Exhibit 10.1

ALASKA AIR GROUP, INC.

2004 LONG-TERM INCENTIVE PLAN

PERFORMANCE STOCK UNIT AWARD AGREEMENT

THIS PERFORMANCE STOCK UNIT AWARD AGREEMENT (this “Agreement”) dated _______ ,
by and between ALASKA AIR GROUP, INC., a Delaware corporation (“Air Group”), and
_______ (the “Participant”) evidences the award of stock units (the “Award”)
granted by Air Group to the Participant as to the number of stock units (the
“Stock Units”) first set forth below.

 

Number of Stock Units1:

  

Award Date:

Performance Period:

  

Vesting1 The Award shall vest and become no forfeitable as provided in Section 2
of the attached Terms and Conditions of Performance Stock Unit Award (the
“Terms”).

The Award is granted under the Alaska Air Group, Inc. 2004 Long-Term Incentive
Plan (the “Plan”) and subject to the Terms attached to this Agreement
(incorporated herein by this reference) and to the Plan. The Award has been
granted to the Participant in addition to, and not in lieu of, any other form of
compensation otherwise payable or to be paid to the Participant. Capitalized
terms are defined in the Plan if not defined herein. The parties agree to the
terms of the Award set forth herein. The Participant acknowledges receipt of a
copy of the Terms, the Plan and the Prospectus for the Plan.

Notwithstanding any other provision herein, the number of shares of Common Stock
payable in respect of the Stock Units is subject to reduction as provided in
Section 6 below.

 

PARTICIPANT    

ALASKA AIR GROUP, INC.

a Delaware Corporation

      By:        

William S. Ayer

Chairman, President and CEO

 

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Subject to adjustment under Section 6 of the Plan.

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TERMS AND CONDITIONS OF PERFORMANCE STOCK UNIT AWARD

1. Stock Units. As used herein, the term “stock unit” shall mean a non-voting
unit of measurement which is deemed for bookkeeping purposes to be equivalent to
one outstanding share of Air Group’s Common Stock (subject to adjustment as
provided in Section 6 of the Plan) solely for purposes of the Plan and this
Agreement. The Stock Units shall be used solely as a device for the
determination of the payment to eventually be made to the Participant if such
Stock Units vest pursuant to this Agreement. The Stock Units shall not be
treated as property or as a trust fund of any kind.

2. Vesting.

(a) Performance-Based Vesting. Subject to Section 7 below, the Award shall vest
and become nonforfeitable based on the achievement of the performance goals
established by the Committee and set forth on Exhibit A attached hereto for the
Performance Period identified on the cover page of this Agreement. The number of
Stock Units that vest and become payable under this Agreement shall be
determined based on the level of results or achievement of targets for each of
the Performance Goals as set forth in Exhibit A. Except as otherwise expressly
provided in Exhibit A, any Stock Units subject to the Award that do not vest in
accordance with Exhibit A shall terminate as of the last day of the Performance
Period.

(b) Possible Acceleration. Notwithstanding any other provision herein or in the
Plan, the Award, to the extent not then vested, shall become fully vested if
either (i) the Participant’s employment with the Company is terminated by the
Company without Cause or by the Participant for Good Reason and such termination
occurs at any time within the period commencing six (6) months before a Change
of Control and ending twenty-four (24) months after such Change of Control, or
(ii) a Change of Control occurs and the Award is not assumed or otherwise
continued following the Change of Control and is to be settled in accordance
with Section 13 of the Plan. (For these purposes, the terms “Cause,” “Change of
Control” and “Good Reason” shall have the meanings ascribed to them in Exhibit B
attached hereto.) For purposes of clarity, the number of Stock Units that shall
be vested after giving effect to the foregoing accelerated vesting provision
shall equal the number of Stock Units set forth on the cover page of this
Agreement (subject to adjustment under Section 6 of the Plan), and the
performance-based vesting provisions of Section 2(a) shall be disregarded. In
the event that, upon the occurrence of a Change of Control, the Participant is
entitled to accelerated vesting of the Award pursuant to clause (i) this
Section 2(b) in connection with a termination of the Participant’s employment
prior to such Change of Control, the Award, to the extent it had not vested and
was cancelled or otherwise terminated upon or prior to the date of such Change
of Control solely as a result of such termination of employment, shall be
reinstated and shall automatically become fully vested.

3. Continuance of Employment. The vesting schedule requires continued employment
or service through each applicable vesting date as a condition to the vesting of
the applicable installment of the Award and the rights and benefits under this
Agreement. Employment or service for only a portion of the vesting period, even
if a substantial portion, will not entitle the Participant to any proportionate
vesting or avoid or mitigate a termination of rights and benefits upon or
following a termination of employment or services as provided in Section 7 below
or under the Plan.

Nothing contained in this Agreement or the Plan constitutes an employment or
service commitment by Air Group, affects the Participant’s status as an employee
at will who is subject to termination without cause, confers upon the
Participant any right to remain employed by or in service to the Company,
interferes in any way with the right of the Company at any time to terminate
such employment or services, or affects the right of the Company to increase or
decrease the Participant’s other compensation or benefits. Nothing in this
paragraph, however, is intended to adversely affect any independent contractual
right of the Participant without his consent thereto.

 

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4. Limitations on Rights Associated with Units. The Participant shall have no
rights as a stockholder of Air Group, no dividend rights and no voting rights,
with respect to the Stock Units and any shares of Common Stock underlying or
issuable in respect of such Stock Units until such shares of Common Stock are
actually issued to and held of record by the Participant. No adjustments will be
made for dividends or other rights of a holder for which the record date is
prior to the date of issuance of the stock certificate.

5. Restrictions on Transfer. Neither the Award, nor any interest therein or
amount or shares payable in respect thereof may be sold, assigned, transferred,
pledged or otherwise disposed of, alienated or encumbered, either voluntarily or
involuntarily. The transfer restrictions in the preceding sentence shall not
apply to (a) transfers to Air Group, or (b) transfers by will or the laws of
descent and distribution.

6. Timing and Manner of Payment of Stock Units; Possible Reduction in Payment.
On or as soon as administratively practical following the date on which any
Stock Units subject to this Award vest pursuant to the terms hereof (and in all
events within two and one-half months after such vesting event), Air Group shall
deliver to the Participant a number of shares of Common Stock (either by
delivering one or more certificates for such shares or by entering such shares
in book entry form, as determined by Air Group in its discretion) equal to the
number of Stock Units subject to this Award that vest on such date, unless such
Stock Units terminate prior to such date pursuant to Section 7. Air Group’s
obligation to deliver shares of Common Stock or otherwise make payment with
respect to vested Stock Units is subject to the condition precedent that the
Participant or other person entitled under the Plan to receive any shares with
respect to the vested Stock Units deliver to Air Group any representations or
other documents or assurances that the Committee may deem necessary or desirable
to assure compliance with all applicable legal and accounting requirements. The
Participant shall have no further rights with respect to any Stock Units that
are paid or that terminate pursuant to Section 7.

Notwithstanding the foregoing provisions, in the event that (a) any Stock Units
vest and become payable hereunder and (b) the number of shares of Common Stock
payable in respect of the aggregate number of such vested units and all other
then-vested and payable units subject to awards of performance stock units
granted under the Plan on or about the Award Date exceeds the number of shares
then available for issuance under the Plan and any other stockholder-approved
equity compensation plan of Air Group, the number of shares available for
issuance under the Plan shall be allocated on a pro rata basis to the Award and
each other such performance stock unit award based on the number of shares then
payable under such awards so that all such shares available for issuance shall
be issued in respect of such awards and, in such event, the Participant shall
have no rights with respect to any vested Stock Units that would otherwise have
been paid but are not actually paid as a result of such proration. For purposes
of the preceding sentence, the number of shares “available for issuance” under a
plan shall exclude any shares issued in respect of an award granted under that
plan on or before the date hereof and any shares subject to a then-outstanding
award granted under that plan on or before the date hereof (other than a
then-outstanding and payable performance stock unit award referred to in the
preceding sentence).

7. Effect of Termination of Employment. The Participant’s Stock Units shall
terminate to the extent such units have not become vested prior to the first
date the Participant is no longer employed by the Company, regardless of the
reason for the termination of the Participant’s employment with the Company.
Notwithstanding the foregoing sentence, if the Participant’s employment
terminates as a result of the Participant’s death, Total Disability or
Retirement (as such terms are defined below), (i) the Participant’s Stock Units
shall be subject to pro-rata vesting such that the number of Stock Units subject

 

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to the Award that shall become vested as of the conclusion of the Performance
Period shall equal (A) the number of Stock Units subject to the Award that would
have vested as of the conclusion of the Performance Period in accordance with
Section 2 above (assuming no termination of employment had occurred), multiplied
by (B) a fraction, the numerator of which shall be the number of whole months
during the Performance Period the Participant was employed by or rendered
services to the Company, and the denominator of which shall be the number of
whole months in the Performance Period; and (ii) any Stock Units subject to the
Award that do not vest in accordance with the foregoing clause (i) shall
terminate as of the last day of the Performance Period. If any unvested Stock
Units are terminated hereunder, such Stock Units shall automatically terminate
and be cancelled as of the applicable termination date without payment of any
consideration by Air Group and without any other action by the Participant, or
the Participant’s beneficiary or personal representative, as the case may be.

For purposes of this Agreement, “Total Disability” means a “permanent and total
disability” (within the meaning of Section 22(e)(3) of the Code or as otherwise
determined by the Committee). For purposes of this Agreement, “Retirement” means
that, as of the date of the termination of the Participant’s employment with the
Company, the Participant has either (i) attained age 55 with at least five
(5) full years of service with the Company, or (ii) has attained age 60, or
(iii) is a participant in and is entitled to commence a benefit under a
Company-sponsored defined benefit plan and has at least 10 years of service with
the Company.

8. Adjustments Upon Specified Events. The Committee may accelerate payment and
vesting of the Stock Units in such circumstances as it, in its sole discretion,
may determine. In addition, upon the occurrence of certain events relating to
Air Group’s stock contemplated by Section 6 of the Plan (including, without
limitation, an extraordinary cash dividend on such stock), the Committee shall
make adjustments in accordance with such section in the number of Stock Units
then outstanding and the number and kind of securities that may be issued in
respect of the Award. No such adjustment shall be made with respect to any
ordinary cash dividend paid on the Common Stock. Furthermore, the Committee
shall adjust the performance measures and performance goals referenced in
Section 3 hereof to the extent (if any) it determines that the adjustment is
necessary or advisable to preserve the intended incentives and benefits to
reflect (1) any material change in corporate capitalization, any material
corporate transaction (such as a reorganization, combination, separation,
merger, acquisition, or any combination of the foregoing), or any complete or
partial liquidation of the Air Group, (2) any change in accounting policies or
practices, (3) the effects of any special charges to the Air Group’s earnings,
or (4) any other similar special circumstances.

9. Tax Withholding. Subject to Section 19 of the Plan, upon any distribution of
shares of Common Stock in respect of the Stock Units, Air Group shall
automatically reduce the number of shares to be delivered by (or otherwise
reacquire) the appropriate number of whole shares, valued at their then Fair
Market Value (determined in accordance with the applicable provisions of the
Plan), to satisfy any withholding obligations of the Company with respect to
such distribution of shares at the minimum applicable withholding rates. In the
event that Air Group cannot legally satisfy such withholding obligations by such
reduction of shares, or in the event of a cash payment or any other withholding
event in respect of the Stock Units, the Company shall be entitled to require a
cash payment by or on behalf of the Participant and/or to deduct from other
compensation payable to the Participant any sums required by federal, state or
local tax law to be withheld with respect to such distribution or payment.

10. Notices. Any notice to be given under the terms of this Agreement shall be
in writing and addressed to Air Group at its principal office to the attention
of the Secretary, and to the Participant at the Participant’s last address
reflected on Air Group’s records, or at such other address as either party may
hereafter designate in writing to the other. Any such notice shall be given only
when received, but if the Participant is no longer an employee of the Company,
shall be deemed to have been duly given by Air

 

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Group when enclosed in a properly sealed envelope addressed as aforesaid,
registered or certified, and deposited (postage and registry or certification
fee prepaid) in a post office or branch post office regularly maintained by the
United States Government.

11. Plan. The Award and all rights of the Participant under this Agreement are
subject to the terms and conditions of the provisions of the Plan, incorporated
herein by reference. The Participant agrees to be bound by the terms of the Plan
and this Agreement. The Participant acknowledges having read and understanding
the Plan, the Prospectus for the Plan, and this Agreement. Unless otherwise
expressly provided in other sections of this Agreement, provisions of the Plan
that confer discretionary authority on the Board or the Committee do not (and
shall not be deemed to) create any rights in the Participant unless such rights
are expressly set forth herein or are otherwise in the sole discretion of the
Board or the Committee so conferred by appropriate action of the Board or the
Committee under the Plan after the date hereof.

12. Entire Agreement. This Agreement and the Plan together constitute the entire
agreement and supersede all prior understandings and agreements, written or
oral, of the parties hereto with respect to the subject matter hereof. The Plan
and this Agreement may be amended pursuant to Section 14 of the Plan. Such
amendment must be in writing and signed by Air Group. Air Group may, however,
unilaterally waive any provision hereof in writing to the extent such waiver
does not adversely affect the interests of the Participant hereunder, but no
such waiver shall operate as or be construed to be a subsequent waiver of the
same provision or a waiver of any other provision hereof.

13. Limitation on Participant’s Rights. Participation in the Plan confers no
rights or interests other than as herein provided. This Agreement creates only a
contractual obligation on the part of Air Group as to amounts payable and shall
not be construed as creating a trust. Neither the Plan nor any underlying
program, in and of itself, has any assets. The Participant shall have only the
rights of a general unsecured creditor of Air Group with respect to amounts
credited and benefits payable, if any, with respect to the Stock Units, and
rights no greater than the right to receive the Common Stock as a general
unsecured creditor with respect to Stock Units, as and when payable hereunder.

14. Counterparts. This Agreement may be executed simultaneously in any number of
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.

15. Section Headings. The section headings of this Agreement are for convenience
of reference only and shall not be deemed to alter or affect any provision
hereof.

16. Governing Law. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of Delaware without regard to
conflict of law principles thereunder.

17. Construction. It is intended that the terms of the Award will not result in
the imposition of any tax liability pursuant to Section 409A of the Code. This
Agreement shall be construed and interpreted consistent with that intent.

 

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EXHIBIT A

PERFORMANCE GOALS

Performance Period

January 1, 2008 through December 31, 2010

The vesting of the Award will be determined based on the three-year average of
Air Group’s Adjusted Pretax Profit Margin as calculated on the last day of each
of the three years during the Performance Period. For Purposes of the Award, the
Performance Goal for the Performance Period is the three-year average of Alaska
Air Group’s Adjusted Pretax Profit Margin (also referred to as “APM”). For this
purpose, “Adjusted Pretax Profit Margin” means the net income of Alaska Air
Group, Inc. as computed under Generally Accepted Accounting Principles (GAAP),
adjusted for Excluded Items and Alternative Accounting Treatments. “Excluded
Items” means (a) income taxes, and (b) special income or expense items such as
gain or loss on disposition of capital assets, impairments or other fleet or
facility exit costs, expenses from voluntary or involuntary severance programs,
government refunds or assistance and cumulative effect of accounting changes.
“Alternative Accounting Treatments” means expense or income relating to fuel
hedge accounting on an “as settled” basis.

 

APM (three-year average)

  

Percentage of Stock Units that Vest

Less than 3%

  

3%

  

4%

  

5%

  

6%

  

7%

  

8%

  

9%

  

10% and above

  

 

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EXHIBIT B

DEFINITIONS

For purposes of the Award, the following terms shall have the meanings set forth
is this Exhibit B.

“Cause” means the occurrence of any of the following:

 

  (i) the Participant is convicted of, or has pled guilty or nolo contendere to,
a felony (other than traffic related offenses or as a result of vicarious
liability); or

 

  (ii) the Participant has engaged in acts of fraud, material dishonesty or
other acts of willful misconduct in the course of his duties to the Company; or

 

  (iii) the Participant willfully and repeatedly fails to perform or uphold his
duties to the Company; or

 

  (iv) the Participant willfully fails to comply with reasonable directives of
the Board which are communicated to him or her in writing;

provided, however, that no act or omission by the Participant shall be deemed to
be “willful” if the Participant reasonably believed in good faith that such acts
or omissions were in the best interests of the Company.

“Change of Control” means the occurrence of any of the following:

 

  (i) the consummation of:

(A) any consolidation or merger of Air Group in which Air Group is not the
continuing or surviving corporation or pursuant to which shares of common stock
of Air Group would be converted into cash, securities or other property, other
than a merger of Air Group in which the holders of common stock of Air Group
immediately prior to the merger have the same proportionate ownership of common
stock of the surviving corporation immediately after the merger; or

(B) any sale, lease, exchange or other transfer (in one transaction or a series
of related transactions) of all, or substantially all, the assets of Air Group.

 

  (ii) at any time during a period of twenty-four (24) months, fewer than a
majority of the members of the Board are Incumbent Directors. “Incumbent
Directors” means (A) individuals who constitute the Board at the beginning of
such period; and (B) individuals who were nominated or elected by all of, or a
committee composed entirely of, the individuals described in (A); and
(C) individuals who were nominated or elected by individuals described in (B).

 

  (iii)

any Person (meaning any individual, entity or group within the meaning of
Section 13(d)(3) or 14(d) of the Exchange Act) shall, as a result of a tender or
exchange offer, open market purchases, privately-negotiated purchases or
otherwise, become the beneficial owner (within the meaning of Rule 13d-3 under
the Exchange Act), directly or indirectly, of the then-outstanding securities of
Air Group ordinarily (and apart from

 

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rights accruing under special circumstances) having the right to vote in the
election of members of the Board (“Voting Securities” to be calculated as
provided in paragraph (d) of Rule 13d-3 in the case of rights to acquire common
stock of Air Group) representing 20% or more of the combined voting power of the
then-outstanding Voting Securities.

 

  (iv) approval by the stockholders of Air Group of any plan or proposal for the
liquidation or dissolution of Air Group.

Unless the Board shall determine otherwise, a Change of Control shall not be
deemed to have occurred by reason of any corporate reorganization, merger,
consolidation, transfer of assets, liquidating distribution or other transaction
entered into solely by and between Air Group and any affiliate thereof, provided
such transaction has been approved by at least two-thirds (2/3) of the Incumbent
Directors (as defined above) then in office and voting.

Notwithstanding the foregoing, in no event shall a transaction or other event
that occurred prior to the date of grant of the Award constitute a Change of
Control, and no Change of Control after the first Change of Control to occur
after the grant date shall be considered for purposes of the Award.

“Good Reason” means, without the Participant’s express written consent, the
occurrence of any one or more of the following:

 

  (i) a material reduction in the Participant’s annual base salary;

 

  (ii) a material diminution or reduction of the Participant’s authority,
duties, or responsibilities;

 

  (iii) a material change in the geographic location at which the Participant
must perform services; or

 

  (iv) any material breach by the Company of any other provision of this
Agreement;

provided, however, that any such condition shall not constitute “Good Reason”
unless both (x) the Participant provides written notice to the Company of the
condition claimed to constitute Good Reason within ninety (90) days of the
initial existence of such condition, and (y) the Company fails to remedy such
condition within thirty (30) days of receiving such written notice thereof; and
provided, further, that in all events the termination of the Participant’s
employment with the Company shall not be treated as a termination for “Good
Reason” unless such termination occurs not more than two (2) years following the
initial existence of the condition claimed to constitute “Good Reason.”

 

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