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UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549
 FORM 10-Q (Mark One)(X)
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934For the quarterly period ended March 31, 2004.
  (   )
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934For the transition period from  .  .  .  .  .  .  to  .  .  .  .  .  .
 Commission file number 1-8957 ALASKA AIRLINES, INC.  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    92-0009235
(I.R.S. Employer
Identification No.)
 19300 Pacific Highway South, Seattle, Washington 98188
(Address of principal executive offices) Registrants telephone number, including area code: (206) 392-5040 Indicate by check mark whether the registrant (1) has 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), and (2) has been subject to such
filing requirements for the past 90 days. Yes  (X)   No  (   ) Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes  (   )   No  (X) APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuers classes
of common stock, as of the latest practicable date. The registrant has 500 common shares, par value $1.00, outstanding at
March 31, 2004.




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TABLE OF CONTENTS PART I. FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsItem 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3.
    
    Quantitative and Qualitative Disclosure About Market RiskItem 4.
    
    Controls and ProceduresPART II. OTHER INFORMATIONItem 1.
    
    Legal ProceedingsItem 6.
    
    Exhibits and Reports on Form 8-KSignaturesEXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  Cautionary Note regarding Forward-Looking Statements In addition to historical information, this Quarterly Report on Form 10-Q
contains forward-looking statements that relate to future events of our future
financial performance and involve a number of risks and uncertainties. These
forward-looking statements are intended to be subject to the safe harbor
protection provided by Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934. In some cases, you can identify
forward-looking statements by terminology such as forecast, may, will,
could, should, expect, plan, believe, potential or other similar
words indicating future events or contingencies. Some of the things that could
cause our actual results to differ from our expectations are: the competitive
environment and other trends in our industry; economic conditions; our reliance
on automated systems; actual or threatened terrorist attacks, global
instability and potential U.S. military involvement; our ability to meet our
cost reduction goals; labor disputes; changes in our operating costs including
fuel and insurance; changes in laws and regulations; liability and other claims
asserted against us; failure to expand our business; interest rates and the
availability of financing; our ability to attract and retain qualified
personnel; changes in our business plans; our significant indebtedness;
downgrades of our credit ratings; and inflation. For a discussion of these and
other risk factors, review the information under the caption Business Risks
in Item 1 of the Companys Annual Report on Form 10-K for the year ended
December 31, 2003. All of the forward-looking statements are qualified in
their entirety by reference to the risk factors discussed therein. Our
forward-looking statements are based on the information currently available to
us and speak only as of the date of this report. 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. We undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result
of new information, future events or otherwise, after the date of this report
to conform them to actual results. 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. 2




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PART I. FINANCIAL STATEMENTS 
  BALANCE SHEETS (unaudited)
 ASSETS December 31,
    
    March 31,(In Millions)
    
    2003
    
    2004Current AssetsCash and cash equivalents
    
    $
    192.5
    
    
    $
    164.7Marketable securities
    
    
    619.4
    
    
    
    665.0Receivables from related companies
    
    
    120.5
    
    
    
    167.7Receivables  net
    
    
    83.0
    
    
    
    102.5Inventories and supplies  net
    
    
    20.7
    
    
    
    19.8Deferred income taxes
    
    
    80.9
    
    
    
    85.2Prepaid expenses and other current assets
    
    
    36.3
    
    
    
    52.9Total Current Assets
    
    
    1,153.3
    
    
    
    1,257.8Property and EquipmentFlight equipment
    
    
    2,188.2
    
    
    
    2,187.1Other property and equipment
    
    
    391.2
    
    
    
    387.6Deposits for future flight equipment
    
    
    32.8
    
    
    
    29.12,612.2
    
    
    
    2,603.8Less accumulated depreciation and amortization
    
    
    816.3
    
    
    
    804.9Total Property and Equipment  Net
    
    
    1,795.9
    
    
    
    1,798.9Intangible Assets
    
    
    45.6
    
    
    
    45.6Other Assets
    
    
    71.6
    
    
    
    83.5Total Assets
    
    $
    3,066.4
    
    
    $
    3,185.8
 See accompanying notes to financial statements. 3




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BALANCE SHEETS (unaudited)
Alaska Airlines, Inc. LIABILITIES AND SHAREHOLDERS EQUITY December 31,
    
    March 31,(In Millions)
    
    2003
    
    2004Current LiabilitiesAccounts payable
    
    $
    108.8
    
    
    $
    112.3Payables to related companies
    
    
    2.7
    
    
    
    2.8Accrued aircraft rent
    
    
    67.8
    
    
    
    60.3Accrued wages, vacation and payroll taxes
    
    
    81.4
    
    
    
    79.3Other accrued liabilities
    
    
    269.1
    
    
    
    287.2Air traffic liability
    
    
    237.1
    
    
    
    309.0Current portion of long-term debt and
capital lease obligations
    
    
    206.7
    
    
    
    201.8Total Current Liabilities
    
    
    973.6
    
    
    
    1,052.7Long-Term Debt and Capital Lease Obligations
    
    
    756.8
    
    
    
    809.5Other Liabilities and CreditsDeferred income taxes
    
    
    181.4
    
    
    
    171.8Deferred revenue
    
    
    246.0
    
    
    
    265.2Other liabilities
    
    
    210.5
    
    
    
    214.6637.9
    
    
    
    651.6Commitments
and ContingenciesShareholders EquityCommon stock, $1 par valueAuthorized:      1,000 sharesIssued: 2003 and 2004 - 500 shares
    
    
    
    
    
    
    Capital in excess of par value
    
    
    448.4
    
    
    
    448.4Accumulated other comprehensive income (loss)
    
    
    (80.2
    )
    
    
    (71.9
    )Retained earnings
    
    
    329.9
    
    
    
    295.5698.1
    
    
    
    672.0Total Liabilities and Shareholders Equity
    
    $
    3,066.4
    
    
    $
    3,185.8
 See accompanying notes to financial statements. 4




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STATEMENTS OF OPERATIONS (unaudited)
Alaska Airlines, Inc. Three Months Ended March 31(In Millions Except Per Share Amounts)
    
    2003
    
    2004Operating RevenuesPassenger
    
    $
    387.0
    
    
    $
    449.3Freight and mail
    
    
    17.4
    
    
    
    17.7Other  net
    
    
    22.6
    
    
    
    24.3Total Operating Revenues
    
    
    427.0
    
    
    
    491.3Operating ExpensesWages and benefits
    
    
    188.0
    
    
    
    200.8Contracted services
    
    
    20.7
    
    
    
    23.1Aircraft fuel
    
    
    76.9
    
    
    
    93.6Aircraft maintenance
    
    
    37.9
    
    
    
    43.5Aircraft rent
    
    
    30.5
    
    
    
    29.5Food and beverage service
    
    
    12.9
    
    
    
    11.2Other selling expenses and commissions
    
    
    30.1
    
    
    
    33.9Depreciation and amortization
    
    
    28.5
    
    
    
    32.8Loss on sale of assets
    
    
    0.3
    
    
    
    0.8Landing fees and other rentals
    
    
    28.7
    
    
    
    33.2Other
    
    
    34.1
    
    
    
    36.9Total Operating Expenses
    
    
    488.6
    
    
    
    539.3Operating Loss
    
    
    (61.6
    )
    
    
    (48.0
    )Nonoperating Income (Expense)Interest income
    
    
    1.2
    
    
    
    5.3Interest expense
    
    
    (11.3
    )
    
    
    (10.8
    )Interest capitalized
    
    
    0.7
    
    
    
    0.1Other  net
    
    
    0.4
    
    
    
    0.2(9.0
    )
    
    
    (5.2
    )Loss before income tax
    
    
    (70.6
    )
    
    
    (53.2
    )Income tax benefit
    
    
    (25.5
    )
    
    
    (18.8
    )Net Loss
    
    $
    (45.1
    )
    
    $
    (34.4
    )
 See accompanying notes to financial statements. 5




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STATEMENT OF SHAREHOLDERS EQUITY (unaudited)
Alaska Airlines, Inc. AccumulatedCapital in
    
    OtherCommon
    
    Excess of
    
    Comprehensive
    
    Retained(In Millions)
    
    Stock
    
    Par Value
    
    Income (Loss)
    
    Earnings
    
    TotalBalances at December 31, 2003:
    
    $
    0.0
    
    
    $
    448.4
    
    
    $
    (80.2
    )
    
    $
    329.9
    
    
    $
    698.1Net loss for the three months
ended March 31, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (34.4
    )
    
    
    (34.4
    )Other comprehensive income (loss):Related to marketable securities:Change in fair value
    
    
    
    
    
    
    
    
    
    
    (0.1
    )Reclassification to earnings
    
    
    
    
    
    
    
    
    
    
    0.1Income tax effect
    
    
    
    
    
    
    
    
    
    
    0.00.0
    
    
    
    
    
    
    
    Related to fuel hedges:Change in fair value
    
    
    
    
    
    
    
    
    
    
    16.3Reclassification to earnings
    
    
    
    
    
    
    
    
    
    
    (3.1
    )Income tax effect
    
    
    
    
    
    
    
    
    
    
    (4.9
    )8.3
    
    
    
    
    
    
    
    8.3Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26.1
    )Balances at March 31, 2004
    
    $
    0.0
    
    
    $
    448.4
    
    
    $
    (71.9
    )
    
    $
    295.5
    
    
    $
    672.0
 See accompanying notes to financial statements. 6




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STATEMENTS OF CASH FLOWS (unaudited)
Alaska Airlines, Inc. Three Months Ended March 31 (In Millions)
    
    2003
    
    2004Cash flows from operating activities:Net loss
    
    $
    (45.1
    )
    
    $
    (34.4
    )Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:Depreciation and amortization
    
    
    28.5
    
    
    
    32.8Amortization of airframe and engine overhauls
    
    
    14.2
    
    
    
    16.9Changes in derivative fair values
    
    
    1.2
    
    
    
    Loss on sale of assets
    
    
    0.3
    
    
    
    0.8Decrease in deferred income taxes
    
    
    (25.4
    )
    
    
    (18.7
    )Increase in accounts receivable  net
    
    
    (69.7
    )
    
    
    (66.7
    )(Increase) decrease in prepaid expenses and other current assets
    
    
    5.5
    
    
    
    (7.2
    )Increase in air traffic liability
    
    
    46.1
    
    
    
    71.8Increase in other current liabilities
    
    
    13.0
    
    
    
    12.1Increase in deferred revenue and other-net
    
    
    11.4
    
    
    
    18.7Net cash provided by (used in) operating activities
    
    
    (20.0
    )
    
    
    26.1Cash flows from investing activities:Proceeds from disposition of assets
    
    
    0.5
    
    
    
    3.9Purchases of marketable securities
    
    
    (171.8
    )
    
    
    (187.9
    )Sales and maturities of marketable securities
    
    
    131.6
    
    
    
    142.3Property and equipment additions:Aircraft purchase deposits
    
    
    (0.9
    )
    
    
    (3.2
    )Capitalized overhauls
    
    
    (18.5
    )
    
    
    (10.9
    )Aircraft
    
    
    (59.3
    )
    
    
    (36.9
    )Other flight equipment
    
    
    (8.3
    )
    
    
    (0.9
    )Other property
    
    
    (5.1
    )
    
    
    (4.9
    )Aircraft deposits returned
    
    
    1.2
    
    
    
    Restricted deposits and other
    
    
    (0.1
    )
    
    
    (3.2
    )Net cash used in investing activities
    
    
    (130.7
    )
    
    
    (101.7
    )Cash flows from financing activities:Proceeds from issuance of long-term debt
    
    
    
    
    
    
    62.6Proceeds from issuance of intercompany long-term debt
    
    
    63.6
    
    
    
    Long-term debt and capital lease payments
    
    
    (36.3
    )
    
    
    (14.8
    )Capital contribution from Air Group
    
    
    60.0
    
    
    
    Net cash provided by financing activities
    
    
    87.3
    
    
    
    47.8Net change in cash and cash equivalents
    
    
    (63.4
    )
    
    
    (27.8
    )Cash and cash equivalents at beginning of period
    
    
    268.9
    
    
    
    192.5Cash and cash equivalents at end of period
    
    $
    205.5
    
    
    $
    164.7Supplemental disclosure of cash paid during the period for:Interest (net of amount capitalized)
    
    $
    7.9
    
    
    $
    8.0Income taxes
    
    
    
    
    
    
    
 See accompanying notes to financial statements. 7




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NOTES TO FINANCIAL STATEMENTS (unaudited)
Alaska Airlines, Inc. Note 1. Basis of Presentation and Significant Accounting PoliciesOrganization and Basis of Presentation
The accompanying unaudited financial statements of Alaska Airlines, Inc.
(Alaska or the Company) should be read in conjunction with the financial
statements in the Companys Annual Report on Form 10-K for the year ended
December 31, 2003. In the opinion of management, all adjustments have been
made which are necessary to present fairly the Companys financial position as
of March 31, 2004, as well as the results of operations for the three months
ended March 31, 2003 and 2004. The adjustments made were of a normal recurring
nature. The Company is a wholly owned subsidiary of Alaska Air Group, Inc. (Air
Group) whose principle subsidiaries are Alaska and Horizon Air Industries, Inc.
(Horizon). The Companys financial statements have been prepared in conformity
with accounting principles generally accepted in the United States
of America (GAAP) and the Company is required to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities, as well as the
reported amounts of revenues and expenses. Significant estimates
made include assumptions used to record liabilities, expenses and
revenue associated with the Companys Mileage Plan, lease return
provisions and the amounts of certain accrued
liabilities. Actual results may differ from the Companys
estimates. Reclassification of Gains and Losses Associated with Fuel Hedging
The Company has made changes to its classification of fuel hedging gains and
losses which are described in the following paragraphs. Impact on First Quarter 2004 Press Release
In Air Groups press release of first quarter results on April 23, 2004, the
Company classified gains and losses associated with the ineffective portion of
changes in fair value of its fuel hedge positions as a component of aircraft
fuel expense rather than nonoperating income (expense) and reclassified the
first quarter of 2003 to conform to the 2004 presentation. The financial
statements included herein have been revised to present those gains and losses
in nonoperating income (expense), consistent with the Companys historical
presentation. There was no impact on pretax loss, net loss, or balance sheet
information in the April 23 press release. The following table reconciles the classification changes: March 31, 2003*
    
    March 31, 2004Aircraft fuel, press release
    
    $
    76.1
    
    
    $
    93.2Reclassification
    
    
    0.8
    
    
    
    0.4Aircraft fuel, Form 10-Q*
    
    $
    76.9
    
    
    $
    93.6Operating loss, press release
    
    $
    (60.8
    )
    
    $
    (47.6
    )Reclassification
    
    
    (0.8
    )
    
    
    (0.4
    )Operating loss, Form 10-Q*
    
    $
    (61.6
    )
    
    $
    (48.0
    )Other-net, press release
    
    $
    (0.4
    )
    
    $
    (0.2
    )Reclassification
    
    
    0.8
    
    
    
    0.4Other-net, Form 10-Q*
    
    $
    0.4
    
    
    $
    0.2Nonoperating income (expense), press release
    
    $
    (9.8
    )
    
    $
    (5.6
    )Reclassification
    
    
    0.8
    
    
    
    0.4Nonoperating income (expense), Form 10-Q*
    
    $
    (9.0
    )
    
    $
    (5.2
    )
  *
    
    The amounts for 2003 are as previously reported in the Form 10-Q for that
period. 8




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The airline data schedule and
non-GAAP disclosures on pages 13 through 14 have
also been modified accordingly. Revision to Previously
Filed Financial Statements and SEC Filings
The Company previously recorded unrealized gains and losses related to the
ineffective portion of changes in fair value of its fuel hedge positions as
non-operating income (expense) and then reclassified those gains and losses to
fuel expense as those hedges were settled. This practice was not consistent
with the Companys policy, which was to record the ineffective portion in
non-operating income (expense). The Company will amend its financial
statements previously filed with the Securities and Exchange Commission to
adjust its historical presentation of such items. Such revisions will result
in reclassification between operating income (loss) and nonoperating
income (expense) in the statements of operations. The revisions have no impact
on previously reported pretax income (loss), net income (loss), the balance
sheets, the statement of shareholders equity or the statements of cash flows
for any prior periods. Stock Options
The Company has three stock option plans that provide for the grant of options
to purchase Air Group common stock at stipulated prices on the date of the
grant to officers and employees of Air Group and its subsidiaries. The Company
applies the intrinsic value method in accordance with the provisions of
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued
to Employees, and related Interpretations, in accounting for stock options.
Accordingly, no compensation cost has been recognized for these plans as the
exercise price of options equals the fair market value on the date of grant. The following table represents the effect of net loss if the Company had
applied the fair value based method and recognition provisions of Statement on
Financial Accounting Standards No. 123 (SFAS No. 123) to its stock-based
employee compensation (in millions): Three Months EndedMarch 31,2003
    
    2004Net loss:As reported
    
    $
    (45.1
    )
    
    $
    (34.4
    )Deduct: Total stock-based employee
compensation expense determined
under fair value based methods for
all awards, net of related tax effects
    
    
    (1.4
    )
    
    
    (0.9
    )Pro forma net loss
    
    $
    (46.5
    )
    
    $
    (35.3
    )
 9




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Note 2. Other Assets
At December 31, 2003 and March 31, 2004, other assets consisted of the following (in millions): December 31, 2003
    
    March 31, 2004Restricted deposits
    
    
    53.2
    
    
    
    56.9Deferred costs and other
    
    
    18.4
    
    
    
    26.6$
    71.6
    
    
    $
    83.5
 Note 3. Frequent Flyer Program
Alaskas Mileage Plan liabilities are included under the following balance sheet captions (in millions): December 31, 2003
    
    March 31, 2004Current Liabilities:Other accrued liabilities
    
    $
    112.9
    
    
    $
    123.4Other Liabilities and Credits (non-current):Deferred revenue
    
    
    204.5
    
    
    
    214.2Other liabilities
    
    
    18.6
    
    
    
    18.9Total
    
    $
    336.0
    
    
    $
    356.5
 Note 4. Related Company Transactions
During 2000, Alaska transferred a flight simulator to Air Group Leasing (AAGL)
in exchange for a $2.4 million note receivable from AAGL and a $0.6 million
reduction in its payable to Air Group. The loan has repayment terms of 12
years at 6.5% interest. AAGL is leasing the simulator to Alaska for 12 years. Alaska performs all ticket processing for Horizon. Horizons ticket sales are
recorded by Alaska as air traffic liability and remitted to Horizon when
transportation is provided. Alaskas Mileage Plan participants may redeem miles on Horizon flights.
Additionally, participants who fly on Horizon may earn miles in Alaskas
Mileage Plan. Alaska does not pay nor receive any amounts from Horizon for its
participation in the plan. The Company periodically loans Horizon funds at varying interest rates. All
amounts are payable on demand. Interest income recognized related to the
Horizon loans totaled $0.5 million and $0.7 million for the quarters ended
March 31, 2003 and 2004, respectively. At March 31, 2004, receivables from
related companies include $115.7 million from Horizon, $9.7 million from AAGL
and $42.3 million from Air Group. Alaska has an agreement with Horizon, the Incentive Payment Program (IPP), to
provide revenue sharing on certain markets. Under the IPP, Alaska makes a
monthly payment to Horizon for markets that provide connecting traffic to
Alaska but create losses for Horizon (the incentive markets). The payment is
based on fully allocated cost for Horizon to provide the transportation
service, plus a 5% mark-up. Incentive markets are analyzed quarterly and the
monthly reimbursement amount is adjusted to reflect the prior quarters actual
performance. Alaska made incentive payments to
Horizon of $5.5 million and $2.0 million during the quarters ended March 10




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31, 2003 and 2004,
respectively, which are reflected as other selling expenses and
commissions in the
statements of operations. Alaska also provides certain services to Horizon for which Alaska receives
payment from Horizon based on the cost of the services, including personnel
expenses related to development and maintenance of alaskaair.com, the
maintenance of telecommunications lines and related software, personnel and
systems expenses to process Horizons revenue transactions, and printing and
graphics services. Alaska also pays certain leasing and other facilities costs
on Horizons behalf that are reimbursed monthly by Horizon. Total amounts
received by Alaska from Horizon were $1.9 million and $2.3 million for the
quarters ended March 31, 2003 and 2004, respectively. In the normal course of business, Alaska and Horizon provide certain ground
handling services to the other company. For the quarter ended March 31, 2003,
Charges for ground services provided by Alaska to Horizon totaled $0.6 million
during each of the quarters ended March 31, 2003 and 2004. For the quarters
ended March 31, 2003 and 2004, charges for ground services provided by Horizon
to Alaska totaled $0.9 million and $1.2 million, respectively. Note 5. Employee Benefit PlansPension Plans-Defined Benefit
Net pension expense for the three months ended March 31 included the following
components (in millions): March 31, 2003
    
    March 31, 2004Service cost
    
    $
    11.1
    
    
    $
    13.7Interest cost
    
    
    10.8
    
    
    
    12.0Expected return on assets
    
    
    (8.5
    )
    
    
    (10.7
    )Amortization of prior service cost
    
    
    1.3
    
    
    
    1.3Actuarial Gain
    
    
    3.7
    
    
    
    3.7Net pension expense
    
    $
    18.4
    
    
    $
    20.0
 The Company made no contributions to its defined benefit pension plans during
the three months ended March 31, 2003. The Company made $16.5 million in
contributions during the three months ended March 31, 2004, and expects to
contribute an additional $32.5 million to these plans during the remainder of
2004. Pension Plans-Noncontributory
Net pension expense for the unfunded noncontributory defined benefit plans for the three
months ended March 31 included the following components (in millions): March 31, 2003
    
    March 31, 2004Service cost
    
    $
    0.2
    
    
    $
    0.3Interest cost
    
    
    0.5
    
    
    
    0.5Actuarial Gain
    
    
    0.1
    
    
    
    0.2Net pension expense
    
    $
    0.8
    
    
    $
    1.0
 11




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Other Postretirement Benefits
Net periodic benefit cost for the postretirement medical plans for the three
months ended March 31 included the following components: March 31, 2003
    
    March 31, 2004Service cost
    
    $
    0.9
    
    
    $
    1.2Interest cost
    
    
    1.1
    
    
    
    1.3Amortization of prior service cost
    
    
    
    
    
    
    (0.1
    )Actuarial Gain
    
    
    0.4
    
    
    
    0.7Net periodic benefit cost
    
    $
    2.4
    
    
    $
    3.1
 Note 6. Long-Term Debt and Capital Lease Obligations
At December 31, 2003, and March 31, 2004, long-term debt and capital lease
obligations were as follows (in millions): December 31, 2003
    
    March 31, 2004Fixed rate notes payable due through 2015
    
    $
    382.6
    
    
    $
    379.2Variable rate notes payable due through 2018
    
    
    572.5
    
    
    
    631.8Long-term debt
    
    
    955.1
    
    
    
    1,011.0Capital lease obligations
    
    
    8.4
    
    
    
    0.3Less current portion
    
    
    (206.7
    )
    
    
    (201.8
    )$
    756.8
    
    
    $
    809.5
 During the first three months of 2004, Alaska issued $62.6 million of debt
secured by flight equipment, having interest rates that vary with LIBOR and
payment terms ranging from 14 to 16 years. Note 7. Contingencies
The Company is a party to routine litigation incidental to its business and
with respect to which no material liability is expected. Management believes
the ultimate disposition of these matters is not likely to materially affect
the Companys financial position or results of operations. However, this
belief is based on managements current understanding of the relevant law and
facts; it is subject to various contingencies, including the potential costs
and risks associated with litigation and the actions of judges and juries. 12




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##### Table of Contents



Alaska Airlines
Financial and Statistical Data (Unaudited)(b) Three Months Ended March 31%2003
    
    2004
    
    ChangeFinancial
Data (in millions):Operating Revenues:Passenger
    
    $
    387.0
    
    
    $
    449.3
    
    
    
    16.1
    %Freight and mail
    
    
    17.4
    
    
    
    17.7
    
    
    
    1.7
    %Other  net
    
    
    22.6
    
    
    
    24.3
    
    
    
    7.5
    %Total Operating Revenues
    
    
    427.0
    
    
    
    491.3
    
    
    
    15.1
    %Operating Expenses:Wages and benefits
    
    
    188.0
    
    
    
    200.8
    
    
    
    6.8
    %Contracted services
    
    
    20.7
    
    
    
    23.1
    
    
    
    11.6
    %Aircraft fuel
    
    
    76.9
    
    
    
    93.6
    
    
    
    21.7
    %Aircraft maintenance
    
    
    37.9
    
    
    
    43.5
    
    
    
    14.8
    %Aircraft rent
    
    
    30.5
    
    
    
    29.5
    
    
    
    -3.3
    %Food and beverage service
    
    
    12.9
    
    
    
    11.2
    
    
    
    -13.2
    %Other selling expenses and commissions
    
    
    30.1
    
    
    
    33.9
    
    
    
    12.6
    %Depreciation and amortization
    
    
    28.5
    
    
    
    32.8
    
    
    
    15.1
    %Loss on sale of assets
    
    
    0.3
    
    
    
    0.8
    
    
    NMLanding fees and other rentals
    
    
    28.7
    
    
    
    33.2
    
    
    
    15.7
    %Other
    
    
    34.1
    
    
    
    36.9
    
    
    
    8.2
    %Total Operating Expenses
    
    
    488.6
    
    
    
    539.3
    
    
    
    10.4
    %Operating Loss
    
    
    (61.6
    )
    
    
    (48.0
    )
    
    
    -22.1
    %Interest income
    
    
    1.2
    
    
    
    5.3Interest expense
    
    
    (11.3
    )
    
    
    (10.8
    )Interest capitalized
    
    
    0.7
    
    
    
    0.1Other  net
    
    
    0.4
    
    
    
    0.2(9.0
    )
    
    
    (5.2
    )Loss Before Income Tax
    
    $
    (70.6
    )
    
    $
    (53.2
    )
    
    
    -24.6
    %Operating Statistics:Revenue passengers (000)
    
    
    3,258
    
    
    
    3,592
    
    
    
    10.3
    %RPMs (000,000)
    
    
    3,143
    
    
    
    3,580
    
    
    
    13.9
    %ASMs (000,000)
    
    
    4,708
    
    
    
    5,178
    
    
    
    10.0
    %Passenger load factor
    
    
    66.7
    %
    
    
    69.1
    %
    
    2.4 ptsBreakeven load factor
    
    
    80.3
    %
    
    
    78.6
    %
    
    -1.7 ptsYield per passenger mile
    
    
    12.31¢
    
    
    
    12.55¢
    
    
    
    1.9
    %Operating revenue per ASM
    
    
    9.07¢
    
    
    
    9.49¢
    
    
    
    4.6
    %Operating expenses per ASM (a)
    
    
    10.38¢
    
    
    
    10.42¢
    
    
    
    0.4
    %Operating expenses per ASM excluding fuel (a)
    
    
    8.75¢
    
    
    
    8.61¢
    
    
    
    -1.6
    %Fuel cost per gallon
    
    
    99.1¢
    
    
    
    112.9¢
    
    
    
    13.9
    %Fuel gallons (000,000)
    
    
    77.6
    
    
    
    82.9
    
    
    
    6.8
    %Average number of employees
    
    
    9,988
    
    
    
    9,984
    
    
    
    0.0
    %Aircraft utilization (blk hrs/day)
    
    
    10.3
    
    
    
    10.4
    
    
    
    1.0
    %Operating fleet at period-end
    
    
    106
    
    
    
    108
    
    
    
    1.9
    %
 NM = Not Meaningful (a) See Note 1 on Page 14. (b) See Note 1
Reclassification of Gains and Losses Associated with Fuel
Hedging on Page 8. 13




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##### Table of Contents



Note 1:
Pursuant to Item 10 of Regulation S-K, we are providing disclosure of
the reconciliation of reported non-GAAP financial measures to our most
directly comparable financial measures reported on a GAAP basis. The non-GAAP
financial measures provide us the ability to measure and monitor our performance both with and without the cost of aircraft fuel.
Because the cost and availability of aircraft fuel are subject to many economic
and political factors beyond our control, it is our view
that the measurement and monitoring of performance without fuel is important.
In addition, these non-GAAP financial measures are also more comparable to
financial measures reported to the Department of Transportation by other major
network airlines. The following table reconciles operating expenses excluding fuel and operating
expenses per ASM excluding fuel for Alaska Airlines, Inc.: Alaska Airlines, Inc.:
($ in millions) Three Months Ended March 31,2003
    
    2004Total GAAP operating expenses
    
    $
    488.6
    
    
    $
    539.3ASMs (000,000)
    
    
    4,708
    
    
    
    5,178GAAP operating expenses per ASM
    
    
    10.38¢
    
    
    
    10.42¢Total GAAP operating expenses
    
    $
    488.6
    
    
    $
    539.3Less: aircraft fuel
    
    
    76.9
    
    
    
    93.6Operating expenses excluding fuel
    
    $
    411.7
    
    
    $
    445.7ASMs (000,000)
    
    
    4,708
    
    
    
    5,178Operating expenses per ASM excluding fuel
    
    
    8.75¢
    
    
    
    8.61¢
 14




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##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with our financial
statements and the related notes contained elsewhere in this quarterly report
on Form 10-Q. All statements in the following discussion that are not reports
of historical information or descriptions of current accounting policy are
forward-looking statements. Please consider our forward-looking statements in
light of the risks referred to in this reports introductory cautionary note. Alaska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. The information contained on our website is not a part of
this quarterly report on Form 10-Q. As used in this Form 10-Q, the terms
Alaska, our, we and the Company refer to Alaska Airlines, Inc., unless
the context indicates otherwise. Reclassification of Gains and Losses Associated with Fuel Hedging
We have made changes to our classification of fuel hedging gains and losses
which are described in the following paragraphs. Impact on First Quarter 2004 Press Release
In Air Groups press release of first quarter results on April 23, 2004, we
classified gains and losses associated with the ineffective portion of changes
in fair value of our fuel hedge positions as a component of aircraft fuel
expense rather than nonoperating income (expense) and reclassified the first
quarter of 2003 to conform to the 2004 presentation. The financial statements
included herein have been revised to present those gains and losses in
nonoperating income (expense), consistent with our historical presentation.
There was no impact on pretax loss, net loss, or balance sheet information in
the April 23 press release. There was also no impact on cost per ASM (CASM)
excluding fuel, a non-GAAP measure we believe is important to some users of our
financial statements. See page 14. The following table reconciles the classification changes: March 31, 2003*
    
    March 31, 2004Aircraft fuel, press release
    
    $
    76.1
    
    
    $
    93.2Reclassification
    
    
    0.8
    
    
    
    0.4Aircraft fuel, Form 10-Q*
    
    $
    76.9
    
    
    $
    93.6Operating loss, press release
    
    $
    (60.8
    )
    
    $
    (47.6
    )Reclassification
    
    
    (0.8
    )
    
    
    (0.4
    )Operating loss, Form 10-Q*
    
    $
    (61.6
    )
    
    $
    (48.0
    )Other-net, press release
    
    $
    (0.4
    )
    
    $
    (0.2
    )Reclassification
    
    
    0.8
    
    
    
    0.4Other-net, Form 10-Q*
    
    $
    0.4
    
    
    $
    0.2Nonoperating income (expense), press release
    
    $
    (9.8
    )
    
    $
    (5.6
    )Reclassification
    
    
    0.8
    
    
    
    0.4Nonoperating income (expense), Form 10-Q*
    
    $
    (9.0
    )
    
    $
    (5.2
    )
  *
    
    The amounts for 2003 are as previously reported in the Form 10-Q for that period. 15




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##### Table of Contents



The airline data schedule and
non-GAAP disclosures on pages 13 through 14 have
also been modified accordingly. Revision to Previously
Filed Financial Statements and SEC Filings
We previously recorded unrealized gains and losses related to the ineffective
portion of changes in fair value of our fuel hedge positions as non-operating
income (expense) and then reclassified those gains and losses to fuel expense
as those hedges were settled. This practice was not
consistent with our
policy, which was to record the ineffective portion in non-operating income
(expense). We will amend our financial statements previously filed with the
Securities and
Exchange Commission to adjust our historical presentation of such items. Such
revisions will result in reclassification between operating income (loss) and
nonoperating income (expense) in the statements of operations. The revisions
have no impact on previously reported pretax income (loss), net income (loss),
the balance sheets, the statement of shareholder's equity or the statements of
cash flows for any prior periods. It also has no impact on cost per ASM
excluding fuel, a non-GAAP measure we believe is important to some users of our
financial statements. See page 15. First Quarter in Review and Current Events
Historically, our operating income is lowest during the first quarter,
increases in the second quarter, reaches its peak during the third quarter and
decreases again in the fourth quarter. We recorded a first quarter 2004 net
loss of $34.4 million. The net loss decreased from the 2003 net loss of $45.1
million despite very high jet fuel costs ($1.13 per gallon in 2004 compared to
$0.99 per gallon in 2003). Results of operations in 2004 were positively
impacted by relatively strong winter demand and improved yields. The comparison
to 2003 is favorably impacted by a demand drop off in 2003 resulting from the
war in Iraq. In February 2004, we initiated a fare simplification plan whereby a number of
fare restrictions were eliminated, walk-up and first class fares were reduced
significantly, and the gap between the highest and lowest fares was reduced.
The goal of this initiative is to increase customer loyalty by driving better
value while simplifying the customers purchase decision and reducing the costs
associated with selling and maintaining a more complex fare structure. For 2004, we expect capacity increases of 6.5%. Our expected capacity increase
is due largely to the annualization of the additional aircraft added in 2003
combined with increases in utilization. Results of OperationsFirst Quarter 2004 Compared with First Quarter 2003
We recorded operating and pre-tax losses of $48.0 million and $53.2 million,
respectively, in 2004 versus $61.6 million and $70.6 million, respectively, in
2003. Financial and statistical data
comparisons are shown on page 13. A discussion of the three-month data
follows. On page 14, we 16




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##### Table of Contents



have included a reconciliation of reported non-GAAP
financial measures to the most directly comparable GAAP financial measure. Alaska Airlines Revenues
Operating revenues increased $64.3 million, or 15.1%, during 2004 as compared
to 2003. For the quarter, available seat miles (ASMs or capacity) increased
10.0% and revenue passenger miles (RPMs or traffic) increased 13.9%.
Approximately two-thirds of our 2004 ASM growth came from expansion in our
Trans Continental markets and Denver. The remaining increases in capacity
primarily reflect increases in service to Nevada, Anchorage/Fairbanks, Southern
California and Mexico, partially offset by decreases in service to Northern
Alaska, Arizona, Canada and Southeast Alaska. Traffic increases primarily
reflect increases in traffic in the Trans Continental, Denver, Nevada, Pacific
Northwest, Mexico, and Southern California markets, partially offset by
decreases in traffic in Northern Alaska, Canada and Arizona. Yield per passenger mile increased 1.9% and passenger load factor increased 2.4
points during the first quarter of 2004 as compared to the same period in 2003.
Increases in traffic and yield resulted in a 16.1% increase in passenger
revenues in 2004. Freight and mail revenues increased slightly by $0.3 million, or 1.7%, compared
to the same period in 2003. Other-net revenues increased $1.7 million, or 7.5%, due largely to revenues
received from an agreement with PenAir to provide flight services to Dutch
Harbor that began in January of 2004. Alaska Airlines Expenses
For the quarter, total operating expenses increased $50.7 million, or 10.4%, as
compared to the same period in 2003. Operating expenses per ASM increased
0.4% in 2004 as compared to 2003. These increases are due largely to the 10.0%
increase in capacity combined with a significant increase in fuel costs and
higher wages and maintenance costs. Operating expense per ASM excluding fuel
decreased 1.6% as compared to the same period in 2003. Explanations of
significant period-over-period changes in the components of operating expenses
are as follows:  
    
    Wages and benefits increased $12.8 million, or 6.8%, during the
first quarter. Approximately $5.9 million of this increase reflects
higher benefit costs, resulting from increases in pension costs of
approximately $3.8 million and higher health insurance costs of $2.1
million. The remaining $6.9 million increase primarily reflects scale
and step increases.In May of 2004, under terms of our union contract, our pilots will
receive a 4% wage rate increase.  
    
    Contracted services increased $2.4 million, or 11.6%, due largely
to expenses associated with an agreement with PenAir to provide flight
services to Dutch Harbor that began in January of 2004.
    
    Aircraft fuel increased $16.7 million, or 21.7%, due to a 13.9%
increase in the fuel cost per gallon and a 6.8% increase in fuel
gallons consumed. Air Groups fuel hedging program 17




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##### Table of Contents



resulted in Alaska
recognizing a $3.1 million reduction in aircraft fuel expense for
hedging gains realized on hedge positions settled during the first
quarter of 2004. Fuel prices remain at very high levels and continue
to be volatile. At March 31, 2004, we have fuel hedge contracts in
place to hedge 40%, 38% and 7% of our expected fuel consumption in
2004, 2005 and 2006, respectively, at prices ranging from $27 to $29
per crude oil barrel.  
    
    Aircraft maintenance increased $5.6 million, or 14.8%, due
largely to an increase in overhaul amortization resulting from the
planned retirement of three Boeing 737-200Cs and an increase in costs
associated with C checks as compared to 2003. We expect maintenance
costs for 2004 to be 1% to 2% higher than in 2003.  
    
    Aircraft rent decreased $1.0 million, or 3.3%, due to lower rates
on extended leases and MD80 returns, offset by three new 737-700
aircraft.  
    
    Other selling expenses and commissions increased $3.8 million, or
12.6%. This increase is due largely to planned increases in
advertising expense to promote our fare simplification and computer
reservation system costs, partially offset by a decrease in incentive
payments made to Horizon. Incentive payments to Horizon are
eliminated in consolidation at the Air Group level.  
    
    Depreciation and amortization increased $4.3 million, or 15.1%
reflecting accelerated depreciation on the planned retirement of three
Boeing 737-200Cs and an increase in depreciation resulting from six
aircraft purchased in the last twelve months.  
    
    Landing fees and other rentals increased $4.5 million, or 15.7%.
The higher rates primarily reflect higher fees at Seattle, Los Angeles
and Oakland, combined with modest volume growth. We expect landing
fees and other rentals to continue to increase as a result of airport
facility expansions and increased costs for security.  
    
    Other expense increased $2.8 million, or 8.2%, primarily
reflecting a $2.6 million increase in professional services associated
with our cost cutting initiatives, Sarbanes-Oxley Section 404
preparation and a $1.0 million increase in foreign exchange loss,
partially offset by a decrease in insurance expense. Nonoperating Income (Expense)
Net nonoperating expense was $5.2 million in 2004 compared to $9.0 million in
2003. Interest income increased $4.1 million due to a higher marketable
securities balance in 2004 combined with a negative adjustment of premium and
discount amortization on our marketable securities portfolio in 2003. Interest
expense (net of capitalized interest) increased $0.1 million due to increases
in debt balances as compared to 2003. Other-net includes $0.7 million and $0.4 million in hedging gains resulting
from hedge ineffectiveness on fuel hedging contracts in 2003 and 2004,
respectively. 18




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##### Table of Contents



Income Tax Benefit
Accounting standards require us to provide for income taxes each quarter based
on either our estimate of the effective tax rate for the full year or the
actual year-to-date effective tax rate if it is our best estimate of our annual
expectation. The volatility of airfares and fuel prices and the seasonality of
our business make it difficult to accurately forecast full-year pretax results.
In addition, a relatively small change in pretax results can cause a
significant change in the effective tax rate due to the magnitude of
nondeductible expenses, such as employee per diem costs relative to pretax
profit or loss. In estimating the 35.3% tax rate for 2004, we considered a
variety of factors, including the U.S. federal rate of 35%, estimates of
nondeductible expenses and state income taxes, and year-to-date pretax results.
We evaluate this rate each quarter and make adjustments when necessary. Critical Accounting Policies
For more information on our critical accounting policies, see Item 7 of our
Annual Report on Form 10-K for the year ended December 31, 2003. Liquidity and Capital Resources
The table below presents the major indicators of financial condition and
liquidity. December 31, 2003
    
    March 31, 2004
    
    Change(In millions, except debt-to-capital amounts)Cash and marketable securities
    
    $
    811.9
    
    
    $
    829.7
    
    
    $
    17.8Working capital
    
    
    179.7
    
    
    
    205.1
    
    
    
    25.4Long-term debt and Long-term
capital lease obligations
    
    
    756.8
    
    
    
    809.5
    
    
    
    52.7Shareholders equity
    
    
    698.1
    
    
    
    672.0
    
    
    
    (26.1
    )Long-term debt-to-capital
    
    
    52%:48
    %
    
    
    55%:45
    %
    
    NALong-term debt-to-capital assuming
aircraft operating leases are capitalized
at seven times annualized rent
    
    
    70%:30
    %
    
    
    71%:29
    %
    
    NA
 We plan to meet our capital and operating commitments through internally
generated funds from operations and cash and marketable securities on hand at
March 31, 2004 totaling $829.7 million. During the quarter ended March 31, 2004, our cash and marketable securities
increased $17.8 million to $829.7 million at March 31, 2004. This increase
reflects cash provided by operating activities of $26.1 million and cash
provided by financing activities of $47.8 million, partially offset by cash
used for the purchase of property and equipment of $52.9 million and $3.2
million paid for restricted deposits. Cash Provided by Operating Activities
During the first three months of 2004, net cash provided by operating
activities was $26.1 million, compared to net cash used in operating activities
of $20.0 million during the first three months of 2003. The increase in cash
flow from 2003 to 2004 resulted primarily from a reduction in our net loss from
2003 combined with year over year increases in air traffic liability,
and other current liabilities, partially offset by increases in accounts
receivable-net,
prepaid expenses and other current assets and by a decrease in deferred taxes. 19




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##### Table of Contents



Cash Used in Investing Activities
Cash used in investing activities was $101.7 million during the first three
months of 2004, compared to $130.7 million in 2003. We had net purchases of
$45.6 million of marketable securities and $52.9 million for property and
equipment, including the purchase of one 737-900. During the first three
months of 2004, our aircraft related capital expenditures decreased $33.9
million as compared to 2003, primarily reflecting a reduction in spending for
new aircraft and capitalized overhauls. Cash Provided by Financing Activities
Net cash provided by financing activities was $47.8 million during the first
three months of 2004 compared to $87.3 during the same period in 2003. Debt
issuances during the quarter of $62.6 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 14 to 16 years. Debt
issuances during the quarter were offset by normal long term debt payments of
$14.8 million. Contractual Obligations, Commitments and Off-Balance Sheet Arrangements
At March 31, 2004, we had firm orders for two aircraft requiring aggregate
payments of approximately $64 million, as set forth below. In addition, we
have options to acquire 26 additional B737s. We expect to finance the new
planes with leases, long-term debt or internally generated cash. During the
first quarter of 2004, we converted two 737-900 aircraft we had on firm order
with Boeing for two 737-800s. The planes are due for delivery in February and
July of 2005. The following table summarizes aircraft deliveries by year and
payments from April 1, 2004 to December 31, 2004 and by fiscal year thereafter: Delivery Period - Firm OrdersApril 1-December 31,
    
    BeyondAircraft
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    2008
    
    TotalBoeing 737-800
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2Total
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2Payments (Millions)
    
    $
    14.8
    
    
    $
    49.3
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    64.1
 The following table provides a summary of our current and long-term debt
obligations, capital lease obligations, operating lease commitments and
aircraft purchase commitments as of March 31, 2004. This table excludes other
obligations that we may have, such as pension obligations and routine purchase
obligations entered into in the normal course of business. April 1-December 31,
    
    Beyond(in millions)
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    2008
    
    TotalCurrent and long-term debt
    
    $
    193.1
    
    
    $
    48.7
    
    
    $
    52.0
    
    
    $
    55.0
    
    
    $
    208.2
    
    
    $
    454.0
    
    
    $
    1,011.0Capital lease obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating lease commitments
    
    
    122.0
    
    
    
    180.3
    
    
    
    142.2
    
    
    
    111.3
    
    
    
    106.8
    
    
    
    579.9
    
    
    
    1,242.5Aircraft purchase commitments
    
    
    14.8
    
    
    
    49.3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    64.1Total
    
    $
    329.9
    
    
    $
    278.3
    
    
    $
    194.2
    
    
    $
    166.3
    
    
    $
    315.0
    
    
    $
    1,033.9
    
    
    $
    2,317.6
 Operating Leases
We are the 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 to us. 20




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##### Table of Contents



These leasing
entities meet the criteria for variable interest entities as defined in
Financial Accounting Standards Board (FASB) Interpretation No. 46,
Consolidation of Variable Interest Entities. However, because we are not the
primary beneficiary of the entitys expected gains or losses, we do not
consolidate these entities. The leasing arrangements involved contain terms
consistent with market terms at their inception and do not include residual
value guarantees made by us, fixed-price purchase obligations or similar
features that would obligate us to absorb the majority of expected losses of
the variable interest entities. Our expected exposure under these types of
lease arrangements is the remaining lease payments reflected in the
table above and lease return provisions
which are recorded when probable and estimable. 
 ITEM 3. Quantitative and Qualitative Disclosure about Market Risk
There have been no material changes in market risk from the information
provided in Item 7A Quantitative and Qualitative Disclosure About Market Risk
in our 2003 10-K except as follows: Fuel Hedging
We purchase jet fuel at prevailing market prices, and seek to manage market
risk through execution of a documented hedging strategy. We utilize financial
derivative 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 March 31, 2004, Air Group had fuel
hedge contracts in place to hedge 123.1 million gallons of its expected jet
fuel usage in 2004, 156.7 million gallons in 2005 and 31.1 million gallons in
2006. This represents 40%, 38% and 7% of Air Groups anticipated fuel
consumption in 2004, 2005 and 2006, respectively. Prices of these agreements
range from $27 to $29 per crude oil barrel. We estimate that a 10% increase or
decrease in crude oil prices as of March 31, 2004 would impact realized hedging
gains (which are recorded in Aircraft Fuel) by approximately $9.0 million. We account for our fuel hedge derivative
instruments as cash flow hedges as defined by SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended. All changes in
fair value that are considered to be effective hedges are recorded in
accumulated other comprehensive income (loss) until the underlying jet fuel is
consumed. As of March 31, 2003 and 2004, the fair values of our fuel hedge positions were
$12.8 million and $32.4 million, respectively. All of the 2003 fair value
amounts and $19.2 million of the 2004 fair value amounts were included in
prepaid and other current asset in the balance sheets. The remaining 2004 fair
value amount of $13.2 million is reflected in other assets in the balance
sheets. During 2003 and 2004, we recognized $7.8 million and $3.1 million,
respectively, in realized hedging gains. These amounts are reflected in
aircraft fuel in our statements of operations. During the three months ended March 31, 2003 and 2004, we recorded gains of
$0.7 million and $0.4 million, respectively, related to hedge ineffectiveness.
These amounts are reflected as non-operating income in other-net in our
statements of operations. During the three months ended March 31, 2003 and 2004, we recorded a net loss
of $0.9 million and a net gain of $8.3 million, respectively, in other
comprehensive income (loss). These amounts include the change in effectiveness
as related to the change in fair market value for future derivative hedge
instruments and the removal of the effective portion of derivative hedge
instruments that matured during 2003 and 2004. 21




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Financial Market Risk
During the first quarter of 2004, we issued $62.6 million of debt secured by
flight equipment, having interest rates that vary with LIBOR and payment terms
ranging from 14 to 16 years. 
 ITEM 4.CONTROLS AND PROCEDURES
As of March 31, 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 certifying officers concluded, based on their evaluation, that disclosure
controls and procedures were effective. We made no changes in our internal controls over financial reporting during the
fiscal quarter ended March 31, 2004, that our certifying officers concluded
materially affected, or are reasonably likely to materially effect, our
internal control over financial reporting. We intend to regularly 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. 22




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PART II. OTHER INFORMATION 
 ITEM 1. Legal Proceedings
  
 ITEM 6. Exhibits and Reports on Form 8-K
See Exhibit Index on page 25. No reports on form 8-K were filed this quarter. 23




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Signatures
Pursuant to the requirements of the Securities Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized. ALASKA AIRLINES, INC.  Date: May 11, 2004 /s/ Brandon S. Pedersen   /s/ Bradley D. Tilden   24




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EXHIBIT INDEX Pursuant to Item 601(a)(2) of Regulation S-K, this Exhibit Index immediately
precedes the exhibits. The following exhibits are
numbered in accordance with Item 601 of Regulation S-K. Exhibit No.
    
    Description31.1(1)
    
    Section 302 Certification of
Chief Executive Officer Pursuant to 18 U.S.C. Section 135031.2(1)
    
    Section 302 Certification of
Chief Financial Officer Pursuant to 18 U.S.C. Section 135032.1(1)
    
    Section 906 Certification of
Chief Executive Officer Pursuant to 18 U.S.C. Section 135032.2(1)
    
    Section 906 Certification of
Chief Financial Officer Pursuant to 18 U.S.C. Section 1350
    25