~interest~~could ~~arbitration~~suffer. These risk factors may not be exhaustive. We operate in a continually changing business environment and new ~~provision~~risk ~~related~~factors ~~only~~emerge from time to ~~wages~~time. 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.

The ~~pilot~~current ~~contract~~economic ~~provides~~recession ~~that,~~will ifimpact andemand ~~agreement~~for onour ~~the~~product entire contract was not reached by December 15, 2004, ten contract issues plus wage rates would be submitted to an interest arbitrator. Issues submitted generally relate to pension plans, medical insurance, profit sharing, code sharing and ~~work~~could ~~rules.~~harm ~~The~~our ~~parties~~financial ~~did~~condition ~~not reach an agreement,~~ and ~~the~~results ~~issues~~of ~~have been submitted to binding arbitration in March 2005 with a decision to be effective in May 2005~~operations. ~~The pilot labor contract contains market related standards for wages and non-wage issues.~~

The current economic recession and outlook has resulted in a decline in demand for air travel. Our passenger count and traffic declined in the fourth quarter when compared to the prior year periods and we anticipate declines into 2009. We plan to reduce 2009 capacity by 7% as compared to 2008 to help offset this anticipated decline in passenger traffic, which will likely result in a decline in operating revenues. If demand declines further than expected, it will harm our business, financial condition and results of operations.

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

We have, and will continue to have for the foreseeable future, a significant amount of debt. Due to our high fixed costs, including aircraft lease commitments and debt 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-term debt outstanding, respectively, all of which is secured by flight equipment, aircraft purchase rights and real property. In addition to long-term debt, we have significant other fixed obligations under operating leases related to our aircraft, airport terminal space, other airport facilities and office space. As of December 31, 2008, future minimum lease payments under noncancelable operating leases with initial or remaining terms in excess of one year were $601.2 million for 2009 through 2013 and an aggregate of $208.4 million for the years thereafter.

At December 31, 2008, we had firm orders to purchase 20 aircraft requiring future aggregate payments of $553.1 million through 2011. We have not secured financing for these aircraft commitments and there is no guarantee that financing will be available when required or at terms that will be acceptable to us. The current market conditions could result in a lack of availability or higher interest rates for financing of aircraft purchases, which would harm our business, financial condition and results of operations.

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

•

limit our ability to obtain additional financing to fund our future capital expenditures, acquisitions, working capital or other purposes;

•

require us to dedicate 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

•

limit our ability to withstand competitive pressures and reduce our flexibility in responding to changing business and economic conditions, including reacting to the current economic slowdown.

~~Alaska’s~~We ~~union~~cannot ~~contracts~~ensure atthat ~~December 31,~~we ~~2004~~will ~~were~~be asable ~~follows:~~to generate sufficient cash flow from our operations to pay our debt and other fixed obligations as they become due. If we fail to do so, our business could be harmed.

		Number of
Union	Employee Group	Employees		Contract Status
Air Line Pilots Association International (ALPA)	Pilots		1,462	Amendable 4/30/05* Submitted to interest arbitration
Association of Flight Attendants (AFA)	Flight attendants		2,321	In Negotiations
International Association of Machinists and Aerospace Workers (IAM/RSSA)	Ramp service and stock clerks Clerical, office and passenger service		1,108 2,913	In Negotiations In Negotiations
Aircraft Mechanics Fraternal Association (AMFA)	Mechanics, inspectors and cleaners		1,096	In Negotiations
Mexico Workers Association of Air Transport	Mexico airport personnel		77	Amendable 9/29/06
Transport Workers Union of America (TWU)	Dispatchers		33	Amendable 6/30/07*

We are required to 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 or that these requirements will not limit our ability to finance our future operations or capital needs.

*Our ~~Collective~~failure ~~bargaining~~to ~~agreement~~successfully ~~contains~~reduce ~~interest~~unit ~~arbitration~~costs ~~provision~~could harm our business.

~~REGULATION General The~~We ~~Airline~~continue ~~Deregulation~~to ~~Act~~strive oftoward ~~1978,~~aggressive ascost-reduction ~~amended,~~goals ~~eliminated~~that ~~most~~are ~~domestic~~an ~~economic~~important ~~regulation~~part of ~~passenger~~ ~~and~~our ~~freight~~business ~~transportation.~~strategy ~~However, the Department~~ of ~~Transportation~~offering ~~and~~ the ~~Federal Aviation~~best ~~Administration~~value ~~(FAA) still~~to ~~exercise~~passengers ~~regulatory~~through ~~authority~~competitive ~~over~~fares ~~air~~while ~~carriers.~~achieving Inacceptable ~~order to~~profit ~~provide~~margins ~~passenger~~ and ~~cargo~~return ~~air~~on ~~transportation~~capital. inWe ~~the~~believe ~~U.S.,~~having a ~~domestic~~lower ~~airline~~cost isstructure ~~required~~better topositions ~~hold a~~us ~~certificate~~to ofbe ~~public~~able ~~convenience~~to ~~and~~fund ~~necessity~~future ~~issued~~growth byand ~~the~~take ~~Department~~advantage of ~~Transportation. Subject~~market toopportunities, ~~certain~~if ~~individual~~economic ~~airport~~conditions ~~capacity~~allow. However, ~~noise~~with ~~and~~our ~~other~~planned ~~restrictions~~capacity reductions, ~~this certificate~~we ~~permits~~will ansee ~~air~~upward ~~carrier~~pressure toon ~~operate~~unit ~~between~~costs, ~~any~~at ~~two~~least ~~points~~ in the Unear term.S. AIf ~~certificate~~we isare ofunable ~~unlimited duration, but may be revoked for failure~~ to ~~comply~~further ~~with~~reduce ~~federal~~our ~~aviation~~non-fuel ~~statutes,~~unit ~~regulations, orders~~costs orover the ~~terms~~long-term ofand ~~the~~achieve ~~certificate~~targeted ~~itself. In addition~~profitability, ~~the~~we ~~Department~~will oflikely ~~Transportation maintains~~not ~~jurisdiction~~be ~~over~~able ~~the~~to ~~approval~~grow ofour ~~international~~business ~~code~~in ~~share~~the ~~agreements,~~future ~~alliance agreements between domestic major airlines, international route authorities~~ and ~~certain consumer~~ ~~protection~~therefore ~~matters,~~our ~~such~~financial asresults ~~advertising,~~may ~~denied boarding compensation and baggage liability~~suffer.

Our business, financial condition, and results of operations are substantially exposed to the volatility of jet fuel prices. Increases in jet fuel costs would harm our business.

Fuel costs constitute a significant portion of our total operating expenses, accounting for 35% and 26% of total 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 prices have 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 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.

Historically, fuel costs and availability have been unpredictable and subject to wide price fluctuations based on geopolitical issues and supply and demand. It is often difficult to increase fares to offset increases in the price of fuel and although we had some success recently, we may not be able to do so in the future.

We utilize fuel hedges as a form of insurance against the volatility of fuel prices. To manage the risk of fuel price increases, we primarily purchase call options that are designed to cap a portion of our fuel costs at designated per-barrel oil prices. Even with hedges, we are substantially and increasingly exposed to increases in jet fuel costs as the average price at which we are hedged in future periods is higher than it has historically been.

The airline industry is highly competitive and subject to rapid change. We may be unable to compete effectively against other airlines with greater financial resources or lower operating costs, or to adjust rapidly enough in the event the nature of competition in our markets changes.

The airline industry is highly competitive as to fares, flight frequency, frequent flyer benefits, routes and service. The industry is particularly susceptible to price 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.

The ~~FAA~~airline ~~regulates~~industry ~~aircraft~~also ~~operations~~faces ~~generally,~~competition ~~including~~from ~~establishing~~ground ~~personnel,~~transportation ~~maintenance and flight operation standards. Domestic airlines are required to hold a valid air carrier operating certificate issued by the FAA. Pursuant to these regulations~~alternatives, wesuch ~~have~~as ~~established~~buses, ~~and~~trains ~~the FAA has~~or ~~approved,~~automobiles. aIncreased ~~maintenance~~use ~~program for each type~~ of ~~aircraft~~technology ~~we operate that provides for the ongoing maintenance of~~ such ~~aircraft,~~as ~~ranging~~video ~~from~~conferencing ~~frequent~~and ~~routine~~internet-based ~~inspections~~meeting totools ~~major~~have ~~overhauls.~~also ~~From time~~resulted toin ~~time~~a ~~the~~change ~~FAA~~in ~~issues~~business ~~airworthiness~~travel, ~~directives~~especially ~~(ADs) that must be incorporated into our aircraft. We are and expect to be~~ in ~~compliance~~short-haul ~~with all applicable requirements of these ADs within the required time periods~~markets.

~~The~~A ~~Department~~significant ofincrease ~~Justice has jurisdiction over airline antitrust matters. The U.S. Postal Service has jurisdiction over certain aspects of the transportation of mail and related services. Labor relations~~ in ~~the~~labor ~~air~~costs ~~transportation~~or ~~industry~~change ~~are regulated under the Railway Labor Act, which vests~~ in ~~the~~key ~~National~~personnel ~~Mediation~~could ~~Board~~adversely ~~(NMB) certain~~affect ~~functions~~our ~~with~~business ~~respect to disputes between airlines~~ and ~~labor~~results ~~unions relating to union representation and collective bargaining agreements. To the extent we continue to pursue alliances with international carriers, we may be subject to certain regulations~~ of ~~foreign agencies~~operations.

InWe ~~November 2001,~~compete against the ~~Aviation~~major ~~and~~U.S. ~~Transportation~~airlines ~~Security~~and ~~Act~~other ~~(the~~businesses ~~Security~~for ~~Act)~~labor ~~was~~in ~~enacted.~~many ~~The Security~~highly ~~Act~~skilled ~~created~~positions. aIf ~~new~~we ~~government~~are ~~agency,~~unable ~~the~~to ~~Transportation Security Administration (TSA)~~hire, ~~which~~ istrain ~~now~~and ~~part~~retain ofqualified ~~the~~employees ~~Department~~at ofa ~~Homeland~~reasonable ~~Security~~cost, ~~and~~or isif ~~responsible~~we ~~for~~lose ~~aviation security.~~the ~~The~~services ~~Security~~of ~~Act~~key ~~mandates~~personnel, ~~that~~we ~~the~~may ~~TSA~~be ~~shall~~unable ~~provide~~to ~~for~~grow ~~the~~or ~~screening~~sustain ofour ~~all~~business. ~~passengers~~In ~~and property,~~such ~~including U.S. mail~~case, ~~cargo,~~our ~~carry-on~~operating ~~and~~results ~~checked baggage,~~ and ~~other~~business ~~articles~~prospects ~~that~~could ~~will~~ be ~~carried~~ ~~aboard~~harmed. aWe ~~passenger~~may ~~aircraft.~~also ~~The~~have ~~TSA~~difficulty ~~performs~~replacing ~~these~~management ~~functions~~or ~~with~~other ~~its~~key ~~own~~personnel ~~federal employees.~~who Onleave ~~December 31~~and, ~~2002~~ therefore, the ~~TSA~~loss ~~began explosive detection screening~~ of ~~all~~any ~~checked baggage. The TSA also provides for increased security on flight decks~~ of ~~aircraft~~these ~~and~~individuals ~~requires federal~~could ~~air~~harm ~~marshals~~our ~~to be present on certain flights~~business.

~~Effective~~Labor ~~February 1,~~costs ~~2002~~are a significant component of our total expenses, ~~the~~accounting ~~Security~~for approximately ~~Act~~23% ~~imposed~~and a27% ~~$2.50~~of ~~per~~our ~~enplanement~~total ~~security~~operating ~~service~~expenses ~~fee (maximum~~in $52008 and 2007, respectively.00 ~~one-way~~As ~~fee)~~of ~~which~~December 31, is2008, ~~collected~~labor byunions ~~the~~represented ~~air~~approximately ~~carriers~~84% ~~and~~of ~~submitted~~our toemployees. ~~the~~Each ~~government to~~of ~~pay~~our ~~for~~represented ~~these~~employee ~~enhanced~~groups ~~security~~has ~~measures.~~a Inseparate ~~addition~~collective bargaining agreement, ~~carriers~~and ~~are~~could ~~required~~make todemands ~~pay~~that ~~an additional~~would ~~amount~~increase toour ~~the~~operating ~~TSA~~expenses and adversely affect our financial performance if we agree to ~~cover~~them. ~~the~~Uncertainty ~~total~~around ~~cost~~open ofcontracts ~~providing~~could ~~security~~be ~~measures~~a ~~equal~~distraction to ~~the amount~~many ~~the~~employees, ~~air~~reduce ~~carriers~~employee engagement ~~paid~~in ~~for~~our ~~screening~~business ~~passengers~~ and ~~property~~divert inmanagement’s ~~2000.~~attention Wefrom ~~paid~~other ~~$9.0 million, $8.4 million~~projects and $7issues.~~1 million~~ toDisengaged ~~the~~employees ~~TSA~~could ~~for~~prevent ~~this~~us ~~security~~from ~~charge~~achieving the operational improvements in ~~2004,~~completion ~~2003~~rate and ~~2002, respectively~~on-time performance that we seek.

~~Recently~~In 2005, Alaska and the ~~United~~Air ~~States~~Line ~~Department~~Pilots ofAssociation ~~Homeland~~(ALPA) ~~Security~~were ~~proposed~~unable ~~raising~~to reach a new agreement, and therefore, pursuant to the ~~aviation~~terms ~~security~~of the collective bargaining ~~fee~~agreement ~~from~~that ~~$2.50~~existed ~~per~~at ~~one-way~~the ~~segment~~time, the parties submitted the agreement to $5binding arbitration.50 ~~per~~That ~~one-way~~arbitration ~~segment~~decision, ~~(or~~which ~~maximum~~was ofeffective $8May 1, ~~for~~2005, aresulted ~~one~~in ~~way trip~~an ~~with~~average ~~multiple~~pilot ~~segments)~~wage reduction of 26%. ~~Although~~That ~~fees~~contract became amendable on May 1, 2007, and ~~taxes~~Alaska ~~are~~has ~~often~~been ~~viewed~~in bynegotiations ~~lawmakers~~with asALPA. ~~pass through~~In ~~costs~~2008, weALPA ~~believe~~requested ~~that~~mediation from the ~~demand~~National ~~for~~Mediation ~~air~~Board ~~travel~~(NMB) isin ~~highly~~order ~~sensitive~~ to ~~price~~assist with contract negotiations. ~~Since~~We ~~all~~have begun meeting with the NMB and hope to reach a ~~such~~negotiated ~~increases~~contract ~~affect~~that recognizes the ~~total~~important ~~ticket~~contributions ~~price~~that ~~paid~~our bypilots ~~consumers~~make while not harming our competitive position. Factoring in pay rates, productivity measures, and pension and postretirement medical benefits, we believe ~~that~~our ~~they~~pilot unit ~~would~~costs ~~reduce passenger~~are ~~traffic~~among ~~and~~the ~~could~~highest ~~have~~in athe ~~negative~~industry ~~impact~~for onthe ~~our~~size ~~results~~of aircraft we operate.

Our continuing obligation to fund our traditional defined-benefit pension plans could negatively affect our ability to compete in the marketplace. 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 are subject to market risk. If market returns are poor in the future, as they were in 2008, our obligation to make additional cash contributions in accordance with the Pension Plan Act of 2006 could increase and harm our liquidity. Poor market returns also lead to higher pension expense in our statement of operations. The calculation of pension expense is dependent on many assumptions that are more fully described in Note 8 to our consolidated financial statements.

Finally, to the extent we are unable to maintain the outsourcing or subcontracting of certain services for our business, we would incur substantial costs, including costs associated with hiring new employees, in order to perform these services in-house.

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.

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

•

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

•

adverse weather conditions;

•

increased security measures or breaches in security; and

~~The~~• ~~Department~~international ofor ~~Transportation,~~domestic ~~under its authority to prevent unfair competitive practices in the industry~~conflicts, ~~has~~terrorist from time to time considered the issuance of pricing and capacity rules that would limit major air carriers’ competitive response to new entrant carriers. Although the Department of Transportation has thus far declined to issue specific competitive guidelinesactivity, ~~it reiterated~~or ~~its~~other ~~intent~~changes ~~to prevent what it considers to be unfair competitive practices~~ in the industry, and to pursue enforcement actions on a case-by-case basis. To the extent that future Department of Transportation enforcement actions either directly or indirectly impose restrictions upon our ability to respond to competitors, our business ~~may be adversely impacted~~conditions. ~~Conversely, a relaxation in either unfair competition enforcement or restrictions could limit our ability to enter new markets or harm our operating results for markets that we have recently entered.~~

~~Airline~~Delays ~~Fares Airlines~~and ~~are~~cancellations ~~permitted~~frustrate topassengers, ~~establish~~reduce ~~their~~aircraft ~~own~~utilization ~~domestic~~and ~~fares~~increase ~~without governmental regulation~~costs, ~~and the~~all ~~industry~~of iswhich ~~characterized~~affect byour ~~vigorous~~profitability. ~~price~~Due ~~competition.~~to ~~The~~our ~~Department~~geographic ofarea ~~Transportation~~of ~~maintains~~operations, ~~authority~~we ~~over~~believe ~~international~~a ~~(generally~~significant ~~outside~~portion of ~~North~~our ~~America)~~operation ~~fares,~~is ~~rates~~more ~~and charges.~~susceptible ~~International~~to ~~fares~~adverse ~~and~~weather ~~rates~~conditions ~~are~~than ~~also~~that ~~subject~~of tomany ~~the jurisdiction~~ of ~~the~~our ~~governments~~competitors. ~~of the~~A ~~foreign~~general ~~countries~~reduction wein ~~serve.~~airline ~~While~~passenger ~~air~~traffic ~~carriers~~as ~~are~~a ~~required~~result toof ~~file~~any ~~and~~of ~~adhere~~the toabove-mentioned ~~international~~factors ~~fare~~could ~~and~~harm ~~rate~~our ~~tariffs~~business, ~~substantial~~financial ~~commissions,~~condition ~~overrides~~ and ~~discounts~~results toof ~~travel agents, brokers and wholesalers characterize many international markets~~operations.

~~Legislation,~~We ~~sometimes~~depend ~~referred to as the “Passengers’ Bill of Rights,” has been discussed in Congress and state legislatures. This legislation could, if enacted, place various limitations~~ on ~~airline~~ ~~fares and/or affect operating practices such as baggage handling and overbooking. In 1999, we, as well as other domestic airlines, implemented~~ a ~~Customer~~few ~~Service~~key ~~Plan~~markets to ~~address~~be a number of service goals, including, but not limited to goals relating to lowest fare availability, delays, cancellations and diversions, baggage delivery and liability, guaranteed fares and ticket refundssuccessful.

ToOur ~~the~~strategy ~~extent legislation~~ is ~~enacted~~to ~~that~~focus ~~would~~on ~~inhibit~~serving ~~our~~a ~~flexibility~~few ~~with~~key ~~respect~~markets, toincluding ~~fares~~Seattle, ~~our revenue~~Portland, ~~management~~Los ~~system,~~Angeles ~~our~~and ~~operations~~Anchorage. orA ~~other~~significant ~~aspects~~portion of our ~~customer~~flights ~~service~~occurs ~~operations,~~to ~~our~~and from ~~financial~~our ~~results~~Seattle ~~could~~hub. beIn ~~adversely~~2008, ~~affected~~passengers to and from Seattle accounted for 62% of Air Group’s total passengers.

~~Fare~~We ~~discounting~~believe bythat ~~competitors~~concentrating ~~has~~our ~~historically~~service offerings ~~had~~in athis ~~negative~~way ~~effect~~allows onus to maximize our ~~financial~~investment ~~results because~~in wepersonnel, ~~generally~~aircraft, ~~match~~and ~~competitors’~~ground ~~fares~~facilities, as well as to ~~maintain~~gain ~~passenger~~greater ~~traffic.~~advantage ~~During~~from ~~recent~~sales ~~years,~~and ~~a number~~marketing ofefforts ~~new~~in ~~low-cost~~those ~~airlines~~regions. ~~have~~As ~~entered~~a ~~the~~result, ~~domestic~~we ~~market~~remain ~~and~~highly ~~several~~dependent ~~major~~on ~~airlines,~~our key ~~including~~markets. ~~Alaska~~Our ~~and~~business ~~Horizon,~~could ~~implemented~~be ~~efforts~~harmed toby ~~lower~~any ~~their~~circumstances ~~cost~~causing ~~structures.~~a ~~Further~~reduction ~~fare reductions,~~in ~~domestic~~demand ~~and~~for ~~international,~~air ~~may~~transportation ~~occur~~ in ~~the~~our ~~future~~key markets. IfAn ~~fare~~increase ~~reductions~~in ~~are~~competition ~~not~~in ~~offset by~~our ~~increases~~key inmarkets ~~passenger~~could ~~traffic,~~also ~~cost~~cause ~~reductions~~us orto ~~changes~~reduce infares ~~the~~or ~~mix~~take ofother ~~traffic~~competitive measures that ~~improves yields,~~could harm our ~~operating~~business, ~~results~~financial ~~will~~condition beand ~~negatively~~results ~~impacted~~of operations.

InThe ~~February 2004,~~airline ~~Alaska~~industry ~~initiated~~continues ato ~~fare~~face ~~simplification~~potential ~~plan~~security ~~whereby~~concerns ~~a number of restrictions were~~and ~~eliminated~~related ~~and the gap between the highest and lowest fares was reduced~~costs. ~~The goal of this initiative was to increase customer value and simplify the customer’s purchase decision by~~

The terrorist attacks of September 11, 2001 and their aftermath negatively affected the airline industry, including our company. These attacks and other foiled terror plots since then have resulted in new security measures that also impacted 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:

•

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

•

significantly increase security and insurance costs;

•

make war risk or other insurance unavailable or extremely expensive;

•

increase fuel costs and the volatility of fuel prices;

•

increase costs from airport shutdowns, flight cancellations and delays resulting from security breaches and perceived safety threats; and

•

result in a grounding of commercial air traffic by the FAA.

The occurrence of any of these events would harm our business, financial condition and results of operations.

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

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.

Although 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 industry. 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.

~~reducing~~Our ~~the~~reputation ~~number~~and offinancial ~~fares~~results ~~sold.~~could Webe ~~believe~~harmed ~~this~~in ~~initiative~~the ~~was~~event ~~revenue~~of ~~neutral~~an ~~overall~~airline accident or incident.

~~Airport~~An ~~Access Heavily~~accident ~~used~~or ~~airports~~incident ~~may~~involving ~~have~~one ~~restrictions~~of ~~with~~our ~~respect~~aircraft tocould ~~the~~involve ~~number~~a ofsignificant ~~permitted~~loss ~~take-offs~~of life and result in a loss of confidence in our airline ~~landings,~~by the ~~total~~flying ~~permitted~~public. ~~annual~~In ~~seat~~addition, ~~capacity~~we tocould beexperience ~~operated~~significant atpotential anclaims ~~airport~~from injured passengers and surviving relatives, as well as costs for the ~~use~~repair or ~~allocation~~ replacement of ~~airport~~a ~~slots,~~damaged aircraft and its consequential temporary or ~~other~~permanent loss ~~restrictions~~from service. WeAlthough ~~currently~~we ~~have~~strive ~~sufficient~~to ~~authorizations~~maintain ~~to operate~~the ~~our~~highest ~~existing~~standards ~~flights~~of safety and ~~have~~reliability, ~~generally~~should ~~been~~an ~~able~~accident toor ~~obtain~~incident ~~gates~~nevertheless tooccur, ~~expand~~we ~~our~~maintain ~~operations~~ liability insurance in amounts and ~~change~~of ~~our~~the ~~schedules~~type generally consistent with industry practice. However, wethe ~~cannot~~amount ~~assure~~of ~~you~~such ~~that~~coverage may not be adequate and we ~~will~~may be ~~able~~forced to ~~obtain authorizations~~bear ~~for~~substantial ~~these~~losses ~~purposes~~from an accident. Substantial claims resulting from an accident in ~~the~~excess ~~future~~of our related insurance coverage would harm our business and financial results. Moreover, any aircraft accident or beincident, ~~able~~even toif dofully soinsured onand ~~economical~~even ~~terms.~~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.

~~Environmental Matters~~ We ~~are~~rely ~~subject~~heavily ~~to various laws and government regulations concerning environmental matters and employee safety and health in the U.S. and other countries. U.S. federal laws that have a particular impact~~ on usautomated ~~include~~systems ~~the~~to ~~Airport~~operate ~~Noise~~our ~~and Capacity Act of 1990~~business, ~~the Clean Air Act, the Resource Conservation~~ and ~~Recovery~~a ~~Act,~~failure ~~the Clean Water Act, the Safe Drinking Water Act, and the Comprehensive Environmental Response, Compensation and Liability Act, or Superfund Act. We are also subject to the oversight~~ of ~~the Occupational Safety and Health Administration, known as OSHA,~~these ~~concerning~~systems ~~employee safety and health matters. The U.S. Environmental Protection Agency,~~ or ~~EPA, OSHA,~~by ~~and~~their ~~other~~operators ~~federal~~could ~~agencies~~harm ~~have been authorized to promulgate regulations that have an impact on~~ our ~~operations~~business. In addition to these federal activities, various states have been delegated certain authorities under the aforementioned federal statutes. Many state and local governments have adopted environmental and employee safety and health laws and regulations, some of which are similar to federal requirements. We maintain our own continuing safety, health and environmental programs in order to meet or exceed these requirements.

~~The~~We ~~Airport~~depend ~~Noise~~on ~~and~~automated ~~Capacity~~systems ~~Act~~to ~~recognizes~~operate ~~the~~our ~~rights~~business, including our computerized airline reservation system, our telecommunication systems, our website, our maintenance systems, and other systems. Substantially all of ~~airport~~our ~~operators~~tickets ~~with~~are ~~noise~~issued ~~problems~~ to ~~implement~~passengers ~~local~~as ~~noise~~electronic ~~abatement~~tickets. ~~programs~~We sodepend ~~long~~on asour ~~they~~computerized doreservation ~~not~~system ~~interfere~~to ~~unreasonably~~be ~~with~~able ~~interstate~~to orissue, ~~foreign~~track ~~commerce~~and oraccept ~~the~~these ~~national~~electronic ~~air~~tickets. ~~transportation~~In order for our operations to work efficiently, our website and reservation system. ~~Authorities~~must inbe ~~several cities~~able ~~have~~to ~~promulgated~~accommodate ~~aircraft~~a ~~noise~~high ~~reduction~~volume ~~programs~~of traffic, ~~including~~maintain ~~the~~secure ~~imposition~~information, ofand ~~nighttime~~deliver important flight ~~curfews~~information. ~~The~~Substantial ~~Airport~~or ~~Noise~~repeated ~~and~~website, ~~Capacity~~reservations ~~Act~~system ~~generally~~or ~~requires~~telecommunication ~~FAA~~systems ~~approval~~failures could reduce the attractiveness of ~~local~~our ~~noise restrictions~~services onand ~~aircraft~~cause our customers to purchase tickets from another airline. ~~While~~In addition, we ~~have~~rely ~~had~~on ~~sufficient~~other automated systems for crew scheduling, ~~flexibility~~flight todispatch, ~~accommodate~~and ~~local noise~~other ~~restrictions~~operational ~~imposed~~needs. toDisruption ~~date~~in, ~~our~~changes ~~operations~~to, or a breach of these systems could beresult ~~adversely~~in ~~affected~~the ifloss ~~such~~of ~~regulations become~~important ~~more~~data, ~~restrictive~~an orincrease ~~widespread.~~of our expenses and a possible temporary cessation of our operations.

~~Although~~We werely ~~do not currently anticipate that these regulatory matters, individually or collectively, will have a material impact~~ on ~~our~~partner ~~financial~~airlines ~~condition,~~for ~~results~~codeshare ofand ~~operations~~frequent orflyer ~~cash flows,~~marketing ~~we cannot assure you that new regulations or compliance issues that we do not currently anticipate will not harm our financial condition, results of operations or cash flows in future periods~~arrangements.

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 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 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.

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

We 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.

Our use of 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 us to renegotiate existing agreements on less favorable terms. These events could result in disruptions in our operations or increases in its cost structure.

~~FUEL Our~~We ~~operations~~ are ~~significantly~~dependent affected by the availability and price of jet fuel. Fuel costs were approximately 20% of our total operating expenses in 2004 and 15% in 2003. Fuel prices, which can be volatile and which are outside of our control, can have a significant impact on ~~our operating results. Currently,~~ a ~~one-cent~~limited ~~change~~number inof ~~the~~suppliers ~~fuel~~for ~~price per gallon affects annual fuel costs by approximately $3.5 million. We believe that operating fuel-efficient~~ aircraft ~~helps~~and ~~to mitigate the effect of high fuel prices~~parts.

We ~~purchase~~are ~~fuel~~dependent ~~hedge~~on ~~contracts~~Boeing toas ~~reduce~~ our ~~exposure~~sole tosupplier ~~fluctuations~~for inaircraft ~~the~~and ~~price~~many ofaircraft ~~jet fuel~~parts. ~~Due~~ toWe ~~the~~are ~~competitive~~also ~~nature~~dependent ofon ~~the~~a ~~airline~~sole ~~industry,~~supplier ~~airlines~~for ~~often~~aircraft ~~are~~engines. ~~unable~~As toa ~~pass~~result, onwe are ~~increased~~more ~~fuel~~vulnerable ~~prices~~ to ~~customers~~any byproblems ~~increasing~~associated ~~fares.~~with ~~Conversely,~~the ~~any~~supply ~~potential benefit~~ of ~~lower fuel~~those ~~prices~~aircraft ~~may be offset by increased fare competition~~ and ~~lower~~parts, ~~revenues.~~including ~~Because~~design ofdefects, ~~rising~~mechanical ~~fuel prices~~problems, ~~our~~contractual ~~fuel~~performance ~~hedging~~by ~~program~~the ~~has~~manufacturers, ~~resulted~~or inadverse ~~significant~~perception ~~savings~~by ~~over~~ the ~~last~~public ~~three~~that ~~years. See~~would ~~Item 7,~~result ~~“Management’s~~in ~~Discussion~~customer avoidance ~~and~~or ~~Analysis~~in ofactions ~~Financial~~by ~~Condition~~the ~~and~~FAA ~~Results~~resulting ~~of Operations,”~~in ~~for~~an ainability ~~discussion~~to ofoperate our ~~fuel hedging activities~~aircraft.

~~While~~Changes ~~we do not currently anticipate a significant reduction~~ in ~~fuel~~government ~~availability,~~regulation ~~dependency~~imposing onadditional ~~foreign~~requirements ~~imports of crude oil~~ and ~~the~~restrictions ~~possibility of changes in government policy~~ on ~~jet~~our ~~fuel production,~~operations ~~transportation and marketing make it impossible to predict the future availability of jet fuel. In the event of significant hostilities~~ or ~~other~~on ~~conflicts in oil producing areas, there could be reductions in~~ the ~~production~~airports ~~and/or~~at ~~importation~~which ofwe ~~crude~~operate ~~oil and price increases, which~~ could ~~adversely~~increase ~~affect~~ our ~~business.~~operating Ifcosts ~~there~~and ~~were~~result ~~major reductions~~ in ~~the~~service ~~availability~~delays ofand ~~jet fuel, our business would be adversely affected~~disruptions.

~~FREQUENT~~Airlines ~~FLYER~~are ~~PROGRAM All~~subject ~~major~~to ~~airlines~~extensive ~~have~~regulatory ~~developed~~and ~~frequent~~legal ~~flyer~~requirements, ~~programs~~both asdomestically aand ~~way~~internationally, ofthat ~~increasing~~involve ~~passenger~~significant ~~loyalty~~compliance costs. ~~Alaska’s~~ ~~Mileage~~In ~~Plan~~the ~~allows~~last ~~members~~several toyears, ~~earn~~Congress ~~mileage~~has bypassed ~~flying on Alaska~~laws, ~~Horizon~~ and ~~other~~the U.S. ~~participating~~Department ~~airlines~~of Transportation, the Transportation Security Administration and bythe ~~using~~Federal Aviation Administration (the ~~services~~“FAA”) ofhave ~~non-airline~~issued ~~partners,~~regulations ~~which~~that ~~include~~have arequired ~~credit card~~significant ~~partner,~~expenditures ~~telephone~~relating ~~companies,~~to ~~hotels,~~the maintenance and ~~car~~operation ~~rental agencies~~of airlines. ~~Alaska~~For isexample, ~~paid~~the byFAA ~~non-airline partners~~has ~~for~~issued ~~the~~regulations ~~miles~~covering, itamong ~~credits~~other tothings, ~~member~~security ~~accounts.~~measures, ~~With~~collision ~~advance~~avoidance ~~notice~~systems, ~~Alaska~~noise ~~has~~abatement, ~~the~~environmental ~~ability to~~restrictions, ~~change~~safety ~~the~~procedures ~~Mileage~~and ~~Plan~~maintenance ~~terms,~~regulations. ~~conditions~~Similarly, ~~partners,~~many ~~mileage~~aspects of ~~credits~~an airline’s operations are subject to increasingly stringent federal, state and ~~award~~local ~~levels~~laws ~~or terminate~~protecting the ~~program~~environment.

~~Mileage~~Because ~~can~~of besignificantly higher ~~redeemed~~security ~~for free or discounted travel~~ and ~~for~~ other ~~travel~~costs ~~industry~~incurred ~~awards.~~by ~~Upon accumulating~~airports ~~the~~since ~~necessary~~September 11, ~~mileage~~2001, ~~members~~many ~~notify~~airports ~~Alaska~~have ofincreased their ~~award~~rates ~~selection.~~and ~~Over~~charges ~~75%~~to ~~of the~~air ~~free~~carriers. ~~flight~~Additional ~~awards~~laws, onregulations, ~~Alaska~~taxes, and ~~Horizon~~airport ~~are~~rates ~~subject to blackout dates~~ and ~~capacity-controlled seating.~~charges ~~Mileage~~have ~~Plan~~been ~~accounts~~proposed ~~are~~from ~~generally~~time to ~~deleted~~time ~~after~~that ~~three~~could ~~years~~significantly ofincrease ~~inactivity~~the incost ~~that member’s account. As~~ of ~~December 31,~~airline ~~2004~~operations ~~and~~or ~~2003,~~reduce ~~Alaska~~the ~~estimated~~demand ~~that~~for ~~2,493,000~~air ~~and~~travel. ~~2,353,000, respectively,~~Although ~~round-trip~~lawmakers ~~flight~~may ~~awards~~impose ~~were~~these ~~eligible~~additional ~~for~~fees ~~redemption~~and byview ~~Mileage~~them ~~Plan~~as ~~members who have mileage credits exceeding the 20,000~~“pass-~~mile~~through” ~~free round-trip domestic ticket award threshold. Of those eligible awards~~costs, ~~Alaska~~we ~~estimated~~believe that ~~approximately~~a ~~88%~~higher oftotal ~~those awards would ultimately be~~ticket ~~redeemed.~~price ~~For~~will ~~the~~influence ~~years~~consumer ~~2004,~~purchase ~~2003~~ and ~~2002,~~travel ~~approximately~~decisions ~~631,000,~~and ~~606,000,~~may ~~and~~result ~~441,000 round-trip~~in ~~flight~~an ~~awards~~overall ~~were~~decline ~~redeemed~~in ~~and~~passenger ~~flown~~traffic, onwhich ~~Alaska~~would ~~and~~harm ~~Horizon~~our business.

ITEM 1B.

UNRESOLVED STAFF COMMENTS

None

ITEM 2.

PROPERTIES

AIRCRAFT

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


Aircraft Type	Passenger Capacity	Owned	Leased	Total	Average Age in 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

*	C=Combination freighter/passenger; F=Freighter

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

As 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.

~~Those~~We ~~awards~~plan ~~represent~~to ~~approximately~~sell ~~7.3%~~up ~~for~~to ~~2004,~~four ~~8.7%~~B737-700 ~~for~~aircraft ~~2003~~in ~~and~~2009 ~~6.8%~~to ~~for~~help ~~2002~~in ofour ~~the~~capacity ~~total passenger~~reduction ~~miles~~plans. ~~flown~~Given onthis ~~Alaska~~plan and ~~Horizon~~our expected ~~for~~deliveries, ~~each period. For~~ the ~~years~~following ~~2004,~~table ~~2003~~displays ~~and~~the ~~2002, approximately~~currently ~~212,000,~~anticipated ~~174,000~~fleet ~~and~~counts ~~174,000,~~as ~~respectively,~~of ~~round-trip~~the ~~flight~~end ~~awards~~of ~~were~~each ~~redeemed and~~quarter ~~flown~~in ~~on airline partners~~2009.

For miles earned by flying on Alaska and travel partners, the estimated incremental cost of providing free travel awards is recognized as a selling expense and accrued as a liability as miles are accumulated. The incremental cost does not include a contribution to overhead, aircraft cost, or profit. Alaska also sells mileage credits to non-airline partners, such as hotels, car rental agencies, and a national bank that rewards users of its credit card. Alaska defers a majority of the sales proceeds, and recognizes these proceeds as revenue when the award transportation is provided on Alaska or another partner airline. The deferred proceeds are recognized as passenger revenue for awards issued and flown on Alaska or Horizon and as other revenue-net for awards issued and flown on other airlines. At December 31, 2004 and 2003, the deferred revenue and the total liability for providing free travel on Alaska and Horizon and for estimated payments to partner airlines was $409.3 million and $336.0 million, respectively, the majority of which is deferred revenue from the sale of mileage credits. Deferred revenue and liabilities associated with the Mileage Plan are carried on Alaska’s balance sheet since Alaska is the sponsor and ticketing carrier.


	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

~~OTHER~~* ~~INFORMATION Seasonality~~C=Combination ~~and~~freighter/passenger; Other Factors Our results of operations for any interim period are not necessarily indicative of those for the entire year, because our business is subject to seasonal fluctuations. Our operating income is generally lowest (or loss the greatest) during the first and fourth quarters due principally to lower traffic and sometimes due to adverse weather conditions, generally increases in the second quarter and generally reaches its highest level during the third quarter. F=Freighter

~~The~~GROUND ~~airline~~FACILITIES ~~industry~~AND isSERVICES characterized generally by low profit margins and high fixed costs, primarily for wages, aircraft fuel, debt service and rent. The expenses of an aircraft flight do not vary significantly with the number of passengers carried and, as a result, a relatively small change in the number of passengers or in pricing has a disproportionate effect on an airline’s operating and financial results. Accordingly, a minor shortfall in expected revenue levels could cause a disproportionately negative impact on our operating results. In addition to passenger loads, factors that could cause our quarterly operating results to vary include:

•We ~~changes~~lease inticket ~~fuel~~counters, ~~security~~gates, cargo and ~~insurance~~baggage ~~costs~~space, •office ~~increases in personnel~~space, ~~marketing, aircraft ownership~~ and other ~~operating expenses to~~ support ~~our~~areas ~~existing~~at ~~operation and anticipated growth, •~~ the ~~timing~~majority ~~and amount~~ of ~~maintenance expenditures, •~~ the ~~timing~~airports ~~and~~they ~~success~~serve. ofWe ~~our~~also ~~growth~~own ~~plan~~terminal asbuildings wein ~~increase~~various ~~flights~~cities in ~~existing~~the ~~markets~~state ~~and~~of ~~enter~~Alaska. ~~new markets and~~

We have centralized operations in several buildings located at or near Seattle-Tacoma International Airport (Sea-Tac) near Seattle, Washington. These include a five-bay hangar and shops complex (used primarily for line maintenance), 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. We also lease a stores warehouse, and office spaces for a reservation facility and for various administrative functions in Kent, Washington. Our major facilities outside of Seattle include a regional headquarters building, an air cargo facility and a hangar/office facility in Anchorage, as well as leased reservations facilities in Phoenix, Arizona 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.

ITEM 3.

LEGAL PROCEEDINGS

Grievance with International Association of Machinists

In June 2005, the International Association of Machinists (IAM) filed a grievance under its Collective Bargaining Agreement (CBA) with Alaska alleging 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

The Company is a party to routine litigation matters incidental to its business and with respect to which no material liability is expected.

Management believes the ultimate disposition of any of the matters discussed above is not likely to materially affect the Company’s 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 arbitrators, judges and juries.

•PART ~~pricing~~II ~~initiatives, both internal and external.~~

InITEM ~~addition, seasonal variations in traffic, various expenditures and weather affect our operating results from quarter to quarter~~5. ~~Given~~MARKET ~~our~~FOR ~~high~~THE ~~proportion~~REGISTRANT'S ofCOMMON ~~fixed costs~~EQUITY, ~~seasonality~~RELATED ~~can~~STOCKHOLDER ~~affect our profitability from quarter to quarter. Many of our areas of operations experience inclement weather conditions in the winter~~MATTERS, ~~causing~~AND ~~increased~~ISSUER ~~costs~~PURCHASES ~~associated~~OF ~~with~~EQUITY deicing aircraft, canceled flights and accommodating displaced passengers. Due to our geographic area of operations, we can be more susceptible to adverse weather conditions than some of our competitors (particularly in the State of Alaska and in the Pacific Northwest), who may be better able to spread weather-related risks over larger route systems. SECURITIES

~~The~~All ~~results~~ of ~~operations~~our inoutstanding ~~the~~shares ~~air~~are ~~transportation~~owned ~~business~~by ~~have~~Air ~~also~~Group. ~~significantly~~As ~~fluctuated~~of ~~in the~~February 15, ~~past~~2009, inAlaska ~~response~~had to500 ~~general~~shares ~~economic~~of ~~conditions.~~common ~~Fare initiatives~~stock, ~~fluctuations~~$1.00 inpar ~~fuel~~value ~~prices~~per share, ~~labor~~ ~~actions~~issued and outstanding. ~~other~~There ~~factors~~is ~~could~~no ~~impact~~established ~~this~~public ~~seasonal~~trading ~~pattern~~market for our common stock.

NoITEM ~~material part of our business or that of our subsidiaries is dependent upon a single customer or very few customers~~7. ~~Consequently,~~MANAGEMENT'S ~~the~~DISCUSSION ~~loss~~AND ofANALYSIS ~~our~~OF ~~largest~~FINANCIAL ~~few~~CONDITION ~~customers~~AND ~~would~~RESULTS ~~not~~OF ~~have a materially adverse effect upon our financial condition, results of operations or cash flows.~~ OPERATIONS

~~Insurance We~~As ~~carry~~permitted ~~insurance~~by ~~for~~General ~~passenger~~Instruction ~~liability~~I(2)(a), ~~property~~the ~~damage~~following ~~and~~section ~~hull~~contains ~~insurance~~management’s ~~for~~narrative ~~damage~~analysis toof our ~~aircraft,~~ inresults ~~amounts~~of ~~and~~operations as of ~~the~~and ~~type~~for ~~generally~~the ~~consistent~~year ~~with~~ended ~~industry~~December 31, ~~practice~~2008.

AsOVERVIEW a result of the events of September 11, 2001, aviation insurers have significantly reduced the maximum amount of insurance coverage available to commercial air carriers for third-party liability for claims resulting from acts of terrorism, war or similar events. At the same time, they significantly increased the premiums for such coverage as well as for aviation insurance in general. Although insurance rates have declined, they are still somewhat above pre-September 11 levels and will likely remain there for the foreseeable future.

~~Pursuant~~The tofollowing ~~authority~~Management’s Discussion ~~granted~~and inAnalysis ~~the~~of ~~Air~~Financial ~~Transportation~~Condition ~~Safety~~ and ~~System~~Results ~~Stabilization~~of ~~Act,~~Operations (MD&A) is intended to help the ~~Homeland~~ ~~Security~~reader ~~Act~~understand ofour ~~2002~~company, our operations and our present business environment. MD&A is provided as ~~amended~~a bysupplement to – and should be read in conjunction with – our financial statements and the ~~Consolidated~~accompanying ~~Appropriations~~notes. ~~Act,~~All ~~2005,~~statements in the following discussion that are not statements of historical information or descriptions of current accounting policy are forward-looking ~~Government~~statements. ~~has~~Please ~~offered,~~consider ~~and~~our weforward-looking ~~have~~statements ~~accepted,~~in ~~war~~light ~~risk~~of ~~insurance~~the risks referred to ~~replace~~in ~~commercial~~this ~~war~~report’s ~~risk insurance~~introductory ~~through~~cautionary ~~August 31~~note and the risks mentioned in Part I, ~~2005~~“Item 1A. Risk Factors.” This overview summarizes the MD&A, which includes the following sections:

~~Other~~• ~~Government~~Year ~~Matters We have elected to participate~~ in ~~the~~Review ~~Civil~~– ~~Reserve~~highlights ~~Air~~from ~~Fleet~~2008 ~~program,~~outlining ~~whereby~~some weof ~~have agreed to make available to~~ the ~~federal~~major ~~government~~events athat ~~certain~~happened ~~number~~during ~~of aircraft in~~ the ~~event~~year ofand ahow ~~military call-up.~~they ~~The~~affected ~~government~~our ~~would~~financial ~~reimburse us for the use of such aircraft~~performance.

•

Results of Operations – an in-depth analysis of our results of operations for 2008 compared to 2007. 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 2009.

YEAR IN REVIEW

In 2008, we reported a net loss of $96.4 million compared to net income of $134.8 million in 2007. The largest driver of the decline in results was fuel expense. Our fuel expense increased by $424.9 million over 2007, primarily due to significantly higher average fuel prices in 2008. Oil prices reached record levels during the summer months, but declined sharply in the last few months of 2008. Even with the benefit of $101.8 million of net cash settlements from our fuel hedge program during the year, our “economic” fuel cost (as defined on page 21) increased $221.2 million, or 28.3%, on a 5.8% decline in fuel gallons consumed. 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:

•

revenue of $42.3 million associated with the change in Mileage Plan 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.

•

fleet transition costs of $47.5 million in 2008.

•

restructuring charges of $12.9 million associated with reductions in work force.

The revenue environment in 2008 was characterized by increased competition in our West Coast market and softer demand in the last half of the year due to the current economic recession. Yield improved over 2007 as we and other carriers added or increased ancillary fees and raised fares to cover higher fuel costs. We posted slightly higher passenger traffic for the full year. All of these factors, along with a one-time $42.3 million benefit from changes in our Mileage Plan program, resulted in an increase in total operating revenues of $151.4 million.

~~ITEM~~Our 2total operating expenses increased by $494.1 ~~PROPERTIES~~million ~~Aircraft~~during ~~The~~2008 ~~following~~compared ~~tables~~to ~~describe~~2007, primarily as a result of the significant ~~aircraft~~increase wein ~~operate~~fuel costs along with an increase in fleet transition costs and ~~their~~restructuring ~~average~~charges. ~~age~~See at“Results ~~December~~of ~~31,~~Operations” ~~2004:~~below for further discussion of changes in revenues and operating expenses.

	Passenger								Average Age
Aircraft Type	Capacity		Owned		Leased		Total		in Years
Alaska Airlines
Boeing 737-200C		111		7		1		8		25.0
Boeing 737-400		144		9		31		40		9.7
Boeing 737-700		120		17		5		22		3.8
Boeing 737-900		172		12		—		12		2.4
Boeing MD-80		140		15		11		26		12.8
				60		48		108		9.6

Accomplishments and Highlights

~~Part II,~~Accomplishments ~~Item 7, “Management’s Discussion~~ and ~~Analysis of Financial Condition and Results of~~highlights ~~Operations,”~~from ~~discusses~~2008 ~~future~~include: ~~orders and options for additional aircraft.~~

32• ofWe ~~the~~improved 60our ~~aircraft~~operational ~~owned~~performance byin ~~Alaska~~2008 as ofmeasured ~~December 31,~~by ~~2004 are subject to liens securing long~~on-~~term~~time ~~debt.~~arrivals ~~The~~and ~~Company~~completion ~~expects to have additional aircraft encumbered pending a re-negotiated credit facility~~rate. ~~Alaska’s~~For ~~leased~~the ~~737-200C,~~full ~~737-400~~year, ~~737-700~~we ~~and~~reported MDan on-80time ~~aircraft~~performance ~~have lease expiration dates in 2006, between 2006~~ and ~~2016,~~completion ~~between~~rate ~~2006~~of ~~and~~78.3% ~~2020~~ and ~~between 2007 and 2013, respectively~~99.2%, ~~Alaska has the option to extend most of the leases for additional periods~~respectively, orcompared ~~the right~~ to ~~purchase the aircraft at the end of the lease term, usually at the then fair market value of the aircraft~~72.4% ~~For information regarding obligations under capital leases~~ and ~~long-term operating~~99.0%, ~~leases~~respectively, ~~see~~for ~~Note 6 to Financial Statements~~2007.

At• ~~December 31,~~We ~~2004,~~received ~~all of our aircraft met~~ the ~~Stage 3 noise requirements under the Airport Noise and Capacity Act of 1990~~J.D. ~~However,~~Power ~~special noise ordinances restrict the timing of flights operated by Alaska~~ and ~~other~~Associates ~~airlines~~“Highest atCustomer ~~Burbank,~~Satisfaction” ~~Long~~award ~~Beach,~~in ~~Orange~~2008 ~~County,~~among ~~San~~North ~~Diego,~~America ~~San~~Airlines ~~Jose and~~in ~~Palm~~a ~~Springs.~~tie Inwith ~~addition,~~Continental ~~Orange County, Reagan National, O’Hare and Long Beach airports restrict the type of aircraft and number of flights~~Airlines.

~~Ground~~• ~~Facilities~~We ~~and~~won ~~Services Alaska leases ticket counters, gates, cargo and baggage space, office space, and other support areas at~~ the ~~majority~~2007 “Program of the ~~airports~~Year” ~~they~~Freddie ~~serve.~~award ~~Alaska~~for ~~also~~our ~~owns~~Mileage ~~terminal~~Plan ~~buildings~~program in ~~various cities in the state of Alaska~~2008.

~~Alaska~~• ~~has~~We ~~centralized~~reached ~~operations~~an inenhanced ~~several~~long-term ~~buildings~~agreement ~~located~~with atDelta orthat ~~near~~will ~~Seattle-Tacoma International~~benefit ~~Airport~~our ~~(Sea-Tac)~~customers inas ~~Seattle,~~it ~~Washington.~~makes ~~The~~us ~~owned~~Delta’s ~~buildings,~~preferred ~~including~~partner ~~land~~on ~~unless located~~the onWest ~~leased~~Coast. ~~airport~~Other ~~property,~~benefits include aenhanced ~~three-bay~~frequent ~~hangar~~flyer ~~facility with maintenance shops, a flight operations~~ and ~~training~~lounge ~~center,~~reciprocity ~~an air cargo facility, an information processing center, several office buildings and our corporate headquarters~~agreements. ~~Alaska also leases a two-bay~~

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

~~Table~~Fleet ofTransition ~~Contents~~

~~hangar/office~~We completed ~~facility~~our attransition ~~Sea-Tac,~~to aan ~~warehouse~~all-B737 ~~and~~fleet ~~reservation/office facility~~ in ~~Kent,~~2008 ~~WA,~~as ~~and~~our ~~a reservation~~final ~~center~~MD-80 inaircraft ~~Boise,~~were ~~ID.~~removed ~~Alaska’s~~from ~~other~~service ~~major~~during ~~facilities~~the ~~include~~year. aWe ~~regional~~now ~~headquarters building,~~have anone ~~air~~of ~~cargo~~the ~~facility~~youngest, ~~and~~most ~~a leased hangar/office facility in Anchorage; a reservations center in Phoenix; and a leased two~~fuel-~~bay~~efficient ~~maintenance~~fleets ~~facility~~ in ~~Oakland~~the industry.

~~ITEM 3. LEGAL PROCEEDINGS~~ We ~~are~~have afour ~~party~~MD-80 toaircraft ~~routine~~under ~~litigation~~long-term ~~incidental~~lease toarrangements ~~our~~that ~~business~~were ~~and~~retired ~~with~~prior ~~respect~~ to ~~which no material liability is expected. Management believes~~ the ~~ultimate~~end ~~disposition~~ of ~~these~~their ~~matters~~lease isterms ~~not~~and ~~likely~~placed toin ~~materially~~temporary ~~affect~~storage ~~our~~at ~~financial~~an ~~position~~aircraft storage ~~or results of operations~~facility. ~~This~~As ~~forward-looking~~a ~~statement~~result isof ~~based~~their ongrounding, ~~management’s~~we ~~current~~recorded ~~understanding~~a of$47.5 ~~the~~million ~~relevant~~charge ~~law~~during ~~and~~2008 ~~facts;~~associated itwith isthese ~~subject~~aircraft torepresenting ~~various contingencies, including~~ the ~~potential~~remaining ~~costs~~obligation ~~and~~under ~~risks associated with litigation and~~ the ~~actions~~existing oflease ~~judges and juries~~contracts.

~~Our~~Fuel ~~existing~~Hedging pilot contract provides that, if a negotiated agreement on the entire contract was not reached by December 15, 2004, ten contract issues plus wage rates would be submitted to an interest arbitrator. Issues submitted generally relate to pension plans, medical insurance, profit sharing, code sharing and work rules. The parties did not reach an agreement, and the issues have been submitted to binding arbitration in March 2005 with a decision to be effective in May 2005. The pilot labor contract contains market related standards for wages and non-wage issues.

~~PART~~We IIutilize primarily crude oil call options to decrease our 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.

~~ITEM~~In ~~5. MARKET~~the ~~FOR~~fourth ~~THE~~quarter ~~REGISTRANT’S~~of ~~COMMON~~2008, ~~STOCK~~we ~~AND~~restructured ~~RELATED~~our ~~STOCKHOLDER~~hedge ~~MATTERS~~portfolio to take advantage of lower fuel prices. We were able to ~~All~~reduce our 2009 average strike price from $103 per barrel at the end of ~~Alaska’s~~the ~~outstanding~~third ~~common~~quarter ~~stock~~of is2008 ~~held~~to by$76 ~~Air~~per ~~Group~~barrel ~~and~~for ~~such~~50% ~~stock~~of isthe ~~not~~planned ~~traded~~2009 inconsumption. ~~any~~As part of this restructuring effort, we terminated some of the previously held contracts. ~~market~~We realized losses on the termination of these contracts of $41.5 Nomillion ~~cash~~representing ~~dividend~~the ~~has~~difference ~~been~~between the original premiums paid ~~since~~to ~~1989~~purchase those contracts and ~~Alaska~~the ~~does~~cash ~~not~~received ~~expect~~from tothe ~~pay~~counterparty ~~regular~~upon termination. We believe that ~~dividends~~restructuring tothe ~~Air~~hedge ~~Group~~portfolio was a wise use of our resources and consistent with our stated objective of managing volatility.

15Operational Performance

~~Table~~Our core promise to our customers is to get them and their bags to their destinations safely and on time. Operational performance was a top initiative in 2008 and we believe we made significant 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 ~~Contents~~the current-year performance, our employees received higher payouts under our Operational Performance Rewards program.

~~Alaska~~14 ~~Airlines Financial and Statistical Data~~

	Quarter Ended December 31									Year Ended December 31
							%									%
	2004			2003			Change			2004			2003			Change
Financial Data (in millions):
Operating Revenues:
Passenger	$	477.8		$	460.3			3.8		$	2,023.6		$	1,840.4			10.0
Freight and mail		21.1			17.5			20.6			86.4			77.3			11.8
Other — net		32.4			26.7			21.3			123.0			109.7			12.1
Total Operating Revenues		531.3			504.5			5.3			2,233.0			2,027.4			10.1
Operating Expenses:
Wages and benefits		187.0			199.9			(6.5	)		798.5			778.6			2.6
Employee profit sharing		0.9			2.9		NM				1.2			2.9		NM
Contracted services		26.2			20.7			26.6			96.5			81.6			18.3
Aircraft fuel		135.6			79.9			69.7			472.0			312.1			51.2
Aircraft maintenance		34.5			35.7			(3.4	)		145.8			153.4			(5.0	)
Aircraft rent		28.0			31.1			(10.0	)		113.5			123.9			(8.4	)
Food and beverage service		11.9			13.9			(14.4	)		49.8			58.7			(15.2	)
Other selling expenses and commissions		31.1			39.0			(20.3	)		132.2			148.0			(10.7	)
Depreciation and amortization		32.9			31.7			3.8			128.1			119.5			7.2
Loss on sale of assets		2.6			2.1		NM				2.0			3.4		NM
Landing fees and other rentals		35.9			34.3			4.7			142.0			127.8			11.1
Other		35.6			34.0			4.7			146.6			136.9			7.1
Restructuring charges		25.9			—			100.0			53.4			—			100.0
Impairment of aircraft		—			—			—			36.8			—			100.0
Total Operating Expenses		588.1			525.2			12.0			2,318.4			2,046.8			13.3
Operating Loss		(56.8	)		(20.7	)	NM				(85.4	)		(19.4	)	NM
Interest income		6.2			4.9						26.2			15.2
Interest expense		(11.0	)		(11.3	)					(44.1	)		(45.2	)
Interest capitalized		0.4			0.2						1.1			1.5
U.S. government compensation		—			—						—			52.8
Other — net, including fuel hedging gains (losses)		(7.7	)		(0.4	)					75.2			6.9
		(12.1	)		(6.6	)					58.4			31.2
Income (Loss) Before Income Tax	$	(68.9	)	$	(27.3	)	NM			$	(27.0	)	$	11.8		NM
Operating Statistics:
Revenue passengers (000)		3,998			3,712			7.7			16,295			15,047			8.3
RPMs (000,000)		3,976			3,608			10.2			16,231			14,554			11.5
ASMs (000,000)		5,452			5,194			5.0			22,276			20,804			7.1
Passenger load factor		72.9	%		69.5	%	3.4		pts		72.9	%		70.0	%	2.9		pts
Yield per passenger mile		12.02	¢		12.76	¢		(5.8	)		12.47	¢		12.65	¢		(1.4	)
Operating revenue per ASM		9.75	¢		9.71	¢		0.4			10.02	¢		9.74	¢		2.9
Operating expenses per ASM (a)		10.79	¢		10.11	¢		6.7			10.41	¢		9.84	¢		5.8
Operating expense per ASM excluding fuel, navigation fee recovery, restructuring and impairment charges (a)		7.83	¢		8.57	¢		(8.6	)		7.92	¢		8.34	¢		(5.0	)
Raw fuel cost per gallon (a)		159.9	¢		102.4	¢		56.2			137.2	¢		98.3	¢		39.5
GAAP fuel cost per gallon (a)		155.7	¢		95.8	¢		62.5			133.1	¢		92.5	¢		43.8
Economic fuel cost per gallon (a)		140.2	¢		94.8	¢		47.8			126.0	¢		90.9	¢		38.5
Fuel gallons (000,000)		87.1			83.4			4.4			354.7			337.3			5.2
Average number of employees		9,433			9,921			(4.9	)		9,968			10,040			(0.7	)
Aircraft utilization (blk hrs/day)		10.8			10.3			4.9			11.0			10.5			4.8
Operating fleet at period-end		108			109			(0.9	)		108			109			(0.9	)

NMFees =and ~~Not~~Mileage ~~Meaningful~~ Plan Changes

~~(a) See~~Like ~~Note~~many Aof onour ~~page~~competitors, 17we have increased existing fees or implemented new fees in an effort to increase our revenues. Examples include:

16 • increasing the charge for booking through reservations and airport sales agents from $10 to $15,

~~Table~~• ofraising ~~Contents~~the fee for overweight baggage from $25 to $50,

~~Note~~• ~~A: Pursuant~~increasing ~~to Item 10 of Regulation S-K, we are providing disclosure of~~ the ~~reconciliation~~charge offor ~~reported~~transporting ~~non-GAAP financial~~pets ~~measures~~in ~~to their most directly comparable financial measures reported on a GAAP basis. The non-GAAP financial measures provide management~~ the ~~ability~~cabin tofrom measure and monitor performance both with and without the cost of aircraft fuel (including the gains and losses associated with our fuel hedging program where appropriate), restructuring charges, aircraft impairment charges, government compensation in 2003 and a large recovery in 2004 of disputed navigation fees paid in prior years (of which $~~7.7 million~~75 ~~was~~to ~~recorded in operating expenses and~~ $~~3.3 million~~100 ~~was recorded in non~~one-operating income). Because the cost and availability of aircraft fuel are subject to many economic and political factors beyond our control and we record changes in the fair value of our hedge portfolio in our income statementway, ~~it is our view that the measurement~~ and ~~monitoring of performance without fuel is important.~~

~~The~~• ~~following~~raising ~~tables~~the ~~reconcile~~unaccompanied ~~our~~minor ~~non-GAAP~~fee ~~financial~~from ~~measures~~$30 to ~~the~~$75 ~~most directly~~for ~~comparable~~one-way ~~GAAP~~nonstop ~~financial~~flights ~~measures~~and ~~for~~from ~~Alaska~~$60 ~~Airlines,~~to ~~Inc~~$75 for connecting flights.:

Alaska Airlines, Inc.:
($ in millions)	Three Months Ended December 31,						Twelve Months Ended December 31,
Unit cost reconciliations:	2004			2004			2004			2004
Operating expenses	$	588.1		$	525.2		$	2,318.4		$	2,046.8
ASMs (000,000)		5,452			5,194			22,276			20,804
Operating expenses per ASM		10.79	¢		10.11	¢		10.41	¢		9.84	¢
Operating expenses	$	588.1		$	525.2		$	2,318.4		$	2,046.8
Less: aircraft fuel		(135.6	)		(79.9	)		(472.0	)		(312.1	)
Less: impairment of aircraft		—			—			(36.8	)		—
Less: restructuring charges		(25.9	)		—			(53.4	)		—
Add: navigation fee recovery		—			—			7.7			—
Operating expense excluding fuel, navigation fee recovery, impairment and restructuring charges	$	426.6		$	445.3		$	1,763.9		$	1,734.7
ASMs (000,000)		5,452			5,194			22,276			20,804
Operating expense per ASM excluding fuel, navigation fee recovery, impairment and restructuring charges		7.83	¢		8.57	¢		7.92	¢		8.34	¢
Aircraft fuel reconciliations:
Fuel expense before hedge activities (“raw fuel”)	$	139.3		$	85.4		$	486.6		$	331.7
Fuel gallons (000,000)		87.1			83.4			354.7			337.3
Raw fuel cost per gallon		159.9	¢		102.4	¢		137.2	¢		98.3	¢
Fuel expense before hedge activities (“raw fuel”)	$	139.3		$	85.4		$	486.6		$	331.7
Less: gains on settled hedges included in fuel expense		(3.7	)		(5.5	)		(14.6	)		(19.6	)
GAAP fuel expense	$	135.6		$	79.9		$	472.0		$	312.1
Fuel gallons (000,000)		87.1			83.4			354.7			337.3
GAAP fuel cost per gallon		155.7	¢		95.8	¢		133.1	¢		92.5	¢
GAAP fuel expense	$	135.6		$	79.9		$	472.0		$	312.1
Less: gains on settled hedges included in nonoperating income (expense)		(13.5	)		(0.8	)		(25.2	)		(5.4	)
Adjusted fuel		122.1			79.1			446.8			306.7
Fuel gallons (000,000)		87.1			83.4			354.7			337.3
Economic fuel cost per gallon		140.2	¢		94.8	¢		126.0	¢		90.9	¢
Mark-to-market gains (losses) included in non-operating income (expense) related to hedges that settle in future periods		($20.3	)		—		$	50.1			—
Reconciliation to GAAP pre-tax income (loss):
Pre-tax income (loss) excluding impairment and restructuring charges, navigation fee recovery, government compensation and mark-to-market hedging gains		($22.7	)		($27.3	)	$	2.1			($41.0	)
Less: impairment of aircraft					—			(36.8	)		—
Less: restructuring charges		(25.9	)		—			(53.4	)		—
Add: government compensation					—			—			52.8
Add: mark-to-market hedging gains (losses) included in nonoperating income (expense)		(20.3	)		—			50.1			—
Add: navigation fee recovery		—			—			11.0			—
Pre-tax income (loss) reported GAAP amounts		($68.9	)		($27.3	)		($27.0	)	$	11.8

The increases above 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.

17On July 24, 2008 we announced a $25 fee for booking Mileage Plan award travel on partner airlines. We also announced that our domestic round-trip “Coach Saver” award will increase to 25,000 miles from 20,000 miles, and we have expanded our 15,000-mile “Intra-Alaska” award levels in coach to an “Intra-State” award. This award offers travel wholly within one state for 15,000 award miles. Other changes include an increase in the award miles needed for “Peak” awards and the introduction of a three-tier award level structure. All of these changes are effective for awards redeemed on or after November 19, 2008.

~~Table~~Additionally, beginning in August 2008, we reduced from three years to two years the length of ~~Contents~~time that a Mileage Plan account could be inactive before the account is deleted. As a result of this change in terms, our Mileage Plan liability was reduced by $42.3 million. This benefit is recorded separately in operating revenues as “Change in Mileage Plan terms.”

~~ITEM~~Update 7.on ~~MANAGEMENT’S~~Labor ~~DISCUSSION~~Negotiations ~~AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

~~The~~We ~~following~~are ~~discussion~~currently ~~should~~in benegotiations ~~read~~with inits ~~conjunction~~pilots ~~with~~and ~~our~~have ~~financial~~been ~~statements~~since ~~and~~early ~~the related~~2007. ~~notes~~The ~~contained~~contract ~~elsewhere~~with inour ~~this~~pilots ~~Annual~~became ~~Report~~amendable on ~~Form~~May 1, ~~10-K~~2007. ~~All~~The ~~statements~~Air inLine ~~the~~Pilots ~~following~~Association ~~discussion~~(ALPA) ~~which~~has ~~are~~requested ~~not~~mediation ~~reports~~from ofthe ~~historical~~National ~~information~~Mediation orBoard ~~descriptions~~(NMB) ofin ~~current accounting~~order ~~policies~~to ~~are~~assist ~~forward-looking~~with ~~statements~~contract negotiations. ~~Please~~We ~~consider~~have ~~our~~begun ~~forward-looking~~meeting ~~statements in~~with ~~light of~~ the ~~risks~~NMB ~~referred~~and hope to inreach ~~this~~a ~~report’s~~negotiated ~~introductory~~contract ~~cautionary~~that ~~note.~~recognizes ~~There~~the ~~can~~important ~~be no~~contributions ~~assurance~~ that ~~actual~~our ~~developments~~pilots ~~will~~make bewhile ~~those~~not ~~anticipated~~harming byour uscompetitive position. ~~Actual~~Factoring ~~results~~in ~~could~~pay ~~differ materially~~rates, ~~from~~productivity ~~those~~measures, ~~projected~~pension, asand apost-retirement ~~result~~medical ~~of a number of factors~~benefits, ~~some of which~~ we ~~cannot~~believe ~~predict or~~our ~~control.~~pilot ~~For~~unit acosts ~~discussion~~are ofamong ~~our~~the ~~risk~~highest ~~factors,~~in ~~see~~the ~~“Risk~~industry ~~Factors,”~~for ~~beginning~~the onsize ~~page~~of aircraft 36operated.

~~General Alaska~~We ishave reached a ~~major~~tentative ~~airline~~agreement ~~serving~~with ~~primarily Alaska;~~ the ~~U.S.~~Association ~~West~~of ~~Coast;~~Flight ~~five~~Attendants ~~cities~~to onextend the ~~U.S. East~~current ~~Coast,~~contract ~~Denver,~~with ~~Chicago;~~our ~~Vancouver~~flight attendants ~~and~~by ~~Calgary,~~two ~~Canada; and Mexico~~years. ItThe ~~operates~~current anagreement ~~all~~becomes ~~jet fleet~~amendable ~~and~~on ~~its~~May 1, ~~average passenger trip is 996 miles~~2010.

~~Year~~We indo ~~Review~~not ~~and~~know ~~Current~~what ~~Events Overall,~~the ~~economic~~final ~~conditions~~outcome inof ~~2004~~these ~~improved~~negotiations ~~over~~will ~~2003. The industry generally enjoyed increases~~be inor ~~both~~when ~~passenger~~an ~~traffic~~agreement ~~and~~will ~~load~~be ~~factors, and Alaska was no different — posting record monthly load factors for much of the year~~reached. However, ~~ticket~~uncertainty ~~yields~~around ~~continued~~open tocontracts ~~remain~~could ~~under~~distract ~~pressure~~some ~~in the wake of growth of low cost carriers such as Southwest and jetBlue and excess capacity in many markets. Fuel prices reached record highs during much of the year~~employees, ~~although~~reduce ~~moderated~~employee ~~somewhat~~engagement in ~~the~~ ~~fourth~~our ~~quarter~~business, ~~but~~and ~~are~~prevent ~~still~~us ~~materially~~from ~~above~~achieving ~~historical averages. These factors, coupled with~~ the ~~high~~operational ~~cost~~goals ~~structures~~(such ofas ~~many~~on-time ~~major~~and ~~carriers, resulted in another year of significant~~completion-rate ~~losses~~targets) ~~for~~that ~~the~~we ~~industry~~have set.

~~During~~Line ~~2004, the management team at Alaska was actively focused on cost reductions. Our stated goal for 2004 was to achieve a unit cost (excluding fuel and significant items)~~ of ~~8.0~~Credit ~~cents~~Modification ~~per available seat mile (ASM) and we achieved a full year unit cost excluding fuel and significant items of 7.92 cents per ASM.~~

~~Restructuring~~We ~~Charges During~~have ~~the third quarter of 2004, Alaska announced~~ a ~~management~~$185 ~~reorganization~~million ~~and~~variable-rate ~~the~~credit ~~closure~~facility ~~of its~~that ~~Oakland~~expires ~~heavy~~in ~~maintenance~~March ~~base,~~2010. ~~contracting~~In ~~out~~the offourth ~~related~~quarter ~~heavy~~we ~~maintenance,~~borrowed ~~contracting~~$75 ~~out of~~million ~~the~~from ~~Company’s~~this ~~Fleet~~facility ~~Service,~~and ~~Ground~~that ~~Support~~amount ~~Equipment~~was ~~and~~outstanding ~~facility~~at ~~maintenance functions~~December 31, ~~maintenance~~ ~~shops and other initiatives~~2008. InOn ~~total~~September 24, we2008, ~~believe these restructuring activities will~~we ~~result~~entered ininto ~~a reduction of approximately 900 employees when fully implemented in~~ the ~~first~~Fourth ~~half~~Amendment ~~of 2005.~~to ~~Severance~~our ~~and related costs associated with this restructuring are estimated at~~ $~~53.4 million,~~185 ~~of which $27.5~~ million ~~was~~variable-rate ~~recorded~~credit ~~during~~facility ~~the~~that ~~third~~eliminated ~~quarter~~all ofprevious ~~2004~~financial covenants and ~~$25.9 million~~replaced ~~was recorded~~them inwith ~~the~~a ~~fourth~~requirement ~~quarter.~~to Wemaintain ~~expect~~a ~~savings~~minimum ~~from~~unrestricted ~~these~~cash ~~job-related~~and ~~initiatives~~marketable tosecurities ~~be approximately~~balance of $~~35 million~~500 ~~per year when fully implemented~~million.

18 Outlook

~~Table~~As ofwe ~~Contents~~look forward to 2009, the two primary uncertainties are the demand environment and fuel prices. Although fuel prices have declined significantly since their record high in July 2008, the global financial instability and economic recession have put downward pressure on demand for air travel.

As15 part of our ongoing cost saving initiatives, we continue to look at all aspects of our business. In 2005, we may outsource other activities or initiate other restructuring activities which would result in further restructuring charges.

LaborTable Costs and Negotiations Alaska continues to pursue the restructuring of its labor agreements so that they are in line with what we believe to be the market. Our objectives as we restructure these agreements are to achieve market labor costs, productivity and employee benefit costs. Based on these three objectives, in 2003 Alaska targeted $112 million per year of labor savings. As a result of increases in our wage rates since that time, combined with labor cost decreases achieved by our competitors, we believe that our wages and benefits are now above market by approximately $125 million. Alaska believes that its pilot labor costs represent the majority of this amount. Despite ongoing negotiations in late 2003 and much of 2004, we were unable to reach a new agreement with the Air Line Pilots Association (ALPA) and have therefore submitted to binding arbitration, the decision of which will be effective in May 2005. The arbitration will cover wages plus five issues submitted by each of the Company and ALPA. The pilot labor contract contains market related standards for wages and benefits. Nevertheless, we cannot predict the outcome of this proceeding, particularly whether the arbitrator’s award will reflect cost savings in wage rates, productivity and benefits equal to what we consider to be the current excess over market. Contents

~~Reducing~~Traffic ~~labor~~was ~~costs~~down ~~and~~by ~~finalizing~~4.4% in the ~~agreements~~fourth ~~with~~quarter ~~our~~as ~~labor~~the ~~groups~~economic isrecession anbegan ~~important~~to ~~objective~~take its toll on travel behaviors of ~~for~~our ~~2005~~customers. In anticipation of this decline in demand, we reduced capacity by 7.1% in the fourth quarter. We currently anticipate further capacity reductions of 8% in 2009 compared with 2008. We believe the actions we are taking to reduce capacity are necessary and appropriate given the uncertainty in the demand outlook, although we do have the flexibility to adjust our capacity throughout the year to stay aligned with demand.

~~Mark-to-Market~~Oil ~~Fuel~~prices ~~Hedging~~have ~~Gains Beginning~~declined infrom ~~the~~a ~~second~~record ~~quarter~~$147 ofper ~~2004,~~barrel wein ~~lost~~July ~~the~~to ~~ability~~approximately $40 to ~~defer,~~$45 asper barrel recently. That translates to a ~~component~~significant ofreduction in fuel cost ~~comprehensive~~for ~~income~~us, ~~recognition~~although ofprices ~~any~~are ~~unrealized~~still ~~gain~~above orhistorical ~~loss~~levels. onIn July 2008, our ~~fuel~~average ~~hedge~~raw, ~~contracts~~unhedged ~~until the~~price ~~hedged~~of jet fuel isper ~~consumed.~~gallon Wewas ~~lost~~$4.19 ~~this~~and ~~ability~~is ~~because~~currently ~~the~~around ~~price~~$1.60 ~~correlation~~per ~~between~~gallon. ~~crude~~Oil ~~oil, the~~prices ~~commodity~~continue weto ~~use~~be tovolatile, ~~hedge~~however, and ~~West~~prices ~~Coast~~could ~~jet~~rise again. ~~fuel~~We ~~fell~~continue ~~below~~to ~~required~~execute ~~thresholds.~~our ~~For~~hedging ~~more discussion,~~strategy ~~see~~to ~~Note~~help 10remove tosome of the impact of that volatility on our financial ~~statements~~results.

~~The~~RESULTS ~~implications~~OF ofOPERATIONS this change are twofold: First, our earnings are more volatile as we mark our entire hedge portfolio to market each quarter-end and report the gain or loss in other non-operating income or expense, even though the actual consumption will take place in a future period. Second, to a large extent, the impact of our fuel hedge program will not be reflected in fuel expense. For example, we recorded gains from settled fuel hedges totaling $39.8 million during 2004, but only $14.6 million of that gain is reflected as an offset to fuel expense with the balance reported in other non-operating income.

We2008 ~~have~~COMPARED ~~provided~~WITH ~~information~~2007 ~~on mark-to-market gains or losses, as well as calculations of our economic fuel cost per gallon on pages 17.~~

19Our 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:

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

We• ~~continue~~fleet totransition ~~believe~~charges ~~that~~of ~~our~~$47.5 ~~fuel~~million ~~hedge~~($29.7 ~~program~~million isafter antax) ~~important~~related ~~part~~to ofthe ~~our~~final ~~strategy~~transition toout ~~reduce our~~of ~~exposure~~the toMD-80 ~~volatile~~fleet; ~~fuel prices.~~ and

~~Impairment~~• ~~of 737-200C Aircraft In June 2004, the Company’s Board approved~~ a ~~plan~~$42.3 tomillion ~~accelerate~~benefit ~~the retirement of its Boeing 737-200C fleet and remove those aircraft from service earlier than initially planned~~($26.5 Inmillion ~~July 2004,~~after ~~the~~tax) ~~Company~~related ~~announced its plan~~ to ~~replace~~a ~~these~~change ~~aircraft~~in ~~by modifying five existing 737-400 aircraft and using other existing 737-400 aircraft for~~ the ~~remaining~~terms ~~passenger capacity. At December 31, 2004 the planned modifications have been delayed. However, management currently believes that all 737-200s will still be retired by the end~~ of ~~2007~~our asMileage ~~planned.~~Plan ~~The Company expects to replace the 737-400s with Boeing 737-800 aircraft in 2005 and 2006~~program.

AsWe abelieve ~~result~~disclosure of ~~this decision,~~ the ~~Company~~impact ~~evaluated impairment as required by SFAS No. 144, “Accounting for the Impairment or Disposal~~ of ~~Long-Lived~~these ~~Assets”~~individual ~~and~~charges ~~concluded~~is ~~that~~useful ~~the~~information ~~carrying value of the 737-200C fleet was no longer recoverable when compared~~ to ~~the~~investors ~~estimated~~because: remaining future cash flows. Accordingly, during the second quarter of 2004, the Company recorded an impairment charge totaling $36.8 million (pre-tax) to write down the fleet to its estimated fair market value. In addition, we revised our estimates of the useful lives and residual values of the fleet and related spare equipment and will depreciate the remaining carrying values through 2007, when the last aircraft will be retired.

~~Navigation~~• ~~Fee~~it ~~Refund During~~is ~~the~~useful ~~third~~to ~~quarter~~monitor ofperformance ~~2004,~~without wethese ~~received~~items aas ~~refund~~it ~~totaling~~improves ~~$11 million~~a ~~(pre-tax)~~reader’s ~~from~~ability ~~the Mexican government related~~ to ~~navigation~~compare ~~fees~~our ~~paid~~results ~~in 2002 and 2003. Approximately $7.7 million of the refund was recorded as a reduction~~ to ~~operating~~other ~~expenses and $3.3 million was recorded as non-operating income.~~ airlines;

~~Other~~• ~~Events During~~our ~~the~~results ~~fourth~~excluding ~~quarter~~these ofadjustments ~~2004,~~related ~~Alaska~~to ~~entered~~fuel ~~into~~hedge aaccounting ~~10 year~~and ~~“power-by-the-hour”~~other ~~engine maintenance~~items ~~agreement~~serve ~~with~~as athe ~~third~~basis ~~party.~~for ~~Under~~our ~~terms~~various ofemployee ~~this~~incentive ~~arrangement~~plans, thus the ~~third~~information ~~party~~allows ~~will provide~~investors ~~routine~~to ~~and~~better ~~major~~understand ~~overhaul~~the ~~maintenance~~changes ~~services~~in onvariable ~~certain~~incentive ~~engines~~pay expense in our ~~737-400~~statements ~~fleet~~of ~~at an agreed upon rate per hour flown.~~ operations;

~~During~~• ~~the~~our ~~fourth~~results ~~quarter,~~excluding ~~Alaska~~these ~~added~~items aare ~~row~~most ofoften ~~seats~~used ~~to its 737-400 fleet. This change will result~~ in aninternal ~~increase~~management ofand ~~approximately~~board ~~2.3¢~~reporting inand available seat miles on an annualized basis. We expect this change will represent a significant portion of our capacity growth in 2005. In late 2004, we also announced that we would be installing winglets on our B737decision-~~700~~making; ~~aircraft.~~ and

~~Outlook For~~• ~~2005,~~we ~~Alaska~~believe ~~expects~~it ~~capacity increases of approximately 3¢. The expected capacity increase~~ is ~~due~~ ~~largely to~~ the ~~annualization~~basis ofby ~~the~~which ~~additional~~we ~~seats~~are ~~added~~evaluated ~~to the B737-400 fleet and the addition of three B737-800s offset~~ by ~~the~~industry ~~retirement of two B737-200s~~analysts.

20 Financial and statistical data are shown on page 17. An in-depth discussion of our results begins on page 18.

~~Table~~16 ~~of Contents~~

RESULTSTable OF OPERATIONS 2004 Compared with 2003 Our net loss for 2004 was $19.1 million, versus net income of $3.0 million, in 2003. The 2004 results include four significant items which impact the comparability to 2003. These items are discussed in the “Year in Review and Current Events” section beginning on page 18. Our 2003 results also include $52.8 million received related to assistance from the government under the Emergency Wartime Supplemental Appropriations Act. Contents

~~Our~~FINANCIAL ~~operating~~AND ~~loss~~STATISTICAL ~~for~~DATA 2004 was $85.4 million compared to a loss of $19.4 million for 2003. Our pre-tax loss for 2004 was $27.0 million compared to pre-tax income of $11.8 million for 2003. Financial and statistical data comparisons for Alaska are shown on page 16, respectively. On page 17, we have included a reconciliation of reported non-GAAP financial measures to the most directly comparable GAAP financial measures.

Alaska Airlines Revenues Operating revenues increased $205.6 million, or 10.1¢, during 2004 as compared to the same period in 2003. The increase in revenues resulted from an 11.5¢ increase in passenger traffic, offset by a 1.4¢ decline in ticket yields. For the year ended December 31, 2004, capacity increased 7.1¢ as compared to 2003. The capacity increases are primarily due to the annualization and expansion of our transcontinental flying, including service from Seattle to Chicago and Los Angeles to Reagan National in Washington D.C. The traffic increase of 11.5¢ outpaced the capacity increase of 7.1¢, resulting in an increase in load factor from 70.0¢ to 72.9¢. The decline in yield per passenger mile was a result of continued industry-wide pricing pressure, particularly in the fourth quarter where yield declines were more substantial, dropping 5.8¢ compared to the fourth quarter of 2003. We expect that load factors will continue to be strong but that yields and passenger unit revenues will continue to decline on a year-over-year basis into the first half of 2005.


	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~~NM ~~and~~= ~~mail~~Not ~~revenues~~Meaningful ~~increased $9.1 million, or 11.8¢, because of a new mail contract we have in the State of Alaska offset by lower freight revenues.~~

~~Other-net~~17 revenues increased $13.3 million, or 12.1¢, due largely to revenues received from an agreement with Pen Air to provide flight services to Dutch Harbor that began in January of 2004 and higher Mileage Plan revenues.

AlaskaTable Airlinesof Expenses For the twelve months ended December 31, 2004, total operating expenses increased $271.6 million, or 13.3¢, as compared to the same period in 2003. Operating expenses per ASM increased 5.8¢ from 9.84 cents in 2003 to 10.41 cents in 2004. The increase in operating expenses per ASM is due largely to significant increase in fuel costs, our restructuring charges, the impairment charge related to our Boeing 737-200 fleet, higher wages and benefits, contracted Contents

21 REVENUES

~~Table~~Total operating revenues increased $151.4 million, or 4.9%, in 2008 as compared to 2007. The components of ~~Contents~~Alaska’s revenue are summarized in the following table:

services costs and landing fees and other rental costs offset by declines in other selling expenses and commissions and the navigation fee recovery. Operating expense per ASM excluding fuel, the navigation fee recovery, restructuring and impairment charges decreased 5¢ to 7.92 cents per ASM compared to 8.34 cents per ASM in 2003. Explanations of significant period-over-period changes in the components of operating expenses are as follows:


	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

•NM ~~Wages~~= ~~and~~Not ~~benefits~~Meaningful increased $19.9 million, or 3%, during 2004. Approximately two thirds of the increase reflects higher pilot wages, substantially all of which is due to the 4% wage rate increase in May 2004 under the terms of our existing union contract . Wages were favorably impacted by the restructuring initiatives announced in August and September. During 2004, there were 9,968 FTEs, which is down by approximately 70 FTEs from 2003 on a 7.1% increase in capacity. Our current plan is for approximately 9,500 FTEs in 2005. Benefits costs were favorably impacted by a $7.3 million reduction in workers compensation expense resulting from positive workers compensation claims experience at Alaska and a related reduction to ultimate loss estimates recorded in December totaling $6.6 million. In total, benefits costs were flat year over year. Beginning in 2005, wages and benefits will include stock-based compensation associated with options granted to certain employees. Based on recent history, stock-based compensation expense associated with option grants is expected to be approximately $8 to $10 million per year (pre-tax). Since FAS 123R is effective for interim periods beginning after June 15, 2005 (our third quarter), we expect that only half that amount will be recorded in 2005. • Contracted services increased $14.9 million, or 18%, due largely to expenses associated with an agreement with PenAir to provide flight services to Dutch Harbor that began in January of 2004, costs associated with a temporary charter contract we have for our new mail contract in Alaska and higher security costs, partially offset by $8.6 million from the recovery in 2004 of disputed Mexico navigation fees paid in 2002 and 2003. • Aircraft fuel increased $159.9 million, or 51%, due to a 43.9% increase in the GAAP fuel cost per gallon and a 5.2% increase in fuel gallons consumed. The increase in aircraft fuel expense is inclusive of $14.6 million of gains from settled hedges. During 2004, Alaska also realized $25.2 million of hedge gains which are recorded in other non-operating income. After including all hedge gains recorded during the year, our “economic” fuel expense increased $140.1 million, or 45.7%, over 2003. Our economic fuel cost per gallon increased 38.6% from 90.9 cents to 126.0 cents.

22 Operating Revenue - Mainline

~~Table~~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 ~~Contents~~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.

LOGO

•Our ~~Aircraft~~advance ~~maintenance~~bookings ~~decreased~~currently ~~$7.6~~suggest ~~million,~~that orload ~~5%,~~factors due largely to fewer engine overhauls during 2004 and a change in the mix of heavy maintenance versus routine maintenance. We plan to change the accounting for engine and airframe overhauls at Alaska and Horizon, effective January 2005. Under the new method, we will charge the costs of these overhauls directly to expense, as opposed to our current practice of capitalizing and amortizing them. To effect this change, we will write off the unamortized portion of previously capitalized overhauls in January 2005 as a cumulative effect of an accounting change. We expect the one-time charge to be ~~approximately~~relatively ~~$80~~flat ~~million, after tax. • Aircraft rent decreased $10.4 million, or 8.4%, due to lower rates on extended leases and fewer leased aircraft~~ in ~~2004 compared to 2003. • Other selling expenses and commissions decreased $15.8 million, or 11%, due to a decline in~~ the ~~incentive~~first ~~payments~~quarter ~~made to Horizon offset by increases in booking fees, credit card fees, and commissions. In 2004, 38.0%~~ of ~~Air~~2009 ~~Group ticket sales were made through traditional travel agents,~~ compared to ~~43.0% in 2003. In 2004, 30.4% of~~ the same ~~ticket~~period ~~sales were made through Alaska’s Internet web site compared to 27.4%~~ in ~~2003. • Depreciation and amortization increased $8.6 million~~2008, oralthough ~~7%,~~that ~~reflecting~~is accelerated depreciation on the planned retirement of the Boeing 737-200C fleet, an increase in depreciation resulting from one aircraft purchased in the last twelve months, and the full year depreciation on aircraft acquired in 2003, and additional provisions for inventory obsolescence. • Landing fees and other rentals increased $14.2 million, or 11%. The higher rates primarily reflect higher joint-use and exclusive rental fees at Seattle, Portland, Los Angeles and Oakland, combined with ~~modest volume growth. We expect landing fees and other rentals to continue to increase as~~ a ~~result~~10% ~~of airport facility expansions and increased costs for security due~~ to ~~unfunded government mandates. • Other expense increased $9.7 million, or 7~~11%, ~~primarily~~decline ~~reflecting a $6.3 million increase~~ in ~~professional services costs, higher moving expenses associated with our restructuring initiatives, higher passenger remuneration costs, and supplies costs~~capacity.

23 18

•Freight ~~Restructuring~~and ~~charges~~mail ~~totaled~~revenues increased $535.41 million, ~~during~~or ~~2004~~5.4%, ~~This~~over ~~charge~~2007. ~~includes~~The ~~wages~~increase ~~and~~is ~~other~~due ~~benefits~~to ~~that~~increased ~~will~~yields befor ~~paid~~freight and asmail aand ~~result~~freight offuel ~~our~~surcharges, ~~restructuring~~partially ~~initiatives~~offset ~~announced~~by ina ~~August~~decline ~~and~~in ~~September~~freight ofvolumes ~~2004.~~compared ~~The~~to ~~following table reconciles~~ the ~~total~~prior ~~charge~~year. toAs ~~the~~fuel ~~remaining~~prices ~~accrual~~decline, onfuel ~~our~~surcharge ~~balance~~revenue ~~sheet~~is asalso ofexpected ~~December~~to ~~31,~~decline ~~2004 (~~in ~~millions):~~2009.

Severance and Related Costs
Balance at December 31, 2003	$	—
Restructuring charges		53.4
Cash payments*		(14.7	)
Balance at December 31, 2004	$	38.7

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.

*Change ~~The~~in ~~Company~~Mileage ~~expects~~Plan ~~the~~Terms ~~majority of cash payments will be made during the first and second quarters of 2005.~~

~~Nonoperating~~Beginning ~~Income~~in ~~(Expense) Net~~August ~~nonoperating~~2008, ~~income~~we ~~was~~reduced ~~$58.4 million~~the inlength ~~2004~~of ~~compared~~time tothat ~~$31.2 million~~a inMileage ~~2003.~~Plan ~~Interest income~~account ~~increased~~could ~~$11.0 million~~be ~~due~~inactive from three years to atwo ~~larger~~years ~~marketable~~before ~~securities~~the ~~portfolio~~account inis ~~2004~~deleted. ~~combined with~~As a ~~correction~~result of ~~premium~~this ~~and~~change ~~discount~~in ~~amortization~~terms, on our ~~marketable~~Mileage ~~securities~~Plan ~~portfolio~~liability ~~in 2003.~~was ~~2004~~reduced ~~interest~~by ~~income also includes~~ $342.3 million. ~~from~~This ~~the~~benefit ~~recovery~~is inrecorded ~~2004~~separately ofin ~~disputed~~operating ~~Mexico navigation~~revenues ~~fees~~as ~~paid~~“Change in ~~2002~~Mileage ~~and 2003.~~Plan terms.”

~~Other-net~~Passenger ~~includes~~Revenue ~~$25.2 million~~— ~~and~~Purchased ~~$5.4 million~~Capacity ~~in gains from settled fuel hedging contracts in 2004 and 2003, respectively. In addition, other-net includes mark-to-market gains on unsettled hedge contracts of $50.1 million in 2004.~~

~~The~~Passenger ~~2003~~revenue ~~results~~— ~~include~~purchased capacity increased by $5219.8 4 million ~~received~~over inthe ~~connection~~same ~~with~~period ~~the~~in ~~government~~2007 ~~reimbursement~~because of ~~security~~ ~~fees~~a ~~remitted~~5.7% ~~and~~increase ~~carrier~~in ~~fees~~unit ~~paid~~revenues ~~under~~on ~~the~~relatively ~~Emergency~~flat ~~Wartime~~capacity. ~~Supplemental Appropriations~~Unit ~~Act~~revenues have increased due to a 6.8% increase in yields, offset by a 0.7-point decline in load factors compared to 2007.

~~2003~~EXPENSES Compared with 2002 Our net income for 2003 was $3.0 million, compared with a net loss of $69.5 million in 2002. Our 2003 results include $52.8 million received related to assistance from the government under the Emergency Wartime Supplemental Appropriations Act. Our 2002 net loss includes $0.3 million received from the government and $12.5 million related to the write-off of goodwill in connection with the adoption of SFAS No. 142 (see discussion in Note 15 in the Notes to Financial Statements).

~~Our~~For ~~operating~~the ~~loss~~year, ~~for~~total ~~2003~~operating ~~was~~expenses ~~$19.4 million~~increased ~~compared to~~ $77494.6 1 million, ~~for~~or ~~2002~~17.3%, ~~Our~~compared ~~pre-tax income~~to ~~for~~2007 ~~2003~~as ~~was~~a ~~$11.8 million~~result ~~compared~~of ~~with~~higher amainline ~~pre-tax~~operating ~~loss~~costs, ~~before~~most ~~accounting~~notably ~~change~~aircraft ~~of $87.3~~fuel ~~million~~expense ~~for~~(including ~~2002.~~hedging ~~Financial~~gains and ~~statistical~~losses), ~~data~~fleet ~~comparisons~~transition ~~for~~charges ~~Alaska~~and ~~are~~restructuring ~~shown~~charges. onWe ~~page~~believe ~~16.~~it Onis ~~page~~useful ~~17,~~to wesummarize ~~have~~operating ~~included~~expenses aas ~~reconciliation~~follows, ofwhich ~~reported~~is ~~non-GAAP~~consistent ~~financial measures~~with to the ~~most~~way ~~directly~~expenses ~~comparable~~are ~~GAAP~~reported ~~financial~~internally ~~measures.~~and evaluated by management.


	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

~~Table~~19 ~~of Contents~~

AlaskaTable Airlines Revenues Operating revenues increased $194.3 million, or 10.6%, during 2003 as compared to the same period in 2002, reflecting stronger summer demand and higher than expected fourth quarter traffic as compared to 2002. For the twelve months ended December 31, 2003, capacity increased 7.5% and traffic increased 10.4% as compared to the same period in 2002. The capacity increases are primarily due to the addition of service to new cities (Boston, Denver, Newark, Washington D.C., Orlando and Miami) and an increase in service in the Pacific Northwest, Mexico, and Canada markets, partially offset by lower capacity in the Bay Area, Arizona and Northern Alaska. During 2003, roughly 75% of our ASM growth came from expansion in the Transcontinental and Denver markets. Traffic increases primarily reflect service to new cities and traffic increases in the Pacific Northwest, Mexico and Nevada, partially offset by decreases in traffic in the Bay Area, Northern Alaska and Arizona. Higher traffic resulted in a $172.7 million, or 10.4%, increase in passenger revenues. Our passenger load factor increased 1.9 percentage points to 70.0% during 2003 as compared to 2002. Contents

~~Our~~Mainline ~~yield~~Operating ~~per~~Expenses passenger mile remained constant compared to 2002 due to a combination of longer average stage lengths, fewer business travelers, and continued pricing pressure by low cost carriers, partially offset by an increase in revenue from expired Mileage Plan accounts.

~~Freight~~Significant ~~and~~mainline ~~mail~~operating ~~revenues~~expense ~~increased~~variances ~~$5.2 million,~~are ordescribed 7below.~~2%,~~ due principally to higher freight and mail volumes attributable to a reduction of security restrictions. Other-net revenues increased $16.4 million, or 17.6%, due largely to cash received from the sale of miles in our frequent flyer program (impacting other revenue currently as a portion is recognized immediately) and redemption of miles on partner airlines.

~~Alaska~~Along ~~Airlines~~with ~~Expenses For~~our ~~the~~financial ~~twelve~~and ~~months~~statistical ~~ended~~data ~~December 31, 2003, total operating expenses increased $136.1 million,~~on orpage ~~7.1%~~17, aswe ~~compared~~are topresenting ~~the~~here ~~same~~our ~~period~~line-item inexpenses ~~2002.~~on ~~This increase is due largely to~~ a ~~7.5% increase in ASMs combined with higher fuel, maintenance, wages and benefits costs and landing fees and other rentals. Operating expense~~ per -ASM ~~decreased~~basis ~~0.3% as compared to the same period~~ (in ~~2002 from 9.87~~ cents ~~to 9~~).84 ~~cents.~~We ~~Operating~~believe ~~expense~~this ~~per~~information ~~ASM~~is ~~excluding~~useful ~~fuel~~because ~~decreased~~it ~~2.1%~~highlights asareas ~~compared to the same period~~ in ~~2002~~which ~~from~~costs ~~8.52~~have ~~cents~~increased toor ~~8.34~~decreased ~~cents.~~either ~~Explanations~~more ofor ~~significant~~less ~~period-over-period changes~~than ~~in the components of operating expenses are as follows~~capacity:

• Wages and benefits increased $75.2 million, or 11%, during 2003 as compared to 2002. Approximately $52.8 million of this increase reflects higher benefit costs, mainly increases in pension costs of approximately $34.1 million and higher health insurance and workers’ compensation costs. The remaining $22.4 million increase reflects scale and step increases, partially offset by a 1.0% decrease in the number of full time equivalent employees.


	Years Ended December 31,			CASM Change
	2008	2007	2006	2008 vs. 2007		2007 vs. 2006
Wages and benefits	3.06	3.11	3.20	(0.05	)	(0.09	)
Variable incentive pay	0.07	0.06	0.12	0.01		(0.06	)
Aircraft fuel, including hedging gains and losses	4.80	3.05	3.25	1.75		(0.20	)
Aircraft maintenance	0.62	0.62	0.67	—		(0.05	)
Aircraft rent	0.44	0.47	0.48	(0.03	)	(0.01	)
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	)

25 Additional line item information is provided below.

~~Table~~Wages ofand ~~Contents~~Benefits

•Wages Alaska recorded employee profit sharing of $2.9 million in 2003, which was paid in 2004. No profit sharing occurred in 2002. • Aircraft fuel increased $51.4 million, or 20%, due to a 14.8% increase in the fuel cost per gallon and abenefits ~~4.3%~~decreased increase in fuel gallons consumed. Air Group’s fuel hedging program resulted in Alaska recognizing a $19.6 million reduction in aircraft fuel expense for hedging gains realized on hedge positions settled during ~~2003.~~the Atfull ~~December~~year ~~31, 2003, we had fuel hedge contracts in place to hedge 33%, 28% and 2%~~ of ~~our~~2008 ~~expected~~by ~~fuel usage in 2004, 2005 and 2006, respectively. • Aircraft maintenance increased~~ $811.2 million, or 61.5%, primarily ~~due~~as toa ~~increases~~result ~~in the number~~ of outside airframe and engine checks and other outside repairs and additional depreciation that was recorded following our decision in the fourth quarter to retire three Boeing 737-200Cs in 2004. • Aircraft rent decreased $4.3 million, or 3%, due to new lease extensions at lower ~~rates, partially offset by five new 737~~defined-~~700~~benefit ~~leases.~~pension ~~• Other selling expenses and commissions decreased $6.6 million, or 4%. This decrease was due principally to lower computer reservation system~~ costs, ~~the elimination of travel agency base commissions and lower Mileage Plan costs~~overtime, ~~partially offset by an increase in credit card commissions, advertising costs,~~ and ~~incentive~~a ~~payments made to Horizon. Incentive payments to Horizon are eliminated in consolidation at the Air Group level. In 2003, 43.~~0~~% of Air Group ticket sales were made through traditional travel agents, compared to 48~~.~~2% in 2002. In 2003, 27.4% of the ticket sales were made through Alaska’s Internet web site compared to 21.0% in 2002. • Depreciation and amortization increased $~~5~~.5 million, or 5~~% ~~reflecting~~decrease ~~a year over year increase~~ in ~~the depreciable asset base and $0.7 million in accelerated depreciation on three 737~~full-~~200s.~~time •equivalent ~~Landing~~employees ~~fees~~compared and other rentals increased $17.3 million, or 16%. The higher rates reflect modest volume growth and an increase in airports’ cost of operations, including facility expansion initiatives, and increased security costs due to ~~unfunded government mandates~~2007. • Other expense decreased $11.9 million, or 8%, primarily reflecting lower expenditures for insurance, supplies, communication services and property taxes, partially offset by increases in expenditures for professional services and per diems. Insurance expense decreases are a reflection of several factors including a $3.7 million insurance reimbursement received during the latter part of 2003 resulting from a clarification of liability related to Flight 261, lower cost coverage from a government aviation war risk

26We currently expect wages and benefits to be flat in 2009 but to increase on a per-ASM basis. Although we expect a significant decline in full-time equivalent employees resulting from the recent reduction in work force, our defined-benefit pension costs are increasing substantially from $48 million in 2008 to an estimated $93 million next year because of poor market returns in 2008. This expectation is exclusive of any potential change in pilot wages that may result from our current contract negotiations.

~~Table~~Variable ofIncentive ~~Contents~~Pay

~~insurance~~Variable incentive 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 ~~competitive~~other ~~pressures~~amounts specified in the ~~aviation~~various ~~war~~incentive ~~risk~~plan ~~insurance~~documents ~~market~~and with fuel stated on an economic basis. ~~However~~Air Group maintains several incentive plans that collectively cover all of our employees and create alignment for employees, ~~aviation~~customers ~~insurance~~and ~~remains~~shareholders. ~~substantially~~These ~~higher~~plans ~~than~~include ~~before~~both ~~September~~operational 11and financial performance metrics that, ~~2001~~to a large extent, are based on certain annual financial targets.

~~Nonoperating~~Aircraft ~~Income~~Fuel (Expense) Net nonoperating items were $31.2 million income in 2003 compared to $9.7 million expense in 2002. The 2003 results include $52.8 million received in connection with the government reimbursement of security fees remitted and carrier fees paid under the Act. Interest income decreased $8.0 million due principally to lower interest rates and an adjustment of premium and discount amortization on our marketable securities portfolio. Interest expense (net of capitalized interest) increased $0.8 million, due primarily to increases in debt (See Note 4 in the Notes to Financial Statements).

~~Other-net~~Aircraft fuel expense includes ~~$6.8 million~~both ~~and~~raw ~~$8.5 million~~fuel inexpense ~~gains~~(as ~~resulting~~defined ~~from~~below) ~~hedge~~plus ~~ineffectiveness~~the ~~on fuel~~effect ~~hedging~~of ~~contracts~~mark-to-market adjustments to our portfolio of hedges included in ~~2003~~our income statement as the value of that portfolio increases and ~~2002~~decreases. Our aircraft fuel expense is very volatile, ~~respectively.~~even Inbetween ~~2003~~quarters, webecause ~~received~~it anincludes ~~insurance~~these ~~recovery of~~gains ~~$3.1 million~~or losses in ~~connection~~the ~~with~~value ~~legal~~of ~~fees~~the ~~associated~~underlying ~~with~~instruments aas ~~U.S.~~crude ~~Attorney~~oil ~~investigation in~~prices ~~Oakland~~increase or decrease. InRaw ~~2002,~~fuel expense is defined as the price that we ~~received~~generally apay $1at the airport, or the “into-plane” price, including taxes and fees.~~4 million~~ ~~insurance~~Raw ~~recovery~~fuel prices are impacted by world oil prices and arefining ~~$0.9 million~~costs, ~~gain~~which oncan ~~conversion~~vary ofby ~~Equant~~region Nin the U.VS. ~~shares~~Raw (afuel ~~telecommunications~~expense ~~network~~approximates ~~company~~cash ~~owned~~paid byto ~~many~~suppliers ~~airlines)~~and does not reflect the effect of our fuel hedges.

~~Cumulative~~20 Effect of Accounting Change Effective January 1, 2002, we adopted Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets.” Under this statement, goodwill is no longer amortized, but instead is tested for impairment on a minimum of an annual basis. During the second quarter of 2002, we completed the first step of our impairment test related to our $12.5 million of goodwill. In the fourth quarter of 2002, we completed the second step of our impairment test and determined that all of our goodwill was impaired. As a result, we recorded a one-time, non-cash charge, effective January 1, 2002, of $12.5 million to write-off all of our goodwill. This charge is reflected as a cumulative effect of accounting change in the Statement of Operations for 2002.

CriticalTable Accounting Estimates The discussion and analysis of our financial position and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires us to make estimates and judgments that affect our financial position and results of operations. See Note 1 to Financial Statements for a description of our significant accounting policies. Critical accounting estimates are defined as those that are reflective of significant judgment and uncertainties, and potentially result in materially different results under different assumptions and conditions. We have identified the following critical accounting estimates. We have discussed the development, selection and disclosure of these policies with our audit committee. Contents

27Aircraft fuel expense increased $424.9 million, or 57.6%, compared to 2007. The elements of the change are illustrated in the following table:


	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

~~Mileage~~NM ~~Plan Our~~= ~~Mileage~~Not ~~Plan~~meaningful loyalty program awards miles to member passengers who fly on Alaska or Horizon and our travel partners. Additionally, we sell miles to third parties, such as our credit card partner, for cash. In either case, the outstanding miles may be redeemed for travel on Alaska, Horizon, or any of our alliance partners. As long as the Mileage Plan is in existence, we have an obligation to provide this future travel; therefore, for awards earned by passengers who fly on Alaska, Horizon or our travel partners, we recognize a liability and the corresponding selling expense for this future obligation. For miles sold to third parties, a majority of the sales proceeds are recorded as deferred revenue and recognized when the award transportation is provided. The deferred proceeds are recognized as passenger revenue when awards are issued and flown on Alaska or Horizon, and as other-net revenue for awards issued and flown on other airlines.

AtFuel ~~December 31,~~gallons ~~2004,~~consumed wedecreased ~~had~~5.8% ~~approximately~~due ~~86 billion~~to ~~miles~~the ~~outstanding,~~decrease ~~resulting~~ in ancapacity ~~aggregate liability~~and ofthe ~~$409.2 million.~~improved ~~The~~fuel ~~liability~~efficiency isof ~~computed~~our ~~based~~fleet onas ~~several~~we ~~assumptions~~completed ~~that~~the ~~require significant~~fleet ~~management~~transition ~~judgment~~out toof ~~estimate~~the ~~and~~less-efficient ~~formulate.~~MD-80 ~~There~~aircraft ~~are~~to ~~uncertainties~~newer, ~~inherent~~more-efficient ~~in estimates;~~B737-800 ~~therefore,~~aircraft anon relatively ~~incorrect~~flat ~~assumption~~capacity ~~impacts~~for the ~~amount~~year. ~~and/or~~Because ~~timing~~the ofB737-800 ~~revenue recognition~~aircraft orare ~~Mileage~~larger ~~Plan~~than ~~expenses.~~the ~~The~~MD-80s, ~~most~~the ~~significant~~flat ~~assumptions~~capacity incame ~~accounting~~on ~~for~~a ~~the Mileage~~2.6% ~~Plan~~decline ~~are~~in ~~described~~revenue ~~below~~block hours.

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. ~~The~~ ~~number~~Crude oil prices have declined dramatically since the record high set in July 2008. Based on the current price of ~~miles~~jet fuel, we expect that ~~will~~the ~~not~~raw fuel price per gallon in the first quarter of 2009 will be ~~redeemed~~significantly ~~for~~lower ~~travel:~~ than in the same period of 2008.

~~Members~~During ~~may~~2008, ~~not~~we ~~reach~~recorded ~~the~~significant ~~mileage~~mark-to-market ~~threshold~~losses ~~necessary~~reflecting ~~for~~ a ~~free~~steep ~~ticket~~decline ~~and~~in ~~outstanding~~the ~~miles~~value ~~may not~~of ~~always~~our befuel ~~redeemed~~hedge ~~for~~portfolio ~~travel.~~as ~~Therefore,~~fuel ~~based~~prices ondeclined ~~the~~sharply ~~number~~late ofin ~~Mileage Plan accounts and~~ the ~~miles~~year. inDuring ~~the accounts~~2007, we ~~estimate~~recorded ~~how many miles will never be used (“breakage”), and do not~~mark-to-market ~~record~~gains areflecting ~~liability~~an ~~for~~increase ~~those~~in ~~miles.~~the ~~Our~~value ~~estimates~~ of ~~breakage~~our ~~consider~~fuel ~~activity~~hedge inportfolio ~~our~~between ~~members accounts~~December 31, ~~account~~2006 ~~balances,~~ and ~~other~~December 31, ~~factors~~2007. WeOur ~~believe~~hedge ~~our~~portfolio ~~breakage~~consists ~~assumptions~~primarily ~~are reasonable. A hypothetical 1.0% change in our estimate~~ of ~~breakage~~call ~~(currently~~options ~~12%~~that inare ~~the aggregate)~~based ~~has approximately a $4.5 million affect~~ on the ~~liability.~~price ~~However, actual breakage could differ significantly from our estimates given the dynamic nature~~ of ~~the~~crude ~~program and our inability to predict our member’s future behavior~~oil.

2We also evaluate economic fuel expense, which we define as raw fuel expense less the cash we receive from hedge counterparties for hedges that settle during the period under their original contract expiration terms, offset by the premium expense that we paid for those contracts. ~~The~~ ~~number~~A key difference between aircraft fuel expense and economic fuel expense is the timing of ~~miles~~gain ~~used~~or ~~per~~loss recognition ~~award~~on (iour hedge portfolio.e. When we refer to economic fuel expense, ~~free~~we ~~ticket):~~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 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 because it most closely approximates 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.

WeOur ~~estimate~~economic ~~how~~fuel ~~many miles will be used per award. If actual miles used are more or less than estimated, we may need to adjust the liability and corresponding~~ expense. ~~Our~~is ~~estimates~~calculated ~~are based~~as onfollows: ~~the current requirements in our Mileage Plan program and historical redemptions on Alaska, Horizon or other airlines.~~

3. The costs which will be incurred to carry the passenger:


	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

~~When~~NM ~~the~~= ~~frequent~~Not ~~flyer~~meaningful travels on his or her award ticket, incremental costs such as food, fuel and insurance are incurred to carry that passenger. We estimate what these costs (excluding any contribution to overhead and profit) will be and accrue a liability. If the passenger travels on another airline on an award ticket, we often must pay the other airline for carrying the

28 21

~~passenger.~~ The ~~other~~total ~~airline~~net ~~costs~~cash ~~are~~benefit ~~based~~from onhedges ~~negotiated~~that ~~agreements~~settled ~~and~~during ~~are~~2008, ~~often substantially~~excluding ~~higher~~hedges ~~than the costs we would incur to carry~~ that ~~passenger.~~were Weterminated ~~estimate~~early, ~~how much~~increased weby ~~will~~$56.9 ~~pay~~million to ~~other~~$101.8 ~~airlines~~million ~~for~~compared ~~future~~to ~~travel awards based on historical redemptions and settlements with other carriers and accrue a liability accordingly~~2007. ~~The~~This ~~costs~~increase ~~actually~~was ~~incurred by~~primarily usdue ~~or paid~~ to ~~other~~the ~~airlines~~record ~~may~~high becrude ~~higher~~oil orprices ~~lower~~during ~~than~~ the ~~costs that were estimated and accrued, and therefore we may need to adjust our liability and recognize a corresponding expense~~year.

4As 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. ~~Redemption~~ 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 ~~Alaska~~termination orof ~~Horizon~~the ~~versus~~contracts. ~~other~~We ~~airlines:~~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.

~~The~~Aircraft ~~cost~~Rent for Alaska or Horizon to carry an award passenger is typically lower than the cost we will pay to other airlines. We estimate the number of awards which will be redeemed on Alaska or Horizon versus other airlines and accrue the costs on this based on our estimate of historical redemption patterns. If the number of awards redeemed on other airlines is higher or lower than estimated, we may need to adjust our liability and corresponding expense.

Aircraft rent declined by $6.6 million, or 5. ~~The~~9% during ~~rate~~2008, atbecause ~~which~~of wethe ~~defer~~retirement ~~sales~~of ~~proceeds~~all ~~from~~remaining ~~sold~~leased ~~miles:~~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.

WeLanding ~~defer~~Fees anand ~~amount that represents our estimate of the value of a free travel award. As fare~~Other ~~levels~~Rents ~~change, our deferral rate changes, which may result in more or less recognition of cash proceeds in any given quarter.~~

WeLanding ~~review~~fees ~~all~~and ~~Mileage~~other ~~Plan~~rents ~~estimates~~declined ~~each~~by ~~quarter~~$2.4 million, ~~and~~or ~~change~~1.4%, ~~our~~compared ~~assumptions~~to if2007. ~~facts~~The ~~and~~decline is primarily attributable to the decline in ~~circumstances~~departures ~~indicate~~resulting ~~that~~in alower ~~change~~landing isfees ~~necessary~~across the system. ~~Any~~However, ~~such~~looking ~~change~~forward ininto ~~assumptions~~2009, ~~could~~even ~~have~~though awe are expecting capacity and departure declines, airport costs may not decline ratably. Airport costs are generally spread across the ~~significant~~airlines ~~effect~~based on ~~our~~passenger ~~financial~~counts ~~position~~ and ~~results~~departures. ofAs ~~operations~~the industry cuts capacity, airport costs on a per-passenger or per-departure basis will likely increase.

~~Pension~~Contracted ~~Plans We~~Services account for the defined benefit pension plans using SFAS No. 87, “Employer’s Accounting for Pensions.” Under SFAS No. 87, pension expense is recognized on an accrual basis over employees’ approximate service periods. Pension expense calculated under SFAS No. 87 is generally independent of funding decisions or requirements. We recognized expense for our defined benefit pension plans of $78.3 million, $73.5 million and $40.0 million in 2004, 2003 and 2002, respectively.

~~The~~During ~~calculation~~2008, ofcontracted ~~pension~~services ~~expense~~increased ~~and~~by ~~the~~$6.1 ~~corresponding~~million, ~~liability~~or ~~requires~~4.9%, ~~the~~compared ~~use~~to of2007. aThis ~~number~~is ~~of important~~primarily ~~assumptions,~~due ~~including~~to efforts ~~the~~to ~~expected~~improve ~~long-term~~our ~~rate~~operational ofperformance ~~return on plan assets~~ and the ~~assumed~~ ~~discount~~introduction ~~rate.~~of ~~Changes~~new instations ~~these assumptions can result~~ in ~~different~~our ~~expense~~route ~~and~~system ~~liability amounts,~~where ~~and~~we ~~future~~contract ~~actual~~airport ~~experience can differ from these assumptions~~services. AtWe ~~December 31,~~expect ~~2004,~~contracted ~~the fair~~services ~~value~~to ofdecline ~~our~~approximately ~~pension~~5% ~~plan~~in ~~assets~~2009 ~~totaled~~as ~~$607.0 million.~~we Wedecrease ~~anticipate~~our ~~making~~departures aacross ~~cash~~the ~~contribution~~system ofand ~~approximately~~require ~~$58 million~~less ~~during~~handling ~~2005~~at airports.

~~Pension~~Selling ~~expense~~Expenses increases as the expected rate of return on pension plan assets decreases. At December 31, 2004, we estimate that the pension plan assets will generate a long-term rate of return of 8.0%. This rate is equal to the assumed rate of 8.0% used at December 31, 2003, and was

29Selling expenses declined $13.3 million, or 10.3%, compared to 2007. The decline is driven by lower ticket distribution fees and lower expenses associated with our Mileage Plan program. We expect selling expenses to increase slightly in 2009 primarily driven by increases in our advertising and marketing efforts tied to our initiative to increase unit revenues.

~~Table~~Depreciation ofand ~~Contents~~Amortization

~~developed~~Depreciation byand ~~evaluating~~amortization ~~input~~increased ~~from~~$23.6 ~~consultants~~million, ~~and~~or ~~economists~~16.6%, ascompared ~~well~~to 2007 as ~~long-term~~a ~~inflation assumptions.~~result Weof ~~regularly review~~ the delivery ~~actual~~of ~~asset~~11 ~~allocation~~B737-800 ~~and~~aircraft ~~periodically~~delivered ~~rebalance investments~~in ~~as considered appropriate~~2008. ~~This~~We ~~expected~~expect ~~long-term~~depreciation ~~rate~~and ofamortization ~~return~~to onbe ~~plan~~about ~~assets~~flat ~~at December 31,~~in ~~2004~~2009. isAlthough ~~based~~we ontook andelivery ~~allocation~~ of ~~U.S.~~11 ~~equities~~new ~~and~~aircraft ~~U.S.~~in ~~fixed~~2008 ~~income~~and ~~securities. Decreasing~~expect ~~the~~ten ~~expected~~more ~~long-term~~in ~~rate~~2009, ofwe ~~return~~expect byto ~~0.5%~~sell ~~(from~~up ~~8.0%~~ to ~~7.5%)~~four ~~would~~B737-700 ~~increase our~~aircraft ~~estimated~~and ~~2005~~complete ~~pension~~sale-leaseback ~~expense~~transactions byfor ~~approximately~~six $3B737-800s.~~1 million.~~

~~Pension~~Other ~~liability~~Operating ~~and~~Expenses future pension expense increase as the discount rate is reduced. We discounted future pension obligations using a rate of 5.75% and 6.00% at December 31, 2004 and 2003, respectively. The discount rate is determined based on the current rates earned on high quality long-term bonds. Decreasing the discount rate by 0.5% (from 5.75% to 5.25%) would increase our accumulated benefit obligation at December 31, 2004 by approximately $52.0 million and increase estimated 2005 pension expense by approximately $8.7 million.

~~The~~Other ~~defined~~operating ~~benefit~~expenses ~~plan~~increased ~~for~~primarily ~~management~~because ~~personnel~~of ~~was~~higher ~~closed~~personnel toand ~~new~~crew ~~entrants~~costs, inproperty ~~2003.~~taxes, Weand ~~are working~~legal tofees, ~~restructure~~partially ~~the~~offset ~~defined~~by ~~benefits~~a ~~plans~~decline ~~for~~in ~~other labor groups. Any such change could~~passenger ~~impact~~remuneration ~~future~~costs ~~pension~~stemming ~~expense~~from ~~and~~our ~~pension~~improved ~~liabilities~~operational performance.

~~Future~~Restructuring ~~changes~~Charges ~~in plan asset returns, assumed discount rates~~ and ~~various~~Fleet ~~other~~Transition ~~factors~~Costs ~~related to the participants in our pension plans will impact our future pension expense and liabilities. We cannot predict what these factors will be in the future.~~

~~Long-lived~~In ~~Assets As~~the third quarter of ~~December 31~~2008, ~~2004,~~ we ~~had~~announced ~~approximately~~reductions ~~$1.7 billion~~in ofwork ~~property~~force ~~and~~among ~~equipment~~union and ~~related assets~~non-union employees. InThe ~~accounting for these long~~non-~~lived~~union ~~assets,~~employees wethat ~~make~~were ~~estimates~~affected ~~about~~by the ~~expected~~reduction ~~useful~~were ~~lives~~terminated ofin the ~~assets~~third quarter, ~~the~~resulting ~~expected~~in ~~residual~~a ~~values~~$1.6 ofmillion ~~the~~severance ~~assets~~charge. For union personnel, we offered extended leaves, a voluntary furlough program, and ~~the~~an ~~potential~~early-out ~~for~~package ~~impairment~~ with a lump-sum payment based on ~~the~~years ~~fair~~of ~~value~~service that included continuation of ~~the~~medical ~~assets~~coverage and ~~the~~travel ~~cash~~privileges ~~flows~~for ~~they~~a ~~generate~~specified period. ~~Factors~~In ~~indicating potential~~addition ~~impairment~~to ~~include~~the voluntary offers, ~~but~~there ~~are~~have ~~not~~been ~~limited~~involuntary furloughs to, ~~significant~~achieve ~~decreases~~the intarget ~~the~~reduction ~~market~~in ~~value~~work ~~of the~~force. ~~long-lived~~We ~~assets,~~recorded aan ~~significant~~$11.3 ~~change~~million charge in 2008 representing the ~~long-lived~~severance ~~assets~~payments ~~condition,~~ and ~~operating~~estimated ~~cash flow~~medical ~~losses~~coverage ~~associated~~obligation ~~with~~for the ~~use~~affected ofunion ~~the long-lived asset~~employees.

In22 2002, 2003 and 2004, due to volatile economic conditions and indications of declining aircraft market values, we evaluated whether the book value of our aircraft was impaired in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” No impairment was necessary based on the results of the evaluations except as related to the B737-200C fleet.

ThereTable isof inherent risk in estimating the future cash flows used in the impairment test. If cash flows do not materialize as estimated, there is a risk the impairment charges recognized to date may be inaccurate, or further impairment charges may be necessary in the future. Contents

30During 2008, we retired four MD-80 aircraft that were under long-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.

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

~~Workers~~Operating ~~Compensation~~costs ~~and~~per ~~Employee~~ASM ~~Health~~(CASM) ~~Care~~is ~~Accruals The~~an ~~Company~~important ~~uses~~metric ain ~~combination~~the ofindustry, ~~insurance~~ and ~~self-insurance~~we ~~mechanisms~~use it to ~~provide~~gauge ~~for~~the ~~workers’ compensation~~effectiveness ~~claims~~of ~~and~~our ~~employee~~cost-reduction ~~health care benefits~~efforts. ~~Liabilities~~Our ~~associated~~effort ~~with~~to ~~the~~reduce ~~risks that~~unit ~~are~~costs ~~retained~~focuses ~~by the Company are~~ not ~~discounted~~only ~~and~~on ~~are~~controlling ~~estimated,~~the inactual ~~part,~~dollars bywe ~~considering historical claims experience and outside expertise~~spend, ~~severity~~but ~~factors~~also ~~and~~on ~~other~~increasing ~~actuarial assumptions.~~our ~~The~~capacity ~~estimated~~without ~~accruals~~adding ~~for~~a ~~these~~commensurate ~~liabilities~~amount ~~could~~of ~~be significantly affected if future occurrences and claims differ from these assumptions and historical trends~~cost.

~~Restructuring accruals~~Our ~~During~~mainline ~~the~~operating third quarter of 2004, Alaska announced a management reorganization and the closure of its Oakland heavy maintenance base, contracting out of the related maintenance activities, contracting out of the Company’s Fleet Service Ground, Support Equipment and facility maintenance functions and other initiatives. Total severance and related costs ~~associated~~per ~~with~~mainline ~~this restructuring~~ASM are ~~estimated~~summarized atbelow: $53.4 million. Our severance package offered to impacted employees included cash payments based on years of service and one year of medical coverage after severance date. Since Alaska self-insures for employee medical coverage, we estimated the projected claims cost for affected employees and recorded a corresponding accrual. Actual experience will likely differ from the estimate if employees accept positions with other employers and no longer need the coverage provided by Alaska or simply submit claims during the one year period that are higher or lower than our estimate. We expect to adjust this accrual quarterly throughout 2005.

Realizability of Deferred Tax Assets The Company has a net deferred tax liability of $92.3 million at December 31, 2004, which includes gross deferred tax assets of $372.1 million offset by a gross deferred tax liability of $464.4 million. In accordance with SFAS No. 109, “Accounting for Income Taxes.”, we have evaluated whether it is more likely than not that the deferred tax asset will be realized. Based on the available evidence, we have concluded that it is more likely than not that those assets would be realizable and thus no valuation allowance has been recorded as of December 31, 2004. Our conclusion is based on the expected future reversals of existing taxable temporary differences and does not rely on future taxable income. Should we incur additional losses in the future, our ability to realize the net operating loss carryforwards may be subject to greater uncertainty. We will continue to reassess the need for a valuation allowance during each future reporting period.


	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

31 NM = Not meaningful

~~Table~~We have separately listed in the above table our fuel costs, restructuring charges and fleet transition costs per ASM. These amounts are included in CASM, but for internal purposes we consistently use unit cost metrics that exclude fuel and certain special items to measure our cost-reduction progress. We believe that such analysis may be important to investors and other readers of ~~Contents~~these financial statements for the following reasons:

~~Liquidity~~• By eliminating fuel expense and ~~Capital~~other ~~Resources The~~special ~~table~~items ~~below~~from ~~presents~~our unit cost metrics, we believe that we have better visibility into the ~~major~~results ~~indicators~~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 ~~financial~~(and ~~condition~~trends in) company-specific cost drivers such as labor rates and ~~liquidity~~productivity, airport costs, maintenance costs, etc. , which are more controllable by management.

	December 31, 2004		December 31, 2003		Change
	(In millions, except per share and debt-to-capital amounts)
Cash and marketable securities	$	873.7	$	811.9	$	61.8
Working capital		299.2		179.7		119.5
Long-term debt and capital lease obligations		798.2		756.8		41.4
Shareholders’ equity		676.6		698.1		(21.5	)
Long-term debt-to-capital		54%:46%		52%:48%	NA
Long-term debt-to-capital assuming aircraft operating leases are capitalized at seven times annualized rent		70%:30%		70%:30%	NA

•

Mainline cost per ASM excluding fuel and certain special items is one of the most important measures used by our management and by our Board of Directors in assessing quarterly and annual cost performance. These decision-makers evaluate operating results of the “mainline” operation, which includes the operation of the B737 fleet branded in Alaska Airlines livery. The revenues and expenses associated with purchased capacity are evaluated separately.

~~During~~• ~~the~~Mainline ~~year~~cost ~~ended~~per ~~December 31,~~ASM ~~2004~~excluding fuel, ~~our~~fleet ~~cash~~transition charges and ~~marketable~~restructuring ~~securities~~charges ~~increased~~(and ~~$61.8 million~~other toitems ~~$873.7 million.~~as ~~This~~specified ~~increase~~in ~~reflects~~our ~~cash~~plan ~~provided~~documents) byis ~~operating~~an ~~activities~~important ofmetric ~~$341.7 million,~~for ~~offset~~the byemployee ~~cash~~incentive ~~used~~plan inthat ~~financing~~covers ~~activities~~company ofmanagement ~~$114.3 million, cash used for property~~ and ~~equipment~~ ~~additions of $159~~executives.~~6 million and net purchases of marketable securities of $204.5 million.~~

~~Cash~~• ~~Provided~~Mainline bycost ~~Operating~~per ~~Activities During~~ASM ~~2004,~~excluding ~~net~~fuel ~~cash~~and ~~provided~~other byspecial ~~operating~~items ~~activities~~is ~~was~~a ~~$341.7 million,~~measure ~~compared~~commonly toused ~~$318.6 million~~by ~~during~~industry ~~2003.~~analysts, ~~Operating~~and ~~cash~~we ~~inflows~~believe init ~~2003~~is ~~included~~the ~~$52.8 million~~basis ofby ~~government compensation,~~which ~~whereas~~they ~~cash~~compare ~~inflows~~our inairline ~~2004~~to ~~included~~others ~~$42~~in the industry.~~7 million~~ The measure is also the subject of ~~cash~~frequent ~~received~~questions from ~~a tax refund~~investors.

~~Cash~~• ~~Used~~Disclosure inof ~~Investing~~the ~~Activities Cash~~individual ~~used~~impact inof ~~investing~~certain ~~activities~~noted ~~was~~items ~~$365.8 million~~provides ~~during~~investors ~~2004,~~the ~~compared~~ability to ~~$576.8 million~~measure ~~in 2003.~~and Wemonitor ~~had~~performance ~~net~~both ~~purchases~~with ~~of $204.5 million of marketable securities~~ and ~~$159.6 million~~without ~~for property~~these ~~and~~special ~~equipment~~items. ~~During~~We ~~2004,~~believe ~~our~~that ~~aircraft~~disclosing ~~related~~the ~~capital~~impact ~~expenditures~~of ~~decreased~~certain ~~$150.4 million~~items, such as ~~compared~~fleet totransition ~~2003,~~costs ~~reflecting~~and arestructuring ~~reduction~~charges, inis ~~spending~~important ~~for~~because ~~new~~it ~~aircraft~~provides ~~and~~information ~~capitalized overhauls.~~on ~~Beginning~~significant ~~January 1,~~items ~~2005,~~that weare ~~will~~not ~~have~~necessarily noindicative ~~capital~~of ~~expenditures~~future ~~related~~performance. toIndustry ~~overhauls~~analysts ~~as those~~and ~~maintenance~~investors ~~activities~~consistently ~~will~~measure beour ~~expensed~~performance aswithout ~~incurred~~these ~~under~~items ~~our~~for ~~maintenance~~better ~~accounting~~comparability ~~policy that~~between ~~will~~periods beand ~~adopted~~among onother ~~that date~~airlines.

~~Cash~~23 Provided by (Used in) Financing Activities Net cash used in financing activities was $114.3 million during 2004 compared to net cash provided by financing activities of $181.8 million during 2003. Debt issuances during 2004 of $94.6 million were secured by flight equipment. These debt issuances have interest rates that vary with the London Interbank Offered Rate (LIBOR) and payment terms ranging from 12 to 16 years. Debt issuances during the period were offset by normal long-term debt payments of $58.9 million and full repayment of our credit facility of $150 million.

32 Table of Contents

~~Table~~• 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 prices. Economic fuel cost represents approximately 35% of ~~Contents~~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.

We ~~plan~~currently toforecast ~~meet~~ our ~~capital~~mainline ~~and~~costs ~~operating~~per ~~commitments~~ASM ~~through~~excluding ~~cash~~fuel ~~flow~~for ~~from~~the ~~operations~~first ~~and~~quarter ~~cash~~ and ~~marketable~~the ~~securities~~full onyear ~~hand~~of at2009 ~~December 31~~to be up 11% to 12% and up 7% to 8%, ~~2004~~respectively, ~~totaling~~compared ~~$873~~to 2008.~~7 million.~~ The increase in unit costs on a full-year basis is primarily due to the following:

~~Bank~~• ~~Line~~Expected ofcapacity ~~Credit~~reductions Facility During 2004, Alaska paid off its $150 million credit facility and, on December 23, 2004, that facility expired. Management is currently negotiating a replacement facility and expects to close the new facility during the first quarter of ~~2005,~~8% ~~although~~for ~~there can be no assurance that this can be accomplished on terms acceptable to us.~~ 2009;

~~The~~• A $~~150~~ 45 million ~~credit~~increase ~~facility that expired~~ in ~~December 2004~~defined-benefit ~~contained~~pension ~~contractual~~costs ~~restrictions, required~~from ~~maintenance~~$48 ofmillion ~~specific~~in ~~levels~~2008 ~~of net worth, maintenance of certain debt and leases~~ to ~~net worth,~~an ~~leverage~~estimated ~~and~~$93 ~~fixed~~million ~~charge~~in coverage ratios, and limits on investments, lease obligations, sales of assets, and additional indebtedness. Such provisions also limited the amount of funds Alaska Airlines can distribute via dividend to Alaska Air Group. As noted above, we are currently negotiating with a replacement facility and hope to have that agreement completed by the end of the first quarter. We expect that the new line of credit facility will be at least as restrictive as the prior credit facility. 2009;

~~Contractual~~• ~~Obligations,~~An ~~Commitments~~increase ~~and Off-Balance Sheet Arrangements Aircraft Purchase Commitments At December 31, 2004, we had firm orders for 3 aircraft requiring aggregate payments~~ of ~~approximately~~ $~~77.6~~ 10 million, asin ~~set~~maintenance ~~forth~~expense ~~below.~~due ~~In addition, Alaska had options~~ to ~~acquire~~the ~~26 additional~~timing ~~B737’s.~~of Weplanned ~~expect~~maintenance toevents ~~finance~~and the ~~firm~~start ~~orders~~of ~~and~~a to power-by-the-hour ~~extent~~agreement ~~exercised,~~on ~~the~~our ~~option aircraft with leases, long~~B737-~~term~~700 ~~debt~~and ~~or internally generated cash. One~~ B737-~~800~~900 ~~was delivered in February 2005~~aircraft, ~~and~~which ~~two~~is ~~others are~~ expected into ~~March~~provide ~~and~~cost ~~July~~savings ofover ~~2005. We have secured lease financing for~~ the ~~March~~life ~~delivery.~~of ~~We purchased~~ the ~~B737-800 aircraft delivered in February 2005 with cash on hand at the time~~agreement, ~~and~~but ~~expect~~will toresult doin ~~the~~higher ~~same~~expense ~~for~~in ~~the July delivery.~~ 2009;

~~The~~• ~~following~~Approximately ~~table~~$10 ~~summarizes~~million in additional aircraft ~~purchase~~rent ~~commitments~~that ~~and~~would ~~payments~~have bybeen ~~year,~~reported as interest expense because of ~~December 31,~~our ~~2004:~~ decision to complete sale-leaseback transactions on six B737-800 aircraft; and

Delivery Period - Firm Orders
											Beyond
Aircraft	2005		2006		2007		2008		2009		2009		Total
Boeing 737-800		3		—		—		—		—		—		3
Total		3		—		—		—		—		—		3
Payments (Millions)	$	71.0	$	3.6	$	1.0	$	1.0	$	1.0	$	—	$	77.6

•

An approximate $15 million increase in our expected incentive payouts in 2009 compared to 2008. Our current expectation is that our results will be better in 2009 compared to those in 2008. However, actual results can differ significantly as the revenue environment is uncertain and fuel is volatile.

InPurchased ~~February 2005,~~Capacity weCosts ~~converted options to acquire three B737-800 aircraft into firm orders to be delivered in 2006. This results in additional purchase commitments which are excluded from the table above.~~

33Purchased capacity costs increased $10.9 million to $313.7 million during 2008 compared to $302.8 million in 2007. Of the total, $293.7 million was paid to Horizon under the capacity purchase arrangement (CPA) for 1.4 billion ASMs. This expense is eliminated in consolidation.

~~Table~~NONOPERATING ofINCOME ~~Contents~~(EXPENSE)

~~Contractual~~Net ~~Obligations The~~nonoperating ~~following~~expense ~~table~~was ~~provides~~$24.4 amillion ~~summary~~in 2008 compared to net nonoperating income of ~~our~~$1.2 ~~principal~~million ~~payments~~in ~~under~~2007. ~~current~~Interest ~~and~~income ~~long-term~~declined ~~debt obligations~~by $13.5 million compared to 2007, ~~operating~~primarily ~~lease~~as ~~commitments~~a result of lower average portfolio returns, ~~aircraft~~partially ~~purchase~~offset ~~commitments~~by a higher average cash and ~~other~~marketable ~~obligations~~securities asbalance. Interest expense increased $6.3 million because of ~~December 31~~ new debt arrangements in 2007 and 2008, ~~2004.~~partially ~~This~~offset ~~table~~by ~~excludes~~lower ~~contributions~~interest torates on our ~~various~~variable-rate ~~pension~~debt. ~~plans~~Capitalized interest declined $5.5 million from 2007, ~~which~~resulting wefrom ~~expect~~a decrease in topre-delivery bedeposits ~~approximately~~in ~~$60 million~~connection towith ~~$75 million~~our ~~per~~orders ~~year~~for ~~through~~B737-800 ~~2008~~aircraft.

											Beyond
(in millions)	2005		2006		2007		2008		2009		2009		Total
Current and long-term debt and capital lease obligations	$	51.1	$	54.6	$	57.6	$	60.7	$	64.3	$	561.0	$	849.3
Operating lease commitments		188.4		139.0		119.0		115.2		104.4		494.7		1,160.7
Aircraft purchase commitments (3)		71.0		3.6		1.0		1.0		1.0		—		77.6
Interest obligations (1)		44.9		42.9		39.9		38.1		33.1		99.6		298.5
Other purchase obligations (2)		28.8		29.1		29.4		29.7		30.0		154.5		301.5
Total	$	384.2	$	269.2	$	246.9	$	244.7	$	232.8	$	1,309.8	$	2,687.6

INCOME TAX EXPENSE (BENEFIT)

We 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-entity basis. Our effective income tax rate on income (1loss) ~~For~~ ~~variable~~before income taxes for 2008 was 37.1% compared to an effective income tax rate ~~debt~~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, ~~future~~our ~~obligations~~effective ~~are~~tax ~~shown~~rate ~~above~~would ~~using~~have ~~interest~~been 38.3%. The difference between the effective tax rates infor ~~effect~~both periods and asour marginal tax rate of ~~December 31~~approximately 37.5% is primarily the magnitude of nondeductible expenses, ~~2004~~such as employee per-diem costs and stock-based compensation expense recorded for certain stock awards.

~~(2) Includes obligations~~24 ~~under our long-term power-by-the-hour maintenance agreement.~~

(3) ExcludesTable threeof B737-800 aircraft to be delivered in 2006. In February 2005, options for three were converted to firm orders, resulting in additional purchase obligations.Contents

~~New~~ITEM ~~Accounting Standards In March 2004, the Financial Accounting Standards Board’s (FASB) Emerging Issues Task Force (EITF) reached a consensus on EITF Issue No~~7A. ~~03-1,~~ ~~“The~~QUANTITATIVE ~~Meaning~~AND ofQUALITATIVE ~~Other-Than-Temporary~~DISCLOSURE ~~Impairment~~ABOUT ~~and~~MARKET Its Application to Certain Investments,” (EITF 03-1). The guidance prescribes a three-step model for determining whether an investment is other-than-temporarily impaired and requires disclosures about unrealized losses on investments. The accounting guidance is effective for reporting periods beginning after June 15, 2004, while the disclosure requirements are effective for annual reporting periods ending after June 15, 2004. In September 2004, the FASB issued FASB Staff Position EITF 03-1-1, “Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1 ‘The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” (FSP EITF 03-01-1). FSP EITF 03-1-1 delays the effective date for the measurement and recognition guidance contained in paragraphs 10-20 of EITF Issue 03-01. During the period of the delay, FSP EITF 03-1-1 states that companies should continue to apply relevant “other-than-temporary” guidance. The Company will assess the impact of paragraphs 10-20 of EITF 03-1 once the guidance has been finalized. At December 31, 2004, available-for-sale investments in the Company’s marketable securities portfolio had unrealized losses totaling $4.0 million which are recorded in Other Accumulated Comprehensive Loss. Management does not believe that the securities with unrealized losses as of December 31, 2004 meet the criteria for recognizing the loss under existing other-than-temporary guidance. RISK

34We 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.

~~Table~~Market ofRisk – ~~Contents~~Aircraft Fuel

~~During the fourth quarter of 2004~~Currently, ~~the~~our ~~Financial~~fuel-hedging ~~Accounting~~portfolio ~~Standards~~consists ~~Board~~almost ~~issued~~exclusively ~~SFAS 123R, “Share Based Payments: An Amendment~~ of ~~FASB~~crude ~~No. 123~~oil ~~and~~call ~~95”~~options. ~~The~~We ~~new~~utilize ~~standard~~the ~~requires~~contracts ~~companies~~in toour ~~recognize~~portfolio inas ~~the~~hedges ~~income~~to ~~statement~~decrease ~~the~~our ~~grant~~exposure ~~date~~to ~~fair~~the ~~value~~volatility of ~~stock~~jet ~~options~~fuel ~~and~~prices. ~~other~~Call ~~equity~~options ~~based compensation~~are ~~issued~~designed to ~~employees.~~effectively ~~This~~cap ~~new~~our ~~standard~~cost ~~will~~of ~~apply~~the tocrude ~~both~~oil ~~stock~~component ~~options~~of tofuel ~~purchase Air~~prices, ~~Group~~allowing ~~common~~us ~~stock~~to ~~that~~limit weour ~~grant~~exposure to ~~employees~~increasing offuel ~~Alaska~~prices. ~~Airlines~~With these ~~and~~call ~~our~~option ~~Employee Stock Purchase Plan~~contracts, ~~which~~we ~~features~~still abenefit ~~look-back~~from ~~provision~~the ~~and~~decline ~~allows~~in ~~employees~~crude tooil ~~purchase~~prices, ~~Air~~as ~~Group common~~there ~~stock~~is atno adownward ~~discount~~exposure inother ~~excess~~than ofthe ~~5%.~~premiums ~~Our~~that ~~options~~we ~~are~~pay ~~typically~~to ~~granted~~enter ~~with~~into ~~graded~~the ~~vesting provisions,~~contracts. ~~and~~Although ~~we intend~~ to ~~amortize~~a ~~compensation~~lesser ~~cost~~extent, ~~over~~we ~~the~~also ~~service~~use ~~period~~collar ~~using~~structures ~~the~~for ~~straight~~fuel ~~line~~hedging ~~method~~purposes. ~~This~~We ~~new~~believe ~~statement~~there is ~~effective~~risk ~~for~~in ~~interim~~not orhedging ~~annual~~against ~~periods~~the ~~beginning~~possibility ~~after~~of ~~June 15,~~fuel ~~2005~~price ~~(our third quarter of 2005)~~increases. We ~~intend~~estimate tothat ~~use~~a ~~the~~10% ~~“modified~~increase ~~prospective~~or ~~method”~~decrease ~~upon adoption~~in ~~whereby~~crude ~~previously~~oil ~~awarded~~prices ~~but~~as ~~unvested~~of ~~equity~~December 31, ~~awards~~2008 ~~are~~would ~~accounted~~increase ~~for~~or indecrease ~~accordance with SFAS 123R but prospective amounts are recognized in~~ the ~~income~~fair ~~statement~~value ~~instead~~ of ~~simply~~our ~~being~~hedge ~~disclosed.~~portfolio ~~Our~~by ~~stock~~approximately ~~based~~$11.5 ~~compensation~~million ~~expense,~~and ~~as measured under SFAS 123, approximates~~ $~~8 to $~~10 .3 million, ~~per year on a pre-tax basis~~respectively.

~~In January 2003~~Additionally, ~~the~~we ~~Financial~~have ~~Accounting~~entered ~~Standards~~into ~~Board~~fuel ~~(FASB) issued~~purchase ~~Interpretation~~contracts ~~No. 46~~that ~~(FIN 46),~~fix ~~“Consolidation of Variable Interest Entities.” FIN 46, as amended by FIN 46 (Revised) in December 2003, requires consolidation of certain types of entities in which~~ the ~~Company absorbs a~~ ~~majority~~refining ofmargin ~~the~~we ~~entity’s~~pay ~~expected~~for ~~losses,~~approximately ~~receives~~40% ~~a majority~~ of ~~the~~our ~~entity’s~~fuel ~~expected~~consumption ~~returns, or both, as a result of ownership, contractual or other financial interests~~ in the ~~entity.~~first ~~These entities~~quarter ~~are called “variable interest entities.” The principal characteristics~~ of variable interest entities are (1) an insufficient amount of equity to absorb the entity’s expected losses, (2) equity owners as a group are not able to make decisions about the entity’s activities, and (3) equity that does not absorb the entity’s losses or receive the entity’s residual returns2009. Variable interests are contractual, ownership or other monetary interests in an entity that change with fluctuations in the entity’s net asset value. As a result, variable interest entities can arise from items such as lease agreements, loan arrangements, guarantees or service contracts.

IfOur anportfolio ~~entity~~of isfuel ~~determined~~hedge tocontracts bewas aworth ~~variable~~$23.5 million ~~interest~~at ~~entity~~December 31, ~~the~~2008, ~~entity~~for ~~must~~which bewe ~~consolidated~~have bypaid ~~the “primary beneficiary”~~$73.9 ~~The primary beneficiary is the holder~~ of ~~the~~premiums ~~variable~~to ~~interests~~counterparties, ~~that absorbs~~compared to a ~~majority~~portfolio value of ~~the~~$94.5 ~~variable~~million ~~interest~~at ~~entity’s~~December 31, ~~expected~~2007. ~~losses~~The ortotal ~~receives~~value ~~a majority~~ of ~~the entity’s~~$23.5 ~~residual~~million ~~returns~~at inDecember 31, ~~the~~2008 ~~event~~is nonet ~~holder~~of ~~has~~ a ~~majority of the expected losses~~$20. ~~There is~~0 nomillion ~~primary~~liability ~~beneficiary~~associated inwith ~~cases~~collar ~~where~~structures nothat ~~single~~would ~~holder~~require ~~absorbs~~future ~~the~~cash ~~majority~~outlays ofif ~~the~~oil ~~expected~~prices ~~losses or~~remained ~~receives~~below ~~a majority of~~ the ~~residual~~strike ~~returns~~price. ~~The~~We ~~determination~~do ofnot ~~the~~have ~~primary~~any ~~beneficiary~~collateral ~~is based~~held onby ~~qualitative~~counterparties ~~aspects~~to ofthese ~~the~~agreements ~~arrangements~~as ~~involved or projected cash flows at the inception~~ of ~~the~~December 31, ~~transaction with the variable interests entity~~2008.

~~FIN~~We 46continue ~~was~~to ~~applicable~~believe tothat ~~financial~~our ~~statements~~fuel hedge program is an important part of ~~companies~~our ~~that~~strategy ~~have~~to ~~interests~~reduce inour ~~“special~~exposure ~~purpose~~to volatile fuel prices. We expect to ~~entities”~~continue to enter into these types of contracts prospectively, asalthough ~~defined~~significant changes in market conditions could affect our decisions. For more discussion, ~~during~~see ~~the~~Note ~~year~~3 ~~ended~~to ~~2003~~our financial statements.

WeFinancial ~~are~~Market ~~the~~Risk ~~lessee in a series of operating leases covering our leased aircraft. In many instances, the lessors are trusts established by a third party specifically to purchase, finance and lease aircraft~~

35We have exposure to market risk associated with changes in interest rates related primarily to our debt obligations and short-term investment portfolio. Our debt obligations include variable-rate instruments, which have exposure to changes in interest rates. This exposure is somewhat mitigated through our variable-rate investment portfolio. A hypothetical 10% change in the average interest rates incurred on variable-rate debt during 2008 would correspondingly change our net earnings and cash flows associated with these items by approximately $1.7 million. In order to help mitigate the risk of interest rate fluctuations, we have fixed the interest rates on certain existing variable-rate debt agreements over the past several years. Additionally, several of our new debt arrangements entered into during 2006 through 2007 are fixed-rate arrangements. Due to the current low interest rate environment, all of our 2008 debt arrangements have been fixed-rate arrangements. Our variable-rate debt is approximately 24% of our total long-term debt at December 31, 2008 compared to 41% at December 31, 2007.

~~Table~~We ofalso ~~Contents~~have 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 2008, interest income would increase by approximately $9.1 million.

to25 us. These leasing entities meet the criteria for variable interest entities. However, they do not meet the consolidation requirements of FIN 46 because we are not the primary beneficiary of the entity’s expected gains or losses. Our conclusions are based on the fact that the leasing arrangements involved contain terms which are consistent with market terms at the inception of the lease and do not include residual value guarantees made by us, fixed-price purchase obligations or similar features that obligate us to absorb the majority of expected losses of the variable interest entities. Our maximum exposure under these types of lease arrangements is the remaining lease payments, which are reflected in future lease commitments in Note 6 (plus the cost, if any, of bringing the equipment into compliance with the physical condition required for return).

EffectTable of Inflation - Inflation and price changes other than for aircraft fuel do not have a significant effect on our operating revenues, operating expenses and operating income. Contents

~~RISK~~ITEM FACTORS Our operations and financial results are subject to various uncertainties, such as global and industry instability, intense competition, volatile fuel prices, a largely unionized labor force, the need to finance large capital expenditures, government regulation, potential aircraft incidents and general economic conditions8. IfFINANCIAL ~~any~~STATEMENTS ofAND ~~the~~SUPPLEMENTARY ~~following occurs, our business, financial condition and results of operations could suffer. In such case, the trading price of our common stock could also decline.~~ DATA

~~The airline industry is highly competitive and subject to rapid change. We may be unable to~~ ~~compete~~SELECTED ~~effectively~~QUARTERLY ~~against~~FINANCIAL ~~other~~INFORMATION ~~airlines with greater financial resources or lower operating costs, or to adjust rapidly enough in the event the basis of competition in our markets changes.~~

~~The~~(unaudited) airline industry is highly competitive as to fares, flight frequency, frequent flyer benefits, routes and service. The industry is particularly susceptible to price discounting because airlines incur only nominal costs to provide service to passengers occupying otherwise unsold seats. We currently compete with one or more other airlines on substantially all of our routes. Many of these airlines are larger and have significantly greater financial resources and name recognition or lower operating costs than our company. Others are operating under bankruptcy court protection and run lower costs more quickly than we can. Some of these competitors have chosen from time to time to add service, reduce their fares, or both, in our markets. We may be unable to compete effectively against other airlines that introduce service or discounted fares in the markets that we serve.

Our strategy is to focus on serving a few key markets, including Seattle, Portland, Los Angeles and Anchorage. Significant portions of our flights occur to and from our Seattle hub. In 2004, this traffic to and from Seattle accounted for 66% of total traffic. We believe that concentrating our service offerings in this way allows us to maximize our investment in personnel, aircraft and ground operations, as well as to gain greater advantage from sales and marketing efforts in these


	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

36 * 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.

~~Table~~26 ~~of Contents~~

regions.Table As a result, we remain highly dependent upon our key markets. Our business would be harmed by any circumstances causing a reduction in demand for air transportation in our key markets, such as adverse changes in local economic conditions, negative public perception of a key market and significant price increases linked to increases in airport access costs and fees imposed on passengers. An increase in competition in our key markets could also cause us to reduce fares or take other competitive measures that harm our operating results. Contents

~~Many~~REPORT ~~airlines,~~OF ~~including~~INDEPENDENT ~~ours,~~REGISTERED ~~have~~PUBLIC ~~code~~ACCOUNTING ~~share~~FIRM and frequent flyer marketing alliances with other airlines. Internet distribution arrangements either in conjunction with other airlines or with independent travel websites have become an important means for selling airline travel. Any consolidation or significant alliance activity within the airline industry, or our loss of key alliance or distribution relationships, could result in our competitors having access to increased route networks and resources, which, in turn, would increase the risks of competition described above.

The ~~airline~~Board ~~industry,~~of ~~particularly~~Directors ~~the regional airlines, also faces competition from ground transportation alternatives, such as the bus, train or automobile. Video teleconferencing~~ and ~~other~~ ~~methods~~Shareholder ~~of electronic communication may add a new dimension of competition to the industry as business travelers seek lower-cost substitutes for air travel.~~

~~Our~~Alaska ~~business~~Airlines, ~~financial condition, and results of operations are substantially exposed to the current high prices and variability of jet fuel~~Inc.: ~~Further increases in jet fuel costs would harm our business.~~

~~Fuel~~We ~~costs~~have ~~constitute~~audited athe ~~significant~~accompanying ~~portion~~balance sheets of ~~our~~Alaska ~~total operating expenses~~Airlines, ~~comprising~~Inc. ~~20%~~as of ~~total~~ ~~operating expenses for the year ended~~ December 31, ~~2004.~~2008 ~~Significant~~and ~~increases~~2007, inand ~~fuel~~the ~~costs during~~related ~~2004~~statements ~~have negatively impacted our results~~ of operations~~. Further increases would harm our~~, ~~financial~~shareholder’s ~~condition~~equity, and ~~results~~cash offlows ~~operations.~~for Weeach ~~estimate~~of ~~that during~~ the ~~year~~years ~~ended~~in ~~December 31, 2004 and during~~ the three-year period ended December 31, ~~2003~~2008. aIn ~~one-cent~~connection ~~increase~~with inour ~~the~~audits ~~price~~of ~~per~~the ~~gallon~~financial ~~of fuel~~statements, ~~would~~we also have ~~increased~~audited ~~our~~financial ~~fuel~~statement ~~expenses~~schedule ~~by $3~~II.~~5 million~~ ~~and~~These ~~$3.4 million, respectively.~~financial ~~Average~~statements ~~economic~~and ~~fuel~~financial ~~prices~~statement ~~(which~~schedule ~~include~~are the ~~benefits~~responsibility of ~~our~~the ~~hedging~~Company’s ~~program) during 2004 were 35~~management.1 ~~cents~~Our ~~higher~~responsibility ~~than~~is into ~~2003.~~express ~~Total~~an ~~fuel~~opinion ~~costs,~~on ~~net~~these offinancial ~~the~~statements ~~benefit~~and ~~received~~financial ~~from~~statement ~~fuel~~schedule ~~hedges settled~~based ~~during~~on ~~the~~our ~~period were $140~~audits.~~1 million~~ ~~higher in 2004 compared to 2003.~~

~~Historically,~~We ~~fuel~~conducted ~~costs~~our ~~have~~audits ~~been~~in ~~unpredictable~~accordance ~~and~~with ~~subject~~the tostandards ~~wide~~of ~~price~~the ~~fluctuations~~Public ~~based~~Company ~~on geopolitical~~Accounting ~~issues~~Oversight ~~and~~Board ~~supply~~(United ~~and demand~~States). ~~Fuel~~Those ~~availability~~standards isrequire ~~also~~that ~~subject~~we toplan ~~periods~~and perform ofthe ~~market surplus~~audit ~~and~~to ~~shortage~~obtain ~~and~~reasonable isassurance ~~affected~~about bywhether ~~demand~~the ~~for~~financial ~~both~~statements ~~home~~are ~~heating~~free ~~oil~~of ~~and~~material ~~gasoline~~misstatement. ~~Because~~An ~~of the~~audit ~~effect~~includes ofexamining, ~~these events~~ on ~~the~~a ~~price~~test ~~and~~basis, ~~availability~~evidence ofsupporting ~~fuel,~~ the ~~cost~~amounts and ~~future~~disclosures ~~availability of~~in ~~fuel~~the ~~cannot~~financial ~~be predicted with any degree of certainty~~statements. ~~In the event of a fuel supply shortage,~~An ~~higher~~audit ~~fuel~~also ~~prices~~includes orassessing the ~~curtailment~~accounting ofprinciples ~~scheduled~~used ~~service~~and ~~could~~significant ~~result.~~estimates ~~Some~~made ofby ~~our~~management, ~~competitors may~~as ~~have~~well ~~more~~as ~~leverage~~evaluating ~~in obtaining fuel. We may be unable to offset increases in~~ the ~~price~~overall ~~of fuel~~financial ~~through~~statement ~~higher fares~~presentation. We ~~utilize~~believe that our ~~fuel~~audits ~~hedges~~provide as a ~~form~~reasonable ofbasis ~~insurance~~for ~~against significant increases in fuel prices. To hedge~~ our ~~exposure to fuel price fluctuations, we began purchasing~~opinion.

37In 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.

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

~~hedging~~/s/ ~~instruments,~~KPMG ~~primarily~~LLP instruments that cap the price paid. At December 31, 2004, we had fuel hedge contracts in place to hedge 50% of our anticipated fuel consumption in 2005 and 35% and 9% of our anticipated fuel consumption in 2006 and 2007, respectively. Even with hedges, we are substantially exposed to increases in jet fuel costs.

~~If we are unable to meet our cost reduction goals~~Seattle, ~~our~~Washington ~~results of operations and financial condition may suffer.~~

WeFebruary 25, ~~along~~2009 with other airlines, have announced aggressive cost reduction goals that are an important part of our business strategy of offering the best value to passengers through competitive fares while at the same time achieving acceptable profit margins and return on capital. We believe having a lower cost structure better positions us to be able to grow our business and take advantage of market opportunities.

We27 have implemented initiatives that we believe will reduce our annual operating costs by approximately $185 million and seek additional savings of approximately $155 million, the majority of which is being sought from our labor groups and, to a lesser extent, additional cost reductions in ticket distribution, maintenance, and other costs. We hope to achieve labor savings through a combination of market-based wage adjustments, a common health and retirement benefits package for every work group, and work rule changes focusing on greater efficiency in operations. We cannot be certain that we will be able to implement changes in our operations sufficient to generate this level of additional targeted savings, or that if such changes are implemented, that forecasted savings will be achieved. In the event that we are unable to achieve our cost reduction goals, or our efforts prove less successful than those of our competitors, our results of operations will likely be below our own expectations and may be below those of outside financial analysts, and our financial condition may be harmed.

ManyTable of our employees are covered by collective bargaining agreements. A failure to negotiate new agreements, or to do so on terms competitive with the labor costs and practices of our competitors, could disrupt our business and increase our costs. Contents

AsBALANCE ofSHEETS December 31, 2004, labor unions represented 83% of Alaska’s employees. Labor costs generally are a significant component of our total expenses, comprising approximately 34% of our total operating expenses in 2004. Each of our different employee groups has separate collective bargaining agreements, and may make demands that would increase our operating expenses and adversely affect our profitability.

AtAlaska ~~December 31~~Airlines, ~~2004 we were in contract talks with most labor groups and had submitted to binding arbitration with the Airline Pilots Association (ALPA)~~Inc. ~~The degree to which we meet our overall labor savings goals will be determined to a large extent by the results of the pilot arbitration.~~


	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

~~Table~~See ofaccompanying ~~Contents~~notes to financial statements.

~~The~~28 pilot contract provides that, if an agreement on the entire contract was not reached by December 15, 2004, ten contract issues plus wage rates would be submitted to an interest arbitrator. Issues submitted generally relate to pension plans, medical insurance, profit sharing, code sharing and work rules. The parties did not reach an agreement, and the issues have been submitted to binding arbitration in March 2005 with a decision to be effective in May 2005. The pilot labor contract contains market related standards for wages and non-wage issues.

IfTable we were unable to reach agreement on the terms of any collective bargaining agreement with any group of our employees or were to experience widespread employee dissatisfaction, we could be subject to work slowdowns or stoppages. We could also become subject to protests or picketing by organized labor groups representing our employees. Any of these events would be disruptive to our operations and could harm our business. In the event any agreement we reach with an organized labor group requires us to pay wages or to incur costs that are materially higher than those we currently pay or we are unable to fully offset such increased costs through fare increases, our expenses would increase and our operating margin would be harmed. Contents

~~Weakness~~BALANCE inSHEETS ~~the~~(continued) ~~general economy, and in the airline industry in particular, could have an adverse effect on our business.~~

WeAlaska believe that airline traffic, including business traffic, is particularly sensitive to changes in economic growth and expectations. Weak economic growth in 2001 through the first half of 2003, low ticket yields, and escalating fuel prices contributed to much of the airline industry suffering significant losses from 2001 through 2004. Currently, US Airways, United Airlines ~~and ATA Airlines~~, ~~as well as other carriers, operate under bankruptcy protection~~Inc. Because airlines operating under bankruptcy protection receive increased flexibility to reduce their costs by voiding contracts and renegotiating existing business obligations, current and future airline bankruptcies could have a substantial impact on industry competition. In the event airlines who have received bankruptcy protection choose to apply some or all of the cost savings they obtain toward reduced fares, bankruptcy by airlines who compete with us may cause us to reduce our fares and result in a substantial reduction in revenue and operating margin. Continued weakness in the airline industry may also result in additional industry consolidation, greater reliance on industry alliances, such as code sharing and frequent flyer reciprocity arrangements, and increased price competition among existing carriers, each of which could dramatically alter the competitive environment in the markets we serve and harm our operating results. Continued weak economic performance in the airline industry may also result in a further reduction in our credit rating and make it more difficult for us to raise capital on economical terms. Any general reduction in airline passenger traffic as a result of a soft economy would harm our business.

We rely heavily on automated systems to operate our business and any failure of these systems could harm our business.


	As of December 31
(in millions except share amounts)	2008			2007
LIABILITIES AND SHAREHOLDER’S EQUITY
Current Liabilities
Accounts payable	$	49.4		$	82.8
Payables to related companies		53.5			47.9
Accrued aircraft rent		60.2			54.1
Accrued wages, vacation and payroll taxes		101.2			92.4
Other accrued liabilities		510.7			471.3
Air traffic liability		372.2			364.6
Securities lending obligation		—			111.9
Fuel hedge contracts liability		20.0			—
Current portion of long-term debt		225.1			170.9

Total Current Liabilities		1,392.3			1,395.9

Long-Term Debt, Net of Current Portion		1,334.1			1,061.5

Other Liabilities and Credits
Deferred income taxes		2.0			118.1
Deferred revenue		394.1			387.8
Obligation for pension and postretirement medical benefits		584.7			276.2
Other liabilities		126.4			105.0

		1,107.2			887.1

Commitments and Contingencies
Shareholder’s Equity
Common stock, $1 par value Authorized: 1,000 shares Issued and outstanding: 2008 and 2007 - 500 shares		—			—
Capital in excess of par value		640.1			630.3
Accumulated other comprehensive loss		(328.3	)		(133.3	)
Retained earnings		283.2			379.6

		595.0			876.6

Total Liabilities and Shareholder’s Equity	$	4,428.6		$	4,221.1

WeSee ~~depend~~accompanying onnotes ~~automated systems~~ to ~~operate~~financial ~~our~~statements. ~~business, including our computerized airline~~

39 29

~~reservation~~STATEMENTS ~~system,~~OF ~~our~~OPERATIONS telecommunication systems and our website. We also issue a substantial number of our tickets 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 to work efficiently, our website and reservation system must be able to accommodate a high volume of traffic and deliver important flight information. Substantial or repeated website, reservations system or telecommunication systems failures could reduce the attractiveness of our services and cause our customers to purchase tickets from another airline. Any disruption in these systems could result in the loss of important data, increase our expenses and generally harm our business.

~~Increases~~Alaska inAirlines, ~~government~~Inc. ~~taxes and fees could reduce demand for air travel and harm our business~~

Airlines pay or are responsible for collecting a number of different taxes and fees including, but not limited to, fuel taxes, airport facility charges, immigration fees, security fees, excise taxes on ticket sales, and fuel taxes. Recently, the United States Department of Homeland Security proposed raising the aviation security fee from $2.50 per one-way segment to $5.50 per one-way segment.


	Year Ended December 31
(in millions)	2008			2007			2006
Operating Revenues
Passenger	$	2,643.7		$	2,547.2		$	2,453.1
Freight and mail		99.3			94.2			93.4
Other - net		135.2			147.1			129.6
Change in Mileage Plan terms		42.3			—			—

Total mainline operating revenues		2,920.5			2,788.5			2,676.1
Passenger - purchased capacity		300.8			281.4			16.4

Total Operating Revenues		3,221.3			3,069.9			2,692.5

Operating Expenses
Wages and benefits		742.7			753.9			745.8
Variable incentive pay		15.8			13.5			27.7
Aircraft fuel, including hedging gains and losses		1,162.4			737.5			757.0
Aircraft maintenance		150.6			149.8			156.8
Aircraft rent		106.2			112.8			110.9
Landing fees and other rentals		167.7			170.1			158.2
Contracted services		130.2			124.1			117.5
Selling expenses		116.0			129.3			141.5
Depreciation and amortization		165.9			142.3			137.8
Food and beverage service		48.3			46.9			48.3
Other		170.3			173.1			161.1
Restructuring charges		12.9			—			24.8
Fleet transition costs - MD-80		47.5			—			189.5

Total mainline operating expenses		3,036.5			2,553.3			2,776.9
Purchased capacity costs		313.7			302.8			14.3

Total Operating Expenses		3,350.2			2,856.1			2,791.2

Operating Income (Loss)		(128.9	)		213.8			(98.7	)

Nonoperating Income (Expense)
Interest income		51.3			64.8			56.3
Interest expense		(92.5	)		(86.2	)		(73.3	)
Interest capitalized		20.2			25.7			21.5
Other - net		(3.4	)		(3.1	)		(0.5	)

		(24.4	)		1.2			4.0

Income (loss) before income tax		(153.3	)		215.0			(94.7	)
Income tax expense (benefit)		(56.9	)		80.2			(37.0	)

Net Income (Loss)	$	(96.4	)	$	134.8		$	(57.7	)

WeSee ~~believe~~accompanying ~~the~~notes ~~demand for air travel is highly sensitive~~ to ~~fare~~financial ~~levels~~statements. Although law makers may impose additional fees and view them as “pass through costs”, we believe that a higher total ticket price in the eyes of the consumer will influence their purchase and travel decisions and may result in an overall decline in passenger traffic, which would harm our business.

~~Moreover,~~30 we believe that the impact of higher fees is proportionally greater for low fare carriers, carriers with a high percentage of leisure travelers, and carriers that fly relatively short segments. Because Alaska carries many leisure travelers, we believe higher security fees and (other fee increases generally) could negatively impact us more than some of our competitors.

TheTable September 11,of 2001 terrorist attacks negatively impacted our industry and our business and further threatened or actual terrorist attacks, or other hostilities involving the U.S., may significantly harm our industry and our business in the future. Contents

~~The~~STATEMENTS ~~terrorist~~OF attacks of September 11, 2001 and their aftermath have negatively impacted the airline industry, including our company. Because a substantial portion of our costs are fixed in the short-term, we were unable to offset the reduction in customer demand through cost savings, and operating results were harmed to a proportionately greater degree. Additional terrorist attacks, the fear of such attacks or other hostilities involving the U.SHAREHOLDER’S. ~~could~~EQUITY ~~have a further significant negative impact on the airline industry, including us, and could:~~

•Alaska ~~result in a grounding of commercial air traffic by the FAA~~Airlines, •Inc. ~~significantly reduce passenger traffic and yields due to a potentially dramatic drop in demand for air travel,~~


(In millions)	Common Stock		Capital in Excess of Par Value			Deferred Stock-Based Compensation			Accumulated Other Comprehensive Loss			Retained Earnings			Total
Balances at December 31, 2005	$	—	$	457.1		$	(6.7	)	$	(132.0	)	$	308.5		$	626.9

Cumulative effect of adoption of SAB 108, net of $4.3 tax effect		—		—			—			—			(6.0	)		(6.0	)

Adjusted balances at December 31, 2005	$	—	$	457.1		$	(6.7	)	$	(132.0	)	$	302.5		$	620.9
2006 net loss													(57.7	)		(57.7	)
Other comprehensive income (loss):
Related to marketable securities:
Change in fair value										4.0
Reclassification to earnings										(0.4	)
Income tax effect										(1.3	)

										2.3						2.3

Related to employee benefit plans:
Pension liability adjustment, net of $24.2 tax effect										(43.1	)					(43.1	)

Postretirement medical liability adjustment, net of $11.1 tax effect										(18.7	)					(18.7	)

Officers supplemental retirement plan, net of $0.2 tax effect										0.4						0.4

Related to fuel hedges:
Reclassification to earnings										(0.5	)
Income tax effect										0.2

										(0.3	)					(0.3	)

Total comprehensive loss																(117.1	)
Implementation of SFAS 123R				(6.7	)		6.7									0.0
Stock-based compensation				9.4												9.4
Contribution from parent				160.2												160.2

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	)											(0.2	)

Balances at December 31, 2007	$	—	$	630.3		$	—		$	(133.3	)	$	379.6		$	876.6

~~Table~~31 ~~of Contents~~

•Table increase security and insurance costs, • increase fuel costs and the volatility of fuel prices, • make it more difficult for us to obtain war risk or other insurance, and • increase costs from airport shutdowns, flight cancellations and delays resulting from security breaches and perceived safety threats.Contents

~~Our~~STATEMENTS ~~insurance~~OF ~~costs~~SHAREHOLDER’S ~~have~~EQUITY ~~increased~~- as(Continued) ~~a result of the September 11, 2001 terrorist attacks, and further increases in insurance costs would harm our business, financial condition and results of operations.~~

~~Following~~Alaska ~~the September 11~~Airlines, 2001 terrorist attacks, aviation insurers dramatically increased airline insurance premiums and significantly reduced the maximum amount of insurance available to airlines for third-party claims resulting from acts of terrorism, war or similar events to $50 million per event and in the aggregateInc. In light of this development, under the Air Transportation Safety and Stabilization Act, the Homeland Security Act of 2002, as amended by the Consolidated Appropriations Act of 2005, the government is currently offering domestic airlines either (i) third-party liability war risk coverage above $50 million, or (ii) in lieu of commercial war risk insurance, full hull, comprehensive and third-party liability war risk coverage. This coverage provides for the same limits of hull and comprehensive insurance and twice the limits of third-party liability insurance carried by the airline on September 11, 2001.

Aviation insurers could increase their premiums even further in the event of additional terrorist attacks, hijackings, airline accidents or other events adversely affecting the airline industry. Furthermore, the full hull, comprehensive and third-party war risk insurance provided by the government is mandated through August 31, 2005. While the government may extend the deadline for when it will stop providing such coverage, we cannot be certain that any extension will occur, or if it does, 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. Significant increases in insurance premiums would adversely impact our business, financial condition and results of operations.


(In millions)	Common Stock		Capital in Excess of Par Value			Accumulated Other Comprehensive Loss			Retained Earnings			Total
Balances at December 31, 2007	$	—	$	630.3		$	(133.3	)	$	379.6		$	876.6

2008 net loss										(96.4	)		(96.4	)
Other comprehensive income (loss):
Related to marketable securities:
Change in fair value							(8.7	)
Reclassification to earnings							(0.2	)
Income tax effect							3.3

							(5.6	)					(5.6	)

Related to employee benefit plans:
Pension liability adjustment, net of $113.5 tax effect							(188.9	)					(188.9	)

Postretirement medical liability adjustment, net of $0.5 tax effect							(0.8	)					(0.8	)

Officers supplemental retirement plan, net of $0.1 tax effect							0.3						0.3

Total comprehensive loss													(291.4	)
Stock-based compensation				10.8									10.8
Impact of issuance of Air Group stock under stock plans				(1.0	)								(1.0	)

Balances at December 31, 2008	$	—	$	640.1		$	(328.3	)	$	283.2		$	595.0

~~Changes~~See inaccompanying ~~government~~notes ~~regulation~~to ~~imposing~~financial ~~additional requirements and restrictions on our operations could increase our operating costs and result in service delays and disruptions~~statements.

~~Airlines~~32 are subject to extensive regulatory and legal requirements, both domestically and internationally, that involve significant compliance costs. In the last several years, Congress has passed laws, and the DOT and the FAA have issued regulations, relating to the operation of airlines that have required significant expenditures. Additional laws, regulations, taxes and airport rates and charges have been proposed from time to time that could significantly increase

41 Table of Contents

~~Table~~STATEMENTS ofOF ~~Contents~~CASH FLOWS

~~the~~Alaska ~~cost of airline operations or reduce the demand for air travel. If adopted~~Airlines, ~~these measures could have the effect of raising ticket prices, reducing revenue and/or increasing costs~~Inc.

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


	Year Ended December 31
(in millions)	2008			2007			2006
Cash flows from operating activities:
Net income (loss)	$	(96.4	)	$	134.8		$	(57.7	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Restructuring charges		12.9			—			24.8
Fleet transition costs, including impairment charge		47.5			—			189.5
Depreciation and amortization		165.9			142.3			137.8
Stock-based compensation		10.8			10.5			9.4
Changes in fair values of open fuel hedge contracts		71.0			(35.4	)		73.8
Loss (gain) on sale of assets		(3.0	)		(3.3	)		0.2
Changes in deferred income taxes		(66.1	)		48.0			(44.7	)
(Increase) decrease in receivables - net		110.2			(317.1	)		(53.6	)
(Increase) decrease in prepaid expenses and other current assets		(13.9	)		10.8			(3.6	)
Increase in air traffic liability		7.6			53.2			19.5
Increase (decrease) in other current liabilities		6.6			75.5			41.9
Increase in deferred revenue and other-net		(6.1	)		74.9			47.7

Net cash provided by operating activities		247.0			194.2			385.0

Cash flows from investing activities:
Property and equipment additions:
Aircraft and aircraft purchase deposits		(246.1	)		(523.1	)		(493.4	)
Other flight equipment		(42.3	)		(37.0	)		(23.6	)
Other property and equipment		(35.4	)		(46.3	)		(48.5	)

Total property and equipment additions		(323.8	)		(606.4	)		(565.5	)
Proceeds from disposition of assets		6.8			61.4			2.9
Purchases of marketable securities		(766.0	)		(1,149.3	)		(806.5	)
Sales and maturities of marketable securities		579.6			1,321.1			935.9
Restricted deposits and other		8.3			(2.2	)		12.1

Net cash used in investing activities		(495.1	)		(375.4	)		(421.1	)

Cash flows from financing activities:
Proceeds from issuance of long-term debt		658.5			281.9			391.4
Long-term debt payments		(331.7	)		(127.2	)		(198.1	)

Net cash provided by financing activities		326.8			154.7			193.3

Net change in cash and cash equivalents		78.7			(26.5	)		157.2
Cash and cash equivalents at beginning of year		204.3			230.8			73.6

Cash and cash equivalents at end of year	$	283.0		$	204.3		$	230.8

Supplemental disclosure of cash paid (refunded) during the year for:
Interest (net of amount capitalized)	$	68.2		$	58.9		$	46.7
Income taxes		0.5			8.4			2.4
Noncash investing and financing activities:
Equity contribution from parent	$	—		$	—		$	160.2
Reduction in intercompany receivables and payables		—			—			40.2
Debt assumed in purchase of MD-80 aircraft		—			—			11.6

AnSee ~~accident~~accompanying ornotes incident involving one of our aircraft could involve a significant loss of life and result in a loss of faith in our airlines 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 believe that we currently maintain liability insurance in amounts and of the type generally consistent with industry practice, 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~~statements. Moreover, any aircraft accident or incident, even if fully insured and even if it does not involve one of our airlines, could cause a public perception that our airlines or the equipment they fly is less safe or reliable than other transportation alternatives, which would harm our business.

~~Our~~33 operations are often affected by factors beyond our control, including traffic congestion at airports, weather conditions and increased security measures, any of which could harm our financial condition and results of operations.

LikeTable other airlines, our operations are subject to delays caused by factors beyond our control, including air traffic congestion at airports, adverse weather conditions and increased security measures. Delays frustrate passengers, reduce aircraft utilization and increase costs, all of which in turn affect our profitability. During periods of fog, snow, rain, freezing rain, storms or other adverse weather conditions, flights may be canceled or significantly delayed. Due to our geographic area of operations, we believe a significant portion of our operation is more susceptible to adverse weather conditions than many of our competitors. Cancellations or delays due to weather conditions, traffic control problems and breaches in security could harm our financial condition and results of operations. Contents

IfNOTES ~~Alaska~~TO ~~fails~~FINANCIAL toSTATEMENTS ~~comply with financial covenants, some of its financing agreements may be terminated.~~

Alaska ~~is required to comply with specific financial covenants in certain agreements. Although our $150 million revolving credit facility expired in December 2004~~Airlines, ~~we are currently negotiating a replacement facility~~Inc. We expect this facility to have covenants that are as restrictive, if not more, than those in our recently expired agreement. We cannot ensure that Alaska will be able to comply with these covenants or provisions or that these requirements will not limit our ability to finance our future operations or capital needs. Alaska’s inability to comply with the required

42 December 31, 2008

~~Table~~NOTE of1. ~~Contents~~GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

~~financial~~Organization ~~maintenance covenants or provisions could result in default under these financing agreements~~ and ~~could~~Basis ~~result in a cross default under Alaska’s other financing agreements. In the event~~ of ~~any~~Presentation such default and our inability to obtain a waiver of the default, all amounts outstanding under the agreements could be declared to be immediately due and payable. If Alaska did not have sufficient available cash to pay all amounts that became due and payable, Air Group or Alaska would have to seek additional debt or equity financing, which may not be available on acceptable terms, or at all. If such financing were not available, Alaska would have to sell assets in order to obtain the funds required to make accelerated payments or risk its aircraft becoming subject to repossession, which could harm our business.

~~Our~~Alaska ~~business~~Airlines, ~~could~~Inc. be(“Alaska” ~~harmed~~or if“the weCompany”), ~~are~~an ~~unable~~Alaska tocorporation, is ~~attract~~a wholly owned subsidiary of Alaska Air Group, Inc. (Air Group), a Delaware corporation. Air Group is also the parent company of Horizon Air Industries, Inc. (Horizon) and ~~retain~~Alaska ~~qualified~~Air ~~personnel~~Group atLeasing (AAGL). Horizon is a regional airline that ~~reasonable~~operates ~~costs~~both turboprop and jet aircraft. These financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and their preparation requires the use of management's estimates. Actual results may differ from these estimates.

~~Our~~Nature ~~business is labor intensive, with labor costs representing approximately 34%~~ of ~~our~~Operations operating expenses for the year ended December 31, 2004. We expect salaries, wages and benefits to increase on a gross basis and that these costs could increase as a percentage of our overall costs, which could harm our business. We compete against the major U.S. airlines 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 and 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.

WeAlaska ~~rely~~is ona ~~third-party~~major ~~vendors~~airline ~~for~~and ~~certain~~principally ~~critical~~serves ~~activities~~destinations in the state of Alaska and provides north/south service between cities in the western U.S., Canada and Mexico. Alaska also provides east/west service to a number of cities in the contiguous U.S. and four islands in Hawaii, primarily from Seattle and to a lesser extent, from Portland and Anchorage. It operates an all-jet fleet and its average passenger trip in 2008 was 1,113 miles.

WeWest ~~have~~Coast ~~historically~~passenger ~~relied~~traffic onaccounted ~~outside vendors~~ for a41% ~~variety~~ of ~~services~~2008 ~~and~~revenue ~~functions~~passenger ~~critical to our business~~miles, ~~including~~passenger ~~airframe~~traffic ~~and~~within ~~engine~~the ~~maintenance,~~state ~~ground~~of ~~handling,~~Alaska ~~fueling,~~and ~~catering, computer~~between ~~reservation~~Alaska ~~system hosting~~ and ~~software~~the ~~maintenance~~U.S. Asmainland accounted ~~part~~for ~~of its cost control efforts~~23%, ~~the~~ ~~reliance~~transcontinental onflights ~~outside~~accounted ~~vendors~~for ~~will increase. In September 2004~~20%, ~~Alaska~~the ~~Airlines~~Mexico ~~announced~~markets ~~that~~accounted ~~it was~~for ~~sub-contracting~~8%, the ~~remaining~~Hawaii ~~heavy~~markets ~~aircraft~~accounted ~~maintenance~~for ~~that it was then performing to outside vendors. In addition~~5%, ~~Alaska~~and ~~retained~~the ~~outside~~Canada ~~suppliers~~markets accounted for ~~fleet~~3%. ~~service~~Based ~~and~~on ~~facilities maintenance.~~passenger ~~In January 2005~~enplanements, Alaska’s ~~signed~~leading anairports ~~agreement~~are Seattle, ~~with~~Los aAngeles, ~~vendor~~Anchorage, ~~for~~and ~~ground~~Portland. ~~handling services~~Based aton ~~Seattle~~2008 inrevenues, the ~~event~~Company’s ~~that~~leading itnonstop ~~does~~routes ~~not~~are ~~reach~~Anchorage-Seattle, anLos ~~agreement~~Angeles-Seattle, ~~with~~and ~~the~~San ~~IAM representing its ramp employees~~Diego-Seattle.

~~Our~~The ~~increased~~Company’s ~~use~~operations ofand ~~outside~~financial ~~vendors~~results ~~increases~~are ~~our~~subject ~~exposure~~ to ~~several~~various ~~risks.~~uncertainties, Insuch ~~the~~as ~~event~~general ~~that one~~economic orconditions, ~~more~~volatile ~~vendors~~fuel ~~goes into bankruptcy~~prices, ~~ceases~~industry ~~operation or fails to perform as promised~~instability, ~~replacement~~ ~~services~~intense ~~may not be readily available at competitive rates~~competition, ora atlargely ~~all.~~unionized ~~Vendor~~work ~~bankruptcies~~force, ~~unionization, regulatory compliance issues or significant changes in~~ the ~~competitive marketplace~~need ~~among suppliers could adversely affect vendor services or force Alaska~~ to ~~renegotiate existing~~finance ~~agreements~~large oncapital ~~less~~expenditures ~~favorable~~and ~~terms.~~the ~~These~~related ~~events~~availability ~~could~~of ~~result~~capital, ingovernment ~~disruptions~~regulation, inand ~~Alaska’s operations~~potential oraircraft ~~increases in its cost structure~~incidents.

43Approximately 84% of the Company’s employees are covered by collective bargaining agreements. Approximately 22% of the Company’s employees are covered under agreements that are currently in negotiations or become amendable prior to December 31, 2009.

~~Table~~The airline industry is characterized by high fixed costs. Small fluctuations in load factors and yield (a measure of ~~Contents~~ticket prices) can have a significant impact on operating results. The Company has been and continues working to reduce unit costs to better compete with carriers that have lower cost structures.

WeSubstantially ~~have~~all ~~incurred~~of ~~operating~~Alaska's ~~losses~~sales inoccur ~~each year since 2000 and may incur substantial operating losses~~ in the ~~future.~~United ~~In addition, our quarterly results can fluctuate substantially~~States.

~~For~~Reclassifications the year ended December 31, 2004, Alaska incurred an operating loss of $85.4 million. Prior to that, we incurred operating losses of $19.4 million and $77.6 million for the years ended December 31, 2003 and 2002, respectively. The inability to achieve or sustain profitability may hinder our ability to honor our existing obligations as they become due, to obtain future equity or debt financing or to do so on economical terms, and to sustain and expand our business.

InCertain ~~addition,~~reclassifications ~~our~~have ~~quarterly~~been ~~results~~made ~~can fluctuate substantially due~~ to aconform ~~variety of factors including seasonal variations in traffic,~~ the ~~timing~~prior of various expenditures, and weather. Because expenses of an aircraft flight do not vary significantly with the number of passengers carried, a relatively small change in the number of passengers or in pricing has a disproportionate effect on an airlineyear’s ~~operating~~data ~~and financial results. Accordingly, a minor shortfall in expected revenue levels could cause a disproportionately negative impact on our operating results. Due~~ to ~~these factors,~~the ascurrent ~~well as other risk factors described in this Form 10-K, quarter-to-quarter comparisons of our results may not be good indicators of our future performance~~format.

~~Our~~Cash ~~indebtedness could increase the volatility of earnings~~ and ~~otherwise~~Cash ~~restrict~~Equivalents ~~our activities.~~

WeCash ~~have~~equivalents ~~and~~consist ~~will~~of highly ~~continue~~liquid toinvestments ~~have~~with ~~for~~original ~~the~~maturities ~~foreseeable~~of ~~future~~three amonths ~~significant~~or ~~amount~~less. ofThey ~~indebtedness~~are carried at cost, which approximates market. The Company reduces cash balances when checks are disbursed. Due to ~~our~~the ~~high~~time ~~fixed~~delay ~~costs,~~in ~~including~~checks ~~aircraft~~clearing ~~lease~~the ~~commitments~~banks, ~~and~~the Company ~~debt~~normally ~~service,~~maintains a ~~decrease~~negative balance in ~~revenues~~ ~~results~~its incash adisbursement ~~disproportionately~~accounts, ~~greater~~which ~~decrease~~is inreported ~~earnings~~as a current liability. AsThe amount of ~~December 31,~~the ~~2004,~~negative ~~we had~~cash ~~approximately~~balance was $~~849~~11.3 2 million ofand ~~indebtedness~~$15.6 ~~outstanding,~~million ~~all~~at ofDecember 31, ~~which~~2008 ~~was~~and ~~secured~~2007, ~~by flight~~respectively, ~~equipment~~ and ~~real~~is ~~property~~included in accounts payable.

~~Our~~Securities ~~outstanding~~Lending ~~indebtedness could have important consequences. For example, it could:~~

•The ~~limit~~Company ~~our~~ended ~~ability~~its tosecurities ~~obtain~~lending ~~additional~~program ~~financing~~during ~~for~~the ~~funding~~fourth ~~our~~quarter ~~growth~~of ~~strategy,~~2008 ~~capital~~and ~~expenditures,~~had ~~acquisitions,~~no ~~working~~securities ~~capital~~on orloan ~~other~~under ~~purposes,~~the •program ~~require~~at usDecember 31, to2008. ~~dedicate~~Prior ato ~~material~~the ~~portion~~fourth quarter of ~~our~~2008, ~~operating~~from ~~cash~~time ~~flow~~ to ~~fund~~time, ~~interest~~the ~~payments~~Company onlent ~~indebtedness,~~certain marketable ~~thereby~~securities ~~reducing~~to ~~funds~~third ~~available~~parties for ~~other~~a ~~purposes,~~period ~~and~~of •less ~~limit~~than ~~our~~one ~~ability~~year to ~~withstand~~enhance ~~competitive~~investment ~~pressures~~income. ~~and~~During ~~reduce~~the ~~our~~time ~~flexibility~~period in ~~responding~~which tothese ~~changing~~securities ~~business~~were ~~and~~loaned ~~economic~~to ~~conditions~~the third parties, ~~including~~the ~~reacting~~Company torequired ~~any~~cash ~~economic~~collateral ~~slowdown~~for in102% of the ~~airline industry.~~daily

In34 ~~addition, we have an ongoing need to finance new aircraft deliveries, and there is no assurance that such financing will be available to us in sufficient amounts or on acceptable terms.~~

44 Table of Contents

~~Table~~ market value of ~~Contents~~the loaned securities. This cash collateral was restricted and was deposited with a lending agent and invested by that agent in accordance with the Company’s guidelines. The Company maintained full ownership rights to the securities loaned and continued to earn interest and appreciation on them. As of December 31, 2007, the Company had $109.8 million of securities on loan under the program. These affected securities were included as marketable securities in the balance sheets.

~~ITEM~~Receivables 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK We have interest rate risk in our floating 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 jet fuel at prevailing market prices, and seek to manage market risk through execution of a documented hedging strategy. 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.

~~Fuel~~Receivables ~~Hedging We~~consist ~~purchase~~primarily ~~jet fuel at prevailing market prices, and seek to manage the risk~~ of ~~price~~airline ~~fluctuations through~~traffic ~~execution~~(including ofcredit acard) ~~documented~~receivables, ~~hedging~~amounts ~~strategy.~~from We utilize derivative financial instruments as hedges to decrease our exposure to the volatility of jet fuel prices. We believe there is risk in not hedging against the possibility of fuel price increases. At December 31customers, ~~2004,~~Mileage wePlan ~~had fuel hedge contracts in place to hedge 182.5 million gallons of our expected jet fuel usage during 2005~~partners, ~~131.0 million~~ ~~gallons~~government intax ~~2006 and 34.0 million gallons in 2007. This represents 50%~~authorities, ~~35%~~ and ~~9% of~~other ~~our~~miscellaneous ~~anticipated~~amounts ~~fuel~~due ~~consumption~~to inthe ~~2005~~Company, ~~2006~~ and ~~2007,~~are ~~respectively.~~net ~~Prices~~ of ~~these~~an ~~agreements range~~allowance ~~from~~for ~~$28.81~~doubtful ~~to $42~~accounts.65 ~~per~~Management ~~crude~~determines ~~oil~~the ~~barrel.~~allowance Wefor ~~estimate~~doubtful ~~that~~accounts abased ~~10%~~on ~~increase~~known ortroubled ~~decrease~~accounts ~~in crude~~and ~~oil~~historical ~~prices~~experience asapplied ofto ~~December 31,~~an ~~2004~~aging ~~would~~of ~~impact hedging positions by approximately $17~~accounts.6 ~~million.~~

AsInventories ~~of December 31, 2004~~ and ~~2003,~~Supplies ~~the~~- ~~fair~~net values of our fuel hedge positions were $84.5 million and $15.7 million, respectively. Of these amounts, $57.9 million of the 2004 fair value amounts and $10.3 million of the 2003 fair value amounts were included in prepaid expenses and other current assets in the balance sheets based on settlement dates for the underlying contracts. The remaining $26.6 million 2004 fair value and $5.4 million 2003 fair value is reflected in other assets in the balance sheets.

~~Please~~Expendable aircraft ~~refer~~parts, tomaterials ~~page~~and ~~17,~~supplies asare ~~well~~stated asat toaverage ~~Note~~cost 10and are included in inventories and supplies-net. An obsolescence allowance for expendable parts is accrued based on estimated lives of the ~~financial~~corresponding ~~statements,~~fleet type and salvage values. Surplus inventories are carried at their net realizable value. The allowance for ~~company~~all ~~specific~~non-surplus expendable inventories was $7.1 million and $15.1 million at December 31, 2008 and 2007, respectively. The decline in the allowance is ~~data~~primarily onattributable to the ~~results~~write off of ~~our~~the MD-80 and B737-200 parts allowances against the cost basis during the period. Inventory and supplies-net also includes fuel ~~hedging~~inventory ~~program~~of $14.0 million and $5.1 million at December 31, 2008 and 2007, respectively. Repairable and rotable aircraft parts inventory are included in flight equipment.

Financial Market Risk We have exposure to market risk associated with changes in interest rates related primarily to our debt obligations and short-term investment portfolio. Our debt obligations include variable ratesProperty, ~~which~~ ~~have~~Equipment ~~exposure to changes in interest rates. A hypothetical 10% change in the average interest rates incurred on variable rate debt during 2004 would correspondingly change our net earnings~~ and ~~cash~~Depreciation ~~flows associated with these items by approximately $3.1 million.~~

WeProperty ~~also~~and ~~have~~equipment ~~investments in marketable securities, which~~ are ~~exposed~~recorded toat ~~market~~cost ~~risk~~and ~~associated~~depreciated ~~with changes~~using inthe ~~interest rates. If short~~straight-~~term~~line ~~interest~~method ~~rates~~over ~~were~~their toestimated ~~average~~useful ~~1% more than they did in 2004~~lives, ~~interest~~which ~~income~~are ~~would~~as ~~increase by approximately 20 basis points.~~follows:


Aircraft and related flight equipment:
Boeing 737-400/700/800/900		20 years
Buildings		25-30 years
Minor building and land improvements		10 years
Capitalized leases and leasehold improvements		Shorter of lease term or estimated useful life
Computer hardware and software		3-5 years
Other furniture and equipment		5-10 years

~~Table~~As a result of ~~Contents~~the early retirement of the MD-80 fleet, all aircraft and related flight equipment have been depreciated to their expected salvage values. The estimated useful lives are aligned with the fleet’s average expected retirement date.

~~ITEM~~“Related flight 8.equipment” ~~FINANCIAL~~includes ~~STATEMENTS~~rotable ~~AND~~and ~~SUPPLEMENTARY~~repairable ~~DATA~~spare ~~See~~inventories, ~~Item~~which 15are depreciated over the associated fleet life unless otherwise noted.

	1st Quarter						2nd Quarter					3rd Quarter				4th Quarter
	2004			2003			2004			2003		2004		2003		2004			2003
	(in millions, except per share)
Operating revenues	$	491.3		$	427.0		$	577.6		$	510.6	$	632.8	$	585.3	$	531.3		$	504.5
Operating income (loss)		(48.0	)		(61.6	)		(21.6	)		5.4		41.0		57.5		(56.8	)		(20.7	)
Net income (loss)		(34.4	)		(45.1	)		(2.7	)		36.8		61.0		29.6		(43.0	)		(18.3	)

Maintenance and repairs are expensed when incurred. Major modifications that extend the life or improve the usefulness of aircraft are capitalized and depreciated over their estimated period of use.

~~ITEM~~The 9Company evaluates long-lived assets to be held and used for impairment whenever events or changes in circumstances indicate that the total carrying amount of an asset or asset group may not be recoverable. ~~CHANGES~~The INCompany ~~AND~~groups ~~DISAGREEMENTS~~assets ~~WITH~~for ~~ACCOUNTANTS~~purposes ONof ~~ACCOUNTING~~such ~~AND~~reviews ~~FINANCIAL~~at ~~DISCLOSURE~~the lowest level for which identifiable cash flows of the asset group are largely independent of the cash flows of other groups of assets and liabilities. An impairment loss is recognized when estimated future undiscounted cash flows expected to result from the use of the asset or asset group and its eventual disposition are less than its carrying amount. If the asset or asset group is not considered recoverable, a write-down equal to the excess of the carrying amount over the fair value will be recorded.

OnInternally ~~August 10,~~Used ~~2004 , Alaska Air Group, Inc. (Air Group) determined for itself and on behalf of its~~Software ~~subsidiaries,~~Costs Alaska Airlines, Inc. (Alaska) and Horizon Air Industries, Inc. (Horizon), to dismiss its independent auditors, Deloitte & Touche LLP (Deloitte) and to select KPMG LLP (KPMG) to serve as its new independent auditors for the year ending December 31, 2004. The dismissal of Deloitte and engagement of KPMG was approved by Air Group’s Audit Committee. On August 10, 2004, Deloitte was notified of their dismissal.

~~Deloitte’s~~The ~~report~~Company oncapitalizes ~~Alaska’s~~costs ~~financial~~to ~~statements~~develop ~~for~~internal-use software that are incurred in the ~~years~~application ~~ended~~development ~~December 31,~~stage. ~~2003~~Amortization ~~and~~commences ~~December 31,~~when ~~2002~~the ~~did~~software ~~not~~is ~~contain~~ready anfor ~~adverse~~its ~~opinion~~intended oruse ~~disclaimer~~and ofthe ~~opinion,~~amortization ~~nor~~period ~~was~~is itthe ~~qualified or~~estimated ~~modified~~useful aslife toof ~~uncertainty~~the software, ~~audit~~generally ~~scope~~three orto ~~accounting~~five ~~principles,~~years. ~~except~~Capitalized ~~the~~costs ~~report~~primarily ~~contained~~include ~~an explanatory~~contract ~~paragraph~~labor ~~relating~~and payroll costs of the individuals dedicated to the ~~adoption~~development of ~~Statement~~internal-use ofsoftware. ~~Financial~~The ~~Accounting~~Company ~~Standards~~capitalized Nosoftware development costs of $1. ~~142~~0 million, ~~“Goodwill~~$3.0 million, and ~~Other~~$2.4 ~~Intangible~~million ~~Assets”~~during the years ended December 31, 2008, 2007, and 2006, respectively.

~~There~~35 ~~were no disagreements with KPMG LLP or Deloitte & Touche LLP on accounting or financial disclosure matters during 2004.~~

ITEMTable 9A.of CONTROLS AND PROCEDURESContents

~~Disclosure~~Workers ~~Controls~~Compensation and ~~Procedures As~~Employee ofHealth-Care ~~December 31,~~Accruals 2004, an evaluation was performed under the supervision and with the participation of our management, including our chief executive officer and chief financial officer (collectively, our “certifying officers”), of the effectiveness of the design and operation of our disclosure controls and procedures. These disclosure controls and procedures are designed to ensure that the information required to be disclosed by us in our periodic reports filed with the Securities and Exchange Commission (the SEC) is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms, and that the information is communicated to our certifying officers on a timely basis.

~~Our~~The ~~certifying~~Company ~~officers~~uses ~~concluded,~~a ~~based~~combination onof ~~their~~self-insurance ~~evaluation,~~and ~~that~~insurance ~~disclosure~~programs ~~controls~~to provide for workers compensation claims and employee health care benefits. Liabilities ~~procedures~~associated ~~were~~with ~~effective~~the risks that are retained by the Company are not discounted and are estimated, in part, by considering historical claims experience, severity factors and other actuarial assumptions. The estimated accruals for these liabilities could be significantly affected if future occurrences and claims differ from these assumptions and historical trends.

46Deferred Revenue

~~Table~~Deferred revenue results primarily from the sale of ~~Contents~~mileage credits. This revenue is recognized when award transportation is provided or over the term of the applicable agreements.

WeOperating ~~made~~Leases no changes in our internal controls over financial reporting during the fiscal quarter ended December 31, 2004, that our certifying officers concluded materially affected, or are reasonably likely to materially effect, our internal control over financial reporting, except with respect to our Mileage Plan deferred revenue calculation as described in the next paragraph.

InThe ~~December 2004~~Company leases aircraft, weairport ~~discovered~~and aterminal ~~clerical~~facilities, ~~error~~office inspace, ~~our~~and ~~calculation~~other ofequipment ~~deferred~~under ~~Mileage~~operating ~~Plan revenue~~leases. ~~that~~Some ~~existed~~of atthese ~~September 30,~~lease ~~2004.~~agreements Ascontain arent ~~result,~~escalation weclauses ~~revised~~or ~~our~~rent ~~third~~holidays. ~~quarter~~For ~~and~~scheduled ~~year~~rent toescalation clauses ~~date~~during ~~condensed~~the ~~financial~~lease ~~statements~~terms toor ~~adjust~~ for ~~this~~rental ~~item.~~payments Incommencing ~~response~~at toa ~~this~~date ~~finding~~other than the date of initial occupancy, ~~management~~ ~~has~~the ~~taken~~Company ~~appropriate~~records ~~steps~~minimum torental ~~strengthen~~expenses ~~preventive~~on ~~and~~a ~~detective~~straight-line ~~internal~~basis ~~controls~~ over the ~~Mileage~~terms ~~Plan~~of ~~deferred~~the ~~revenue~~leases ~~calculation~~in the statements of operations.

WeLeased ~~intend~~Aircraft toReturn ~~regularly~~Costs review and evaluate the design and effectiveness of our disclosure controls and procedures and internal controls over financial reporting on an ongoing basis and to improve these controls and procedures over time and to correct any deficiencies that we may discover in the future. While we believe the present design of our disclosure controls and procedures and internal controls over financial reporting are effective, future events affecting our business may cause us to modify our these controls and procedures in the future.

~~PART~~Cash IVpayments associated with returning leased aircraft are accrued beginning immediately after the last heavy maintenance visit prior to the scheduled aircraft return date. This accrual is based on the time remaining on the lease, planned aircraft usage and the provisions included in the lease agreement, although the actual amount due to any lessor upon return will not be known with certainty until lease termination.

~~ITEM 15~~As leased aircraft are returned, any payments are charged against the established accrual. ~~EXHIBITS~~ The accrual is part of other current and long-term liabilities, ~~FINANCIAL~~and ~~STATEMENT~~was $13.3 million and $6.9 million as of December 31, 2008 and ~~SCHEDULES~~December 31, 2007, respectively. The increase in the accrual is primarily due to the four leased MD-80 aircraft that were retired in 2008 and sent to a temporary aircraft storage facility. The associated lease return expense related to these four aircraft was approximately $9 million and is included in “Fleet transition costs – MD-80” in the statements of operations. There were no other material changes in our estimate of leased aircraft return costs during 2008.

(a) Financial Statements:			Page(s)
Balance Sheets as of December 31, 2004 and 2003			49-50
Statements of Operations for the years ended December 31, 2004, 2003 and 2002			51
Statements of Shareholder’s Equity for the years ended December 31, 2004, 2003 and 2002			52
Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002			53
Notes to Financial Statements			54-80
Reports of Independent Registered Public Accounting Firms			81-82
Financial Statement Schedule II, Valuation and Qualifying Accounts, for the years ended December 31, 2004, 2003 and 2002			83

Revenue Recognition

~~See~~Passenger ~~Exhibit Index~~revenue onis recognized ~~page~~when 84the passenger travels. Tickets sold but not yet used are reported as air traffic liability. Passenger traffic commissions and related fees are expensed when the related revenue is recognized. Passenger traffic commissions and related fees not yet recognized are included as a prepaid expense. Due to complex pricing structures, refund and exchange policies, and interline agreements with other airlines, certain amounts are recognized as revenue using estimates regarding both the timing of the revenue recognition and the amount of revenue to be recognized. These estimates are generally based on the Company’s historical data.

47 Freight and mail revenues are recognized when service is provided. Other-net revenues are primarily related to the Mileage Plan and they are recognized as described in the “Mileage Plan” paragraph below.

~~Table~~Mileage ofPlan ~~Contents~~

~~SIGNATURES~~The Company operates a frequent flyer program ~~Pursuant~~(“Mileage Plan”) that provides travel awards to members based on accumulated mileage. For miles earned by flying on Alaska and through airline partners, the ~~requirements~~estimated cost of ~~Section 13~~providing orfree ~~15(d)~~travel awards is recognized as a selling expense and accrued as a liability as miles are earned and accumulated. The Company also sells mileage credits to non-airline partners such as hotels, car rental agencies, a grocery store chain, and a major bank that offers Alaska Airlines affinity credit cards. The Company defers the portion of the ~~Securities~~sales ~~Exchange~~proceeds ~~Act~~that represents the estimated fair value of ~~1934,~~the award transportation and recognizes that amount as revenue when the award transportation is provided. The deferred proceeds are recognized as ~~registrant~~passenger ~~has~~revenue ~~duly~~for ~~caused~~awards ~~this~~redeemed ~~report~~and toflown beon ~~signed~~Alaska or Horizon, and as other-net revenue for awards redeemed and flown on ~~its~~other ~~behalf~~airlines. byThe portion of the ~~undersigned,~~sales ~~thereunto~~proceeds not deferred is recognized as commission income and included in other ~~duly~~revenue-net ~~authorized~~in the statements of operations. Mileage Plan deferred revenue and liabilities are included under the following balance sheet captions at December 31 (in millions):

ALASKA AIRLINES, INC.
Balance Sheet Captions	2008		2007
By:	/s/ William S. Ayer			Date: February 22, 2005
Current Liabilities:
	William S. Ayer, Chairman and Chief Executive Officer
Other accrued liabilities	$	280.4	$	239.7
Other Liabilities and Credits:
Deferred revenue		394.1		387.8
Other liabilities		15.9		21.0
Total	$	690.4	$	648.5

~~Pursuant~~36 to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on February 22, 2005 on behalf of the registrant and in the capacities indicated.

/s/Table Williamof S. Ayer Chairman, President, Chief Executive Officer and Director William S. Ayer /s/ Bradley D. Tilden Executive Vice President/Finance and Chief Financial Officer Bradley D. Tilden (Principal Financial Officer) /s/ Brandon S. Pedersen Staff Vice President/Finance and Controller Brandon S. Pedersen (Principal Accounting Officer) /s/ George D. Bagley Director George D. Bagley /s/ Phyllis J. Campbell Director Phyllis J. Campbell /s/ Jessie J. Knight, Jr. Director Jessie J. Knight, Jr. /s/ Dennis F. Madsen Director Dennis F. Madsen /s/ Byron I. Mallott Director Byron I. Mallott /s/ Richard A. Wien Director Richard A. WienContents

48The amounts recorded in other accrued liabilities relate primarily to deferred revenue expected to be realized within one year, including $43.4 million and $37.1 at December 31, 2008 and 2007, respectively, associated with Mileage Plan awards issued but not yet flown.

~~Table~~Mileage Plan revenue is included under the following statements of ~~Contents~~operations captions for the years ended December 31 (in millions):

BALANCE SHEETS Alaska Airlines, Inc.


	2008		2007		2006
Passenger revenues	$	144.2	$	115.6	$	95.5
Other-net revenues		101.5		112.0		98.7
Change in Mileage Plan terms		42.3		—		—

Total Mileage Plan revenues	$	288.0	$	227.6	$	194.2

~~ASSETS~~During 2008, the Company changed the terms of its Mileage Plan program regarding the expiration of award miles. Beginning in the third quarter, Mileage Plan accounts with no activity for two years are deleted. As a result of the deletion of a number of accounts, the Company reduced its liability for future travel awards by $42.3 million, which has been recorded in the statements of operations as “Change in Mileage Plan terms.”

As of December 31 (In Millions)	2004		2003
Current Assets
Cash and cash equivalents	$	54.1	$	192.5
Marketable securities		819.6		619.4
Receivables from related companies		64.9		120.5
Receivables — less allowance for doubtful accounts (2004 - $2.5; 2003 - $1.6)		91.9		83.0
Inventories and supplies — net		17.0		20.7
Deferred income taxes		66.6		80.9
Prepaid expenses and other assets		96.8		36.3
Total Current Assets		1,210.9		1,153.3
Property and Equipment
Flight equipment		2,101.7		2,188.2
Other property and equipment		396.6		391.2
Deposits for future flight equipment		39.5		32.8
		2,537.8		2,612.2
Less accumulated depreciation & amortization		809.6		816.3
Total Property and Equipment — Net		1,728.2		1,795.9
Intangible Assets		38.6		45.6
Other Assets		104.2		71.6
Total Assets	$	3,081.9	$	3,066.4

Aircraft Fuel

~~See~~Aircraft ~~accompanying~~fuel ~~notes~~includes toraw ~~financial~~jet ~~statements~~fuel and associated “into-plane” costs, fuel taxes, oil, and all of the gains and losses associated with fuel hedge contracts.

49 Contracted Services

~~Table~~Contracted ofservices includes ~~Contents~~expenses for ground handling, security, navigation fees, temporary employees, data processing fees, and other similar services.

~~BALANCE SHEETS~~Selling ~~Alaska~~Expenses ~~Airlines, Inc.~~

~~LIABILITIES~~Selling ~~AND~~expenses ~~SHAREHOLDER’S~~include ~~EQUITY~~credit card fees, global distribution systems charges, the estimated cost of Mileage Plan free travel awards, advertising, promotional costs, commissions, and incentives. Advertising production costs are expensed the first time the advertising takes place. Advertising expense was $12.6 million, $12.0 million, and $13.0 million during the years ended December 31, 2008, 2007, and 2006, respectively.

As of December 31 (In Millions Except Share Amounts)	2004			2003
Current Liabilities
Accounts payable	$	125.9		$	108.8
Payables to related companies		5.7			2.7
Accrued aircraft rent		68.2			67.8
Accrued wages, vacation and payroll taxes		119.6			81.4
Other accrued liabilities		291.8			269.1
Air traffic liability		249.4			237.1
Current portion of long-term debt and capital lease obligations		51.1			206.7
Total Current Liabilities		911.7			973.6
Long-Term Debt & Capital Lease Obligations, Net of Current		798.2			756.8
Other Liabilities and Credits
Deferred income taxes		158.9			181.4
Deferred revenue		299.2			246.0
Other liabilities		237.3			210.5
		695.4			637.9
Commitments and Contingencies
Shareholder’s Equity
Common stock, $1 par value Authorized: 1,000 shares Issued: 2004 and 2003 - 500 shares		—			—
Capital in excess of par value		451.4			448.4
Deferred stock-based compensation		(2.9	)		—
Accumulated other comprehensive loss		(82.7	)		(80.2	)
Retained earnings		310.8			329.9
		676.6			698.1
Total Liabilities and Shareholder’s Equity	$	3,081.9		$	3,066.4

Capitalized Interest

~~See~~Interest ~~accompanying~~is ~~notes~~capitalized toon ~~financial~~flight ~~statements~~equipment purchase deposits as a cost of the related asset, and is depreciated over the estimated useful life of the asset. The capitalized interest is based on the Company’s weighted-average borrowing rate.

50 Derivative Financial Instruments

~~Table~~The Company accounts for financial derivative instruments utilizing Statement of ~~Contents~~Financial Accounting Standards No. 133 (SFAS 133), Accounting for Derivative Instruments and Hedging Activities, as amended. See Note 3 for further discussion.

~~STATEMENTS~~37 ~~OF OPERATIONS Alaska Airlines, Inc.~~

Year Ended December 31
(In Millions)	2004			2003			2002
Operating Revenues
Passenger	$	2,023.6		$	1,840.4		$	1,667.7
Freight and mail		86.4			77.3			72.1
Other — net		123.0			109.7			93.3
Total Operating Revenues		2,233.0			2,027.4			1,833.1
Operating Expenses
Wages and benefits		798.5			778.6			703.4
Employee profit sharing		1.2			2.9			—
Contracted services		96.5			81.6			80.1
Aircraft fuel		472.0			312.1			260.7
Aircraft maintenance		145.8			153.4			145.2
Aircraft rent		113.5			123.9			128.2
Food and beverage service		49.8			58.7			63.5
Other selling expenses and commissions		132.2			148.0			154.6
Depreciation and amortization		128.1			119.5			114.0
Loss on sale of assets		2.0			3.4			1.7
Landing fees and other rentals		142.0			127.8			110.5
Other		146.6			136.9			148.8
Restructuring charges		53.4			—			—
Impairment of aircraft		36.8			—			—
Total Operating Expenses		2,318.4			2,046.8			1,910.7
Operating Loss		(85.4	)		(19.4	)		(77.6	)
Nonoperating Income (Expense)
Interest income		26.2			15.2			23.2
Interest expense		(44.1	)		(45.2	)		(46.6	)
Interest capitalized		1.1			1.5			2.1
U.S. government compensation		—			52.8			0.3
Other — net, including fuel hedging gains		75.2			6.9			11.3
		58.4			31.2			(9.7	)
Income (loss) before income tax and accounting change		(27.0	)		11.8			(87.3	)
Income tax expense (benefit)		(7.9	)		8.8			(30.3	)
Income (loss) before accounting change		(19.1	)		3.0			(57.0	)
Cumulative effect of accounting change		—			—			(12.5	)
Net Income (Loss)	$	(19.1	)	$	3.0		$	(69.5	)

~~See~~Income Taxes ~~accompanying notes to financial statements.~~

51The Company uses the asset and liability approach for accounting and reporting income taxes. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. A valuation allowance would be established, if necessary, for the amount of any tax benefits that, based on available evidence, are not expected to be realized. The Company accounts for unrecognized tax benefits in accordance with Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109 (FIN 48). See Note 11 for further discussion.

~~Table~~Taxes ofCollected ~~Contents~~from Passengers

~~STATEMENTS~~Taxes OFcollected ~~SHAREHOLDER’S~~from ~~EQUITY~~passengers, including sales taxes, airport and security ~~Alaska~~fees ~~Airlines~~and other fees, ~~Inc~~are recorded on a net basis within passenger revenue in the statements of operations.

								Accumulated
			Capital in		Deferred			Other
	Common		Excess of		Stock-Based			Comprehensive			Retained
(In Millions)	Stock		Par Value		Compensation			Loss			Earnings			Total
Balances at December 31, 2001		—		324.8		—			(2.2	)		396.4			719.0
2002 net loss												(69.5	)		(69.5	)
Other comprehensive income (loss):
Officers supplemental retirement plan net of $0.4 tax benefit									(0.7	)					(0.7	)
Related to marketable securities:
Change in fair value									(0.4	)
Reclassification to earnings									0.6
Income tax effect									(0.1	)
									0.1						0.1
Related to fuel hedges:
Change in fair value									22.5
Reclassification to earnings									(9.7	)
Income tax effect									(4.8	)
									8.0						8.0
Minimum pension liability adjustment net of $52.5 tax benefit									(87.2	)					(87.2	)
Total comprehensive loss															(149.3	)
Balances at December 31, 2002		—		324.8		—			(82.0	)		326.9			569.7
2003 net income												3.0			3.0
Other comprehensive income (loss):
Officers supplemental retirement plan net of $1.0 tax benefit									(2.0	)					(2.0	)
Related to marketable securities:
Change in fair value									(1.2	)
Reclassification to earnings									(0.1	)
Income tax effect									0.5
									(0.8	)					(0.8	)
Related to fuel hedges:
Change in fair value									24.0
Reclassification to earnings									(25.0	)
Income tax effect									0.4
									(0.6	)					(0.6	)
Minimum pension liability adjustment net of $3.3 tax expense									5.2						5.2
Total comprehensive income															4.8
Capital contribution from Air Group				123.6											123.6
Balances at December 31, 2003		—		448.4		—			(80.2	)		329.9			698.1
2004 net loss												(19.1	)		(19.1	)
Other comprehensive income (loss):
Officers supplemental retirement plan net of $1.0 tax expense									1.5						1.5
Related to marketable securities:
Change in fair value									(5.2	)
Reclassification to earnings									0.9
Income tax effect									1.6
									(2.7	)					(2.7	)
Related to fuel hedges:
Change in fair value									16.1
Reclassification to earnings									(14.5	)
Income tax effect									(0.6	)
									1.0						1.0
Minimum pension liability adjustment net of $1.2 tax benefit									(2.3	)					(2.3	)
Total comprehensive loss															(21.6	)
Stock-based compensation				3.0		(3.0	)								—
Amortization of deferred stock-based compensation						0.1									0.1
Balances at December 31, 2004	$	—	$	451.4	$	(2.9	)	$	(82.7	)	$	310.8		$	676.6

Stock-Based Compensation

~~See~~The ~~accompanying~~Company ~~notes~~accounts for equity awards using Statement of Financial Accounting Standards (SFAS) No. 123R, Share-Based Payment: An Amendment of SFAS Nos. 123 and 95. This standard requires companies to ~~financial~~recognize ~~statements~~as expense the fair value of stock options and other equity-based compensation issued to employees as of the grant date. The standard applies to stock options, restricted stock units, and performance stock units that Air Group grants to the Company’s employees as well as the Air Group Employee Stock Purchase Plan (ESPP), which features a look-back provision and allows employees to purchase stock at a 15% discount. The Company used the “modified prospective method” when SFAS 123R was adopted in 2006, which is explained below. All stock-based compensation expense is recorded in wages and benefits in the statements of operations.

52For stock options granted prior to January 1, 2006, for which the vesting period is not complete, the “modified prospective method” for transition permitted by SFAS 123R was used. Under this method, the Company accounts for the unvested portion of these awards on a prospective basis, with expense recognized in the statements of operations beginning January 1, 2006 using the grant-date fair values previously calculated for pro-forma disclosures. The Company selected this method due to the relatively limited use of stock-based awards and the immaterial impact on the comparability between periods. The standard also requires that tax benefits realized from stock award exercise gains in excess of stock-based compensation expense recognized for financial statement purposes be reported as cash inflows from financing activities and cash outflows from operating activities.

~~Table~~Variable ofInterest ~~Contents~~Entities

~~STATEMENTS~~The OFCompany ~~CASH~~is ~~FLOWS~~the ~~Alaska~~lessee ~~Airlines~~in a series of operating leases covering our leased aircraft. In many instances, ~~Inc~~the lessors are trusts established by a third party specifically to purchase, finance and lease aircraft to the Company. These leasing entities meet the criteria for variable interest entities. However, they do not meet the consolidation requirements of Financial Accounting Standards Board (FASB) issued Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46), because the Company is not the primary beneficiary of the entity’s expected gains or losses. The Company’s conclusions are based on the fact that the leasing arrangements involved contain terms which are consistent with market terms at the inception of the lease and do not include residual value guarantees made by the Company, fixed-price purchase obligations or similar features that obligate the Company to absorb the majority of expected losses of the variable interest entities. The Company’s maximum exposure under these types of lease arrangements is the remaining lease payments, which are reflected in future lease commitments in Note 7 (plus the cost, if any, of bringing the equipment into compliance with the physical condition required for return, which is accrued as leased aircraft return costs).

Year Ended December 31 (In Millions)	2004			2003			2002
Cash flows from operating activities:
Net income (loss)	$	(19.1	)	$	3.0		$	(69.5	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Cumulative effect of accounting change		—			—			12.5
Impairment of aircraft		36.8			—			—
Depreciation and amortization		128.1			119.5			114.2
Amortization of airframe and engine overhauls		56.1			63.8			59.8
Stock-based compensation		0.1			—			—
Changes in derivative fair values		(46.5	)		2.3			(4.7	)
Loss on sale of assets		2.0			3.4			1.7
Changes in deferred income tax liabilities		(8.2	)		5.7			19.5
(Increase) decrease in accounts receivable — net		46.7			5.0			(70.0	)
(Increase) decrease in other current assets		(15.3	)		4.0			(15.9	)
Increase (decrease) in air traffic liability		12.3			26.0			(5.3	)
Increase in other current liabilities		81.5			39.3			20.9
Increase in deferred revenue and other-net		67.2			46.6			56.4
Net cash provided by operating activities		341.7			318.6			119.6
Cash flows from investing activities:
Proceeds from disposition of assets		10.1			0.5			1.3
Purchases of marketable securities		(961.3	)		(942.9	)		(630.8	)
Sales and maturities of marketable securities		756.8			689.0			433.9
Aircraft deposits returned		—			1.2			22.4
Property and equipment additions:
Aircraft purchase deposits		(13.5	)		(7.6	)		(22.1	)
Capitalized overhauls		(58.0	)		(62.0	)		(56.2	)
Aircraft		(40.5	)		(196.5	)		(40.6	)
Other flight equipment		(14.4	)		(11.9	)		(8.8	)
Other property		(33.2	)		(31.4	)		(40.9	)
Restricted deposits and other		(11.8	)		(15.2	)		(13.8	)
Net cash used in investing activities		(365.8	)		(576.8	)		(355.6	)
Cash flows from financing activities:
Proceeds from issuance of long-term debt, net		94.6			129.5			58.0
Long-term debt and capital lease payments		(208.9	)		(71.3	)		(43.8	)
Capital contribution from Air Group		—			123.6			—
Net cash provided by financing activities		(114.3	)		181.8			14.2
Net change in cash and cash equivalents		(138.4	)		(76.4	)		(221.8	)
Cash and cash equivalents at beginning of year		192.5			268.9			490.7
Cash and cash equivalents at end of year	$	54.1		$	192.5		$	268.9
Supplemental disclosure of cash paid (refunded) during the year for:
Interest (net of amount capitalized)	$	42.8		$	43.3		$	45.2
Income taxes		3.3			(0.4	)		(22.8	)

Accounting Pronouncements Adopted in 2008

~~See~~In ~~accompanying~~February ~~notes~~2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Standards (SFAS) No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, which allows entities the option to measure eligible financial ~~statements~~instruments at fair value as of specified dates. Such election, which may be applied on an instrument-by-instrument basis, is typically irrevocable once elected. This statement was effective beginning January 1, 2008. The Company did not elect the fair value option upon adoption.

53 38

~~NOTES~~In TOSeptember ~~FINANCIAL~~2006, ~~STATEMENTS~~the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value, ~~Alaska~~establishes ~~Airlines~~a framework for measuring fair value and expands disclosure about fair-value measurements required under other accounting pronouncements. SFAS 157 does not change existing guidance as to whether or not an instrument is carried at fair value. The Company partially adopted this standard for financial assets and liabilities as of January 1, ~~Inc~~2008. In accordance with FASB Staff Position No. 157-2, the Company has deferred adoption of SFAS 157 as it relates to nonfinancial assets and liabilities until January 1, 2009. In October 2008, the FASB issued Staff Position No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active (FSP 157-3), which clarifies the application of SFAS 157 in cases where a market is not active. The Company has considered the guidance provided by FSP 157-3 in its determination of estimated fair values as of December 31, ~~2004~~2008, and determined that there was no impact.

~~Note~~SFAS ~~1. Summary~~157 ofdefines ~~Significant~~fair ~~Accounting~~value ~~Policies Organization~~as ~~and~~the ~~Basis~~exchange ofprice ~~Presentation Alaska~~that ~~Airlines,~~would ~~Inc.~~be received for an asset or paid to transfer a liability (~~Alaska~~an exit price) in the principal or most advantageous market for the ~~Company),~~asset anor ~~Alaska~~liability ~~corporation,~~in isan aorderly ~~wholly~~transaction ~~owned~~between ~~subsidiary of~~market ~~Alaska~~participants ~~Air~~on ~~Group,~~the ~~Inc~~measurement date. ~~(Air~~SFAS ~~Group),~~157 also establishes a ~~Delaware~~fair ~~corporation.~~value ~~Air~~hierarchy, ~~Group~~which isrequires ~~also~~an entity to maximize the ~~parent company~~use of observable ~~Alaska~~inputs ~~Air~~and ~~Group~~minimize ~~Leasing~~the ~~(AAGL) and~~use ~~Horizon~~of ~~Air~~unobservable ~~Industries,~~inputs ~~Inc.~~when ~~(Horizon)~~measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

~~These~~Level ~~financial~~1 ~~statements~~- ~~have~~Quoted ~~been~~prices ~~prepared~~ in ~~conformity~~active ~~with~~markets ~~accounting~~for ~~principles~~identical ~~generally accepted~~assets inor ~~the United States of America and their preparation requires the use of management’s estimates~~liabilities. ~~Actual results could differ from these estimates.~~

~~Nature~~Level of2 ~~Operations~~- Observable inputs ~~Alaska~~other isthan aLevel ~~major~~1 ~~airline~~prices ~~serving~~such ~~primarily~~as ~~Alaska;~~quoted ~~the~~prices ~~U.S.~~for ~~West~~similar ~~Coast~~assets or liabilities; ~~Chicago,~~quoted ~~Denver,~~prices ~~five cities~~in onmarkets ~~the~~that ~~U.S.~~are ~~East~~not ~~Coast~~active; ~~Vancouver,~~or ~~Canada;~~other ~~and~~inputs ~~Mexico.~~that Itare ~~operates~~observable anor ~~all~~can ~~jet~~be ~~fleet~~corroborated ~~and~~by ~~its average~~observable ~~passenger~~market ~~trip~~data isfor ~~996~~substantially ~~miles.~~the ~~Substantially~~full ~~all~~term of the ~~Alaska’s~~assets ~~sales~~or ~~occur in the United States~~liabilities.

~~The~~Level ~~Company’s~~

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