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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-Q

(Mark One)

|/x/ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- | ---------------------------------------------------------------------------------------

For the quarterly period ended September 30, 2000

or

|/ / | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- | ----------------------------------------------------------------------------------------

For the transition period from  to

Commission file number 1-8957

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ALASKA AIRLINES, INC.(Exact name of registrant as specified in its charter)

|Alaska(State or other jurisdiction of
incorporation or organization) |  | 92-0009235(I.R.S. Employer
Identification No.)
|-------------------------------------------------------------------- |  | ----------------------------------------------

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19300 Pacific Highway South, Seattle, Washington 98188(Address of principal executive offices)

Registrant's
telephone number, including area code:(206) 431-7079

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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 / /

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 September 30, 2000.

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## 

PART I. FINANCIAL STATEMENTS

ITEM 1. Financial Statements

BALANCE SHEET (unaudited)       Alaska Airlines, Inc.

ASSETS

|                                               |  | December 31,
1999 |         | September 30,
2000
|---------------------------------------------- |  | ----------------- | ------- | ------------------
|
|Current Assets                                 |  |                   |         |                   
|Cash and cash equivalents                      |  | $                 | 132.3   |                   
|Marketable securities                          |  |                   | 196.5   |                   
|Receivables from related companies             |  |                   | 27.1    |                   
|Receivablesnet                                |  |                   | 70.9    |                   
|Inventories and supplies                       |  |                   | 29.9    |                   
|Prepaid expenses and other assets              |  |                   | 120.5   |                   
|                                               |  |                   |         |                   
|Total Current Assets                           |  |                   | 577.2   |                   
|                                               |  |                   |         |                   
|Property and Equipment                         |  |                   |         |                   
|Flight equipment                               |  |                   | 1,286.2 |                   
|Other property and equipment                   |  |                   | 280.1   |                   
|Deposits for future flight equipment           |  |                   | 163.8   |                   
|                                               |  |                   |         |                   
|                                               |  |                   | 1,730.1 |                   
|Less accumulated depreciation and amortization |  |                   | 421.6   |                   
|                                               |  |                   |         |                   
|                                               |  |                   | 1,308.5 |                   
|                                               |  |                   |         |                   
|Capital leases:                                |  |                   |         |                   
|Flight and other equipment                     |  |                   | 44.4    |                   
|Less accumulated amortization                  |  |                   | 31.6    |                   
|                                               |  |                   |         |                   
|                                               |  |                   | 12.8    |                   
|                                               |  |                   |         |                   
|Total Property and EquipmentNet               |  |                   | 1,321.3 |                   
|                                               |  |                   |         |                   
|Intangible AssetsSubsidiaries                 |  |                   | 13.5    |                   
|                                               |  |                   |         |                   
|Other Assets                                   |  |                   | 69.2    |                   
|                                               |  |                   |         |                   
|Total Assets                                   |  | $                 | 1,981.2 |                   
|                                               |  |                   |         |                   

See
accompanying notes to financial statements.

2

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## 

BALANCE SHEET (unaudited)       Alaska Airlines, Inc.

LIABILITIES AND SHAREHOLDER'S EQUITY

|                                                                |  | December 31,
1999 |         | September 30,
2000
|--------------------------------------------------------------- |  | ----------------- | ------- | ------------------
|
|Current Liabilities                                             |  |                   |         |                   
|Accounts payable                                                |  | $                 | 88.3    |                   
|Payables to related companies                                   |  |                   | 126.9   |                   
|Accrued aircraft rent                                           |  |                   | 68.3    |                   
|Accrued wages, vacation and payroll taxes                       |  |                   | 70.7    |                   
|Other accrued liabilities                                       |  |                   | 89.6    |                   
|Air traffic liability                                           |  |                   | 183.2   |                   
|Current portion of long-term debt and capital lease obligations |  |                   | 66.5    |                   
|                                                                |  |                   |         |                   
|Total Current Liabilities                                       |  |                   | 693.5   |                   
|                                                                |  |                   |         |                   
|Long-Term Debt and Capital Lease Obligations                    |  |                   | 337.0   |                   
|                                                                |  |                   |         |                   
|Other Liabilities and Credits                                   |  |                   |         |                   
|Deferred income taxes                                           |  |                   | 143.3   |                   
|Deferred revenue                                                |  |                   | 34.2    |                   
|Other liabilities                                               |  |                   | 104.3   |                   
|                                                                |  |                   |         |                   
|                                                                |  |                   | 281.8   |                   
|                                                                |  |                   |         |                   
|Shareholder's Equity                                            |  |                   |         |                   
|Common stock, $1 par value                                      |  |                   |         |                   
|Authorized: 1,000 shares                                        |  |                   |         |                   
|Issued: 1999 and 2000500 shares                                |  |                   |        |                   
|Capital in excess of par value                                  |  |                   | 225.8   |                   
|Retained earnings                                               |  |                   | 443.1   |                   
|                                                                |  |                   |         |                   
|                                                                |  |                   | 668.9   |                   
|                                                                |  |                   |         |                   
|Total Liabilities and Shareholder's Equity                      |  | $                 | 1,981.2 |                   
|                                                                |  |                   |         |                   

See
accompanying notes to financial statements.

3

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## 

CONSOLIDATED STATEMENT OF INCOME (unaudited)       Alaska Airlines, Inc.

|                               |  | Three Months Ended
September 30 |      
|------------------------------ |  | ------------------------------- | -----
|
|
|Operating Revenues             |  |                                 |      
|Passenger                      |  | $                               | 435.6
|Freight and mail               |  |                                 | 21.9 
|Othernet                      |  |                                 | 18.6 
|                               |  |                                 |      
|Total Operating Revenues       |  |                                 | 476.1
|                               |  |                                 |      
|Operating Expenses             |  |                                 |      
|Wages and benefits             |  |                                 | 137.5
|Contracted services            |  |                                 | 14.1 
|Aircraft fuel                  |  |                                 | 59.5 
|Aircraft maintenance           |  |                                 | 23.7 
|Aircraft rent                  |  |                                 | 40.1 
|Food and beverage service      |  |                                 | 13.1 
|Commissions                    |  |                                 | 26.7 
|Other selling expenses         |  |                                 | 21.7 
|Depreciation and amortization  |  |                                 | 16.9 
|Loss on sale of assets         |  |                                 | 0.2  
|Landing fees and other rentals |  |                                 | 18.3 
|Other                          |  |                                 | 28.6 
|                               |  |                                 |      
|Total Operating Expenses       |  |                                 | 400.4
|                               |  |                                 |      
|Operating Income               |  |                                 | 75.7 
|                               |  |                                 |      
|Nonoperating Income (Expense)  |  |                                 |      
|Interest income                |  |                                 | 5.5  
|Interest expense               |  |                                 | (3.6 
|Interest capitalized           |  |                                 | 2.2  
|Othernet                      |  |                                 | 0.5  
|                               |  |                                 |      
|                               |  |                                 | 4.6  
|                               |  |                                 |      
|Income before income tax       |  |                                 | 80.3 
|Income tax expense             |  |                                 | 31.6 
|                               |  |                                 |      
|Net Income                     |  | $                               | 48.7 
|                               |  |                                 |      

See
accompanying notes to financial statements.

4

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## 

CONSOLIDATED STATEMENT OF INCOME (unaudited)       Alaska Airlines, Inc.

|                                                                             |  | Nine Months Ended September 30 |        
|---------------------------------------------------------------------------- |  | ------------------------------ | -------
|
|
|Operating Revenues                                                           |  |                                |        
|Passenger                                                                    |  | $                              | 1,157.1
|Freight and mail                                                             |  |                                | 60.6   
|Othernet                                                                    |  |                                | 58.9   
|                                                                             |  |                                |        
|Total Operating Revenues                                                     |  |                                | 1,276.6
|                                                                             |  |                                |        
|Operating Expenses                                                           |  |                                |        
|Wages and benefits                                                           |  |                                | 390.5  
|Contracted services                                                          |  |                                | 40.7   
|Aircraft fuel                                                                |  |                                | 144.2  
|Aircraft maintenance                                                         |  |                                | 69.1   
|Aircraft rent                                                                |  |                                | 120.5  
|Food and beverage service                                                    |  |                                | 37.0   
|Commissions                                                                  |  |                                | 73.2   
|Other selling expenses                                                       |  |                                | 61.7   
|Depreciation and amortization                                                |  |                                | 49.3   
|Loss on sale of assets                                                       |  |                                | 0.4    
|Landing fees and other rentals                                               |  |                                | 51.7   
|Other                                                                        |  |                                | 80.8   
|Special chargeMileage Plan                                                  |  |                                |       
|                                                                             |  |                                |        
|Total Operating Expenses                                                     |  |                                | 1,119.1
|                                                                             |  |                                |        
|Operating Income                                                             |  |                                | 157.5  
|                                                                             |  |                                |        
|Nonoperating Income (Expense)                                                |  |                                |        
|Interest income                                                              |  |                                | 16.3   
|Interest expense                                                             |  |                                | (11.1  
|Interest capitalized                                                         |  |                                | 5.8    
|Othernet                                                                    |  |                                | 3.0    
|                                                                             |  |                                |        
|                                                                             |  |                                | 14.0   
|                                                                             |  |                                |        
|Income before income tax and accounting change                               |  |                                | 171.5  
|Income tax expense                                                           |  |                                | 67.4   
|                                                                             |  |                                |        
|Income before accounting change                                              |  |                                | 104.1  
|Cumulative effect of accounting change, net of income taxes of $35.6 million |  |                                |       
|                                                                             |  |                                |        
|Net Income (Loss)                                                            |  | $                              | 104.1  
|                                                                             |  |                                |        

See
accompanying notes to financial statements.

5

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## 

STATEMENT OF SHAREHOLDER'S EQUITY (unaudited)       Alaska Airlines, Inc.

|                                                      |  | Common
Stock |   | Capital in
Excess of
Par Value |   | Retained
Earnings |  | Total |      
|----------------------------------------------------- |  | ------------ | - | ------------------------------ | - | ----------------- |  | ----- | -----
|
|Balances at December 31, 1999                         |  | $            |  |                                | $ | 225.8             |  | $     | 443.1
|Net loss for the nine months ended September 30, 2000 |  |              |   |                                |   |                   |  |       | (41.7
|                                                      |  |              |   |                                |   |                   |  |       |      
|Balances at September 30, 2000                        |  | $            |  |                                | $ | 225.8             |  | $     | 401.4
|                                                      |  |              |   |                                |   |                   |  |       |      

See
accompanying notes to financial statements.

6

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## 

STATEMENT OF CASH FLOWS (unaudited)       Alaska Airlines, Inc.

|                                                            |                                               | Nine Months Ended
September 30 |       
|----------------------------------------------------------- | --------------------------------------------- | ------------------------------ | ------
|
|
|Cash flows from operating activities:                       |                                               |                                |       
|Net income (loss)                                           |                                               | $                              | 104.1 
|Adjustments to reconcile net income (loss) to cash:         |                                               |                                |       
|                                                            | Cumulative effect of accounting change        |                                |       
|                                                            | Special chargeMileage Plan                   |                                |       
|                                                            | Depreciation and amortization                 |                                |       
|                                                            | Amortization of airframe and engine overhauls |                                |       
|                                                            | Loss on sale of assets                        |                                |       
|                                                            | Increase (decrease) in deferred income taxes  |                                |       
|                                                            | Increase in accounts receivable               |                                |       
|                                                            | Decrease in other current assets              |                                |       
|                                                            | Increase in air traffic liability             |                                |       
|                                                            | Increase in other current liabilities         |                                |       
|                                                            | Othernet                                     |                                |       
|                                                            |                                               |                                |       
|Net cash provided by operating activities                   |                                               |                                | 301.5 
|                                                            |                                               |                                |       
|Cash flows from investing activities:                       |                                               |                                |       
|Proceeds from disposition of assets                         |                                               |                                | 0.2   
|Purchases of marketable securities                          |                                               |                                | (98.7 
|Sales and maturities of marketable securities               |                                               |                                | 205.9 
|Restricted deposits                                         |                                               |                                | 3.9   
|Additions to flight equipment deposits                      |                                               |                                | (106.7
|Additions to property and equipment                         |                                               |                                | (241.4
|                                                            |                                               |                                |       
|Net cash used in investing activities                       |                                               |                                | (236.8
|                                                            |                                               |                                |       
|Cash flows from financing activities:                       |                                               |                                |       
|Proceeds from issuance of long-term debt                    |                                               |                                |      
|Long-term debt and capital lease payments                   |                                               |                                | (17.6 
|                                                            |                                               |                                |       
|Net cash provided by (used in) financing activities         |                                               |                                | (17.6 
|                                                            |                                               |                                |       
|Net change in cash and cash equivalents                     |                                               |                                | 47.1  
|Cash and cash equivalents at beginning of period            |                                               |                                | 29.1  
|                                                            |                                               |                                |       
|Cash and cash equivalents at end of period                  |                                               | $                              | 76.2  
|                                                            |                                               |                                |       
|Supplemental disclosure of cash paid during the period for: |                                               |                                |       
|                                                            | Interest (net of amount capitalized)          |                                | $     
|                                                            | Income taxes                                  |                                |       

Noncash
investing and financing activities:

2000A
flight simulator was transferred to Alaska Air Group Leasing in exchange for a $2.4 million note receivable and a $0.6 million reduction in its payable to Alaska Air Group.

See
accompanying notes to financial statements.

7

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## 

NOTES TO FINANCIAL STATEMENTS THAT HAVE CHANGED SIGNIFICANTLY
DURING THE NINE MONTHS ENDED SEPTEMBER 30, 2000
Alaska Airlines, Inc.

Note 1. Basis of presentation

The accompanying unaudited financial statements of Alaska Airlines, Inc. (the Company or Alaska), 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, 1999. They include all adjustments that are, in the opinion of management, necessary
for a fair presentation of the results for the interim periods. The adjustments made were of a normal recurring nature.

The
Company is a wholly owned subsidiary of Alaska Air Group, Inc. (Air Group) whose principal subsidiaries are Alaska Airlines, Inc. and Horizon Air
Industries, Inc.

Note 2. Prepaid Expenses and Other Current Assets

At September 30, 2000, other current assets included $38.5 million of restricted deposits that will be used to pay certain current liabilities.
At December 31, 1999, these deposits were included with other assets. These deposits are yen-denominated investments that are held to repay yen-denominated borrowings
that are due in the next 12 months.

Note 3. Frequent Flyer Program

(a) Change in Accounting Principle

In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin 101 (SAB 101), Revenue Recognition in Financial Statements.
SAB 101 gives specific guidance on the conditions that must be met before revenue may be recognized, and in June 2000 Alaska changed its method of accounting for the sale of miles in its
Mileage Plan. Under the new method, a majority of the sales proceeds is deferred, and recognized when the award transportation is provided. The deferred proceeds are recognized as passenger revenue
for awards issued on Alaska and as other revenue-net for awards issued on other airlines. In connection with the change, Alaska recognized a $56.9 million cumulative effect charge,
net of income taxes of $35.6 million, effective January 1, 2000. Accordingly, results for the first quarter 2000 have been restated.

(b) Special ChargeMileage Plan

In June 2000, Alaska recorded a $24.0 million special charge to recognize the increased incremental cost of travel awards earned by flying on
Alaska and travel partners. The higher cost is due to an increase in the estimated costs Alaska incurs to acquire awards on other airlines for its Mileage Plan members, as well as lower assumed
forfeiture of miles.

8

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(c) Balance Sheet Classification of Frequent Flyer Liability

Alaska's Mileage Plan liabilities are included under the following balance sheet captions.

|                               |                           | December 31, 1999 |      | September 30, 2000
|------------------------------ | ------------------------- | ----------------- | ---- | ------------------
|
|Current Liabilities:           |                           |                   |      |                   
|                               | Other accrued liabilities |                   | $    | 40.0              
|Other Liabilities and Credits: |                           |                   |      |                   
|                               | Deferred revenue          |                   |      |                  
|                               | Other liabilities         |                   |      |                  
|                               |                           |                   |      |                   
|Total Liabilities              |                           | $                 | 40.0 |                   
|                               |                           |                   |      |                   

(d) Restated First Quarter 2000

The following table shows Alaska's previously reported results and the restated results for the change in accounting principle for the sale of miles.

|                                                         |                  | 1st Quarter 2000 |      
|-------------------------------------------------------- | ---------------- | ---------------- | -----
|
|
|Operating Revenues:                                      |                  |                  |      
|                                                         | Passenger        |                  | $    
|                                                         | Freight and mail |                  |      
|                                                         | Othernet        |                  |      
|                                                         |                  |                  |      
|Total Revenues                                           |                  | $                | 394.3
|                                                         |                  |                  |      
|Loss before accounting change                            |                  | $                | (10.9
|Cumulative effect of accounting change net of income tax |                  |                  |     
|                                                         |                  |                  |      
|Net Loss                                                 |                  | $                | (6.5 
|                                                         |                  |                  |      

(e) Pro Forma Results for 1999

The following table shows Alaska's previously reported results and what those results would have been on a pro forma basis if the new accounting policy for the
sale of miles had been in effect in 1999.

|                    |                  | Three Months Ended
September 30, 1999 |       |       |   |      
|------------------- | ---------------- | ------------------------------------- | ----- | ----- | - | -----
|
|
|
|
|Operating Revenues: |                  |                                       |       |       |   |      
|                    | Passenger        |                                       | $     | 435.6 |   | $    
|                    | Freight and mail |                                       |       | 21.9  |   |      
|                    | Othernet        |                                       |       | 18.6  |   |      
|                    |                  |                                       |       |       |   |      
|Total Revenues      |                  | $                                     | 476.1 |       | $ | 474.6
|                    |                  |                                       |       |       |   |      
|Net Income          |                  | $                                     | 48.7  |       | $ | 47.9 
|                    |                  |                                       |       |       |   |      

9

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Alaska Airlines       Financial and Statistical Data

|                                               |  | Quarter Ended September 30 |       | Nine Months Ended September 30 |  
|---------------------------------------------- |  | -------------------------- | ----- | ------------------------------ | -
|
|
|Operating Revenues:                            |  |                            |       |                                |  
|Passenger                                      |  | $                          | 435.6 |                                | $
|Freight and mail                               |  |                            | 21.9  |                                |  
|Othernet                                      |  |                            | 18.6  |                                |  
|                                               |  |                            |       |                                |  
|Total Operating Revenues                       |  |                            | 476.1 |                                |  
|                                               |  |                            |       |                                |  
|Operating Expenses:                            |  |                            |       |                                |  
|Wages and benefits                             |  |                            | 130.0 |                                |  
|Employee profit sharing                        |  |                            | 7.5   |                                |  
|Contracted services                            |  |                            | 14.1  |                                |  
|Aircraft fuel                                  |  |                            | 59.5  |                                |  
|Aircraft maintenance                           |  |                            | 23.7  |                                |  
|Aircraft rent                                  |  |                            | 40.1  |                                |  
|Food and beverage service                      |  |                            | 13.1  |                                |  
|Commissions                                    |  |                            | 26.7  |                                |  
|Other selling expenses                         |  |                            | 21.7  |                                |  
|Depreciation and amortization                  |  |                            | 16.9  |                                |  
|Loss on sale of assets                         |  |                            | 0.2   |                                |  
|Landing fees and other rentals                 |  |                            | 18.3  |                                |  
|Other                                          |  |                            | 28.6  |                                |  
|Special chargeMileage Plan                    |  |                            |       |                                |  
|                                               |  |                            |       |                                |  
|Total Operating Expenses                       |  |                            | 400.4 |                                |  
|                                               |  |                            |       |                                |  
|Operating Income                               |  |                            | 75.7  |                                |  
|                                               |  |                            |       |                                |  
|Interest income                                |  |                            | 5.5   |                                |  
|Interest expense                               |  |                            | (3.6  | )                              |  
|Interest capitalized                           |  |                            | 2.2   |                                |  
|Othernet                                      |  |                            | 0.5   |                                |  
|                                               |  |                            |       |                                |  
|                                               |  |                            | 4.6   |                                |  
|                                               |  |                            |       |                                |  
|Income Before Income Tax and Accounting Change |  | $                          | 80.3  |                                | $
|                                               |  |                            |       |                                |  
|Operating Statistics:                          |  |                            |       |                                |  
|Revenue passengers (000)                       |  |                            | 3,813 |                                |  
|RPMs (000,000)                                 |  |                            | 3,265 |                                |  
|ASMs (000,000)                                 |  |                            | 4,641 |                                |  
|Passenger load factor                          |  |                            | 70.3  | %                              |  
|Breakeven load factor                          |  |                            | 56.7  | %                              |  
|Yield per passenger mile                       |  |                            | 13.34 | ¢                              |  
|Operating revenue per ASM                      |  |                            | 10.26 | ¢                              |  
|Operating expenses per ASM                     |  |                            | 8.63  | ¢                              |  
|Fuel cost per gallon                           |  |                            | 72.8  | ¢                              |  
|Fuel gallons (000,000)                         |  |                            | 81.8  |                                |  
|Average number of employees                    |  |                            | 9,419 |                                |  
|Aircraft utilization (blk hrs/day)             |  |                            | 11.7  |                                |  
|Operating fleet at period-end                  |  |                            | 88    |                                |  

---

NM
= Not Meaningful

10

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ITEM 2. Management's Discussion and Analysis of Results of Operations and Financial Condition

Forward-Looking Information

This report may contain forward-looking statements that are based on the best information currently available to management. 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. Forward-looking
statements are indicated by phrases such as "will", "should", "the Company believes", "we expect" or any other language indicating a prediction of future events. There can be no assurance that actual
developments will be those anticipated by the Company. Actual results could differ materially from those projected as a result of a number of factors, some of which the Company cannot predict or
control. For a discussion of these factors, please see Item 1 of the Company's Annual Report on Form 10-K for the year ended December 31, 1999.

Results of Operations

Third Quarter 2000 Compared with Third Quarter 1999

Net income for the third quarter of 2000 was $17.4 million compared with $48.7 million in 1999. Operating income for the third quarter of 2000
was $33.3 million compared with $75.7 million for 1999. The $42.4 million reduction in operating income was largely due to higher fuel prices, and higher labor and aircraft
maintenance costs. Financial and statistical data is shown on page 10. A discussion of this data follows.

Revenues

Capacity was reduced 3.2% in order to improve schedule reliability. Traffic dropped 1.2%, resulting in a 1.5 point increase in passenger load factor. Passenger
yields were up 4.9% (4.0% excluding the impact of a new accounting method for the sale of miles), primarily due to fuel-related fare increases. Yields were up in substantially all major
markets. The lower traffic combined with the higher yield resulted in a 3.7% increase in passenger revenue. In spite of the loss of the marketing alliance with Canadian Airlines in August 2000,
traffic and load factor in the Canadian market increased in September 2000.

Freight
and mail revenues decreased 9.6%, primarily due to lower freight volumes that resulted from 4.7% fewer flights operated, lower seafood shipments and more competition.

Other-net
revenues decreased $5.5 million (29.8%), due to a change in accounting for the sale of miles in Alaska's frequent flyer program. If the new accounting
method had been in effect in 1999, other-net revenues would have increased $1.4 million (11.6%).

Expenses

Operating expenses grew by 12.6% as a result of an 16.3% increase in cost per ASM. The increase in cost per ASM was largely due to higher fuel prices, higher
labor and aircraft maintenance costs and lower ASMs. Explanations of significant year-over-year changes in the components of operating expenses are as follows:



11

---



Nonoperating Income (Expense)Net nonoperating income decreased $2.9 million, primarily due to higher interest
expense resulting from new debt incurred in late 1999 and in the third quarter of 2000.

Nine Months 2000 Compared with Nine Months 1999

In accordance with guidance provided in the SEC's Staff Accounting Bulletin 101, Alaska changed its method of accounting for the sale of miles in its Mileage
Plan. In connection with the change, Alaska recognized a $56.9 million cumulative effect charge, net of income taxes of $35.6 million, effective January 1, 2000. The income before
accounting change for the nine months ended September 30, 2000 was $15.2 million compared with $104.1 million in 1999. Operating income for the first nine months of 2000 was
$26.5 million compared with $157.5 million for 1999.

The
$131.0 million reduction in operating income was primarily due to higher fuel prices ($74.4 million) and a special charge related to Mileage Plan estimates
($24.0 million). Changes in operating revenues and operating expenses are generally due to the same reasons stated above in the third quarter comparison.

12

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Liquidity and Capital Resources

The table below presents the major indicators of financial condition and liquidity.

|                                                                                                  |  | December 31,
1999 |         | September 30,
2000 |   | Change  |  
|------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | ------------------ | - | ------- | -
|
|Cash and marketable securities                                                                    |  | $                 | 328.8   |                    | $ | 383.3   |  
|Working capital (deficit)                                                                         |  |                   | (116.3  | )                  |   | (132.8  | )
|Long-term debt and capital lease obligations                                                      |  |                   | 337.0   |                    |   | 406.5   |  
|Shareholders' equity                                                                              |  |                   | 668.9   |                    |   | 627.2   |  
|Debt-to-capital                                                                                   |  |                   | 34%:66% |                    |   | 39%:61% |  
|Debt-to-capital assuming aircraft operating leases are capitalized at seven times annualized rent |  |                   | 67%:33% |                    |   | 69%:31% |  

The
Company's cash and marketable securities portfolio increased by $55 million during the first nine months of 2000. Operating activities provided $196 million of cash
during this period. Additional cash was provided by the issuance of $119 million of new debt. Another $37 million was provided by insurance proceeds from an aircraft accident and other
asset dispositions. Cash was used for $277 million of capital expenditures, including the purchase of five new Boeing 737 aircraft, flight equipment deposits and airframe and engine overhauls,
and for $20 million of debt repayment.

Aircraft AccidentOn January 31, 2000, Alaska Airlines flight 261 from Puerto Vallarta en route to San
Francisco, went down in the water off the coast of California near Point Mugu. The flight carried 83 passengers and five crew members. There were no survivors. Consistent with industry standards, the
Company maintains insurance against aircraft accidents. The Company expects substantially all accident response and civil litigation costs to be covered by insurance. However, any aircraft accident,
even if fully insured, could cause a negative public perception of the Company with adverse financial consequences. Principally as a result of added maintenance inspections Alaska carried out after
the accident, Alaska estimates that it canceled 6% of its flights in February and 3% of its flights in March.

Safety ActivitiesIn March 2000, to enhance existing lines of communication, Alaska established a "safety
hotline" for employees to contact the chairman's office directly regarding any safety concern. In April 2000, an independent team of outside safety experts began a full audit of the
maintenance, flight operations, hazardous materials handling and security areas of Alaska. The team presented its final report to Alaska in June 2000 and Alaska is implementing those
recommendations. Alaska has also hired a vice president of safety, who reports directly to the chairman.

CommitmentsAs of September 30, 2000, the Company had firm orders for 18 aircraft requiring aggregate payments
of approximately $475 million, as set forth below. In addition, Alaska has options to acquire 26 more B737s. Alaska expects to finance the new planes with either leases, long-term
debt or internally generated cash.

|                    |  | Delivery PeriodFirm Orders
|------------------- |  | ---------------------------
|
|Boeing B737-700     |  |                            
|Boeing B737-900     |  |                            
|                    |  |                            
|Total               |  |                            
|                    |  |                            
|Payments (Millions) |  | $                          
|                    |  |                            

13

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PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

In December 1998, search warrants and a grand jury subpoena (for the U.S. District Court for the Northern District of California) were served on Alaska,
initiating an investigation into the Company's Oakland maintenance base by the U.S. Attorney for the Northern District of California. Alaska has cooperated with the U.S. Attorney's initial and
subsequent requests for information concerning the
Company's maintenance operations. In addition, the Federal Aviation Administration (FAA) issued a letter of investigation (LOI) to Alaska relating to maintenance performed on an MD-80
aircraft. In April 1999, the FAA issued a notice of proposed civil penalty for $44,000. In July 1999, Alaska responded informally to the notice, disputing that any violation occurred,
and to date the FAA has not taken any further action. The Company understands that information developed by the National Transportation Safety Board in connection with the crash of flight 261 on
January 31, 2000 is being shared with the U.S. Attorney and that the U.S. Attorney is using this information, along with other records relating to the aircraft Alaska has produced, to evaluate
whether any crimes were committed in connection with flight 261. To the Company's knowledge, no charges have been filed as a result of the grand jury investigation.

Alaska
is currently a defendant in a number of lawsuits relating to flight 261. The Company is unable to predict the amount of claims that may ultimately be made against it or how
those claims might be resolved. Consistent with industry standards, the Company maintains insurance against aircraft accidents.

In
April 2000, the FAA began an audit of Alaska's maintenance and flight operations departments to ensure adherence to mandated procedures. During the audit, the FAA requested
that Alaska take a number of actions, which Alaska has done or is currently implementing. In June 2000, the FAA informed Alaska that it was proposing to amend Alaska's operations specification
to suspend the Company's ability to perform heavy maintenance on its aircraft. In June 2000, Alaska submitted an Airworthiness and Operations Action Plan describing numerous steps Alaska would
take to address the FAA's concerns. In response to this plan the FAA withdrew its proposal. The FAA also requested that the Company submit a growth plan to demonstrate its ability to handle
operationally its planned fleet additions. In June 2000, Alaska submitted its growth plan to the FAA. In July 2000, Alaska responded in writing to each of the FAA's findings from its
April audit. The FAA has issued a number of LOIs stemming from the resulting increased FAA oversight. Alaska is investigating and responding to these LOIs, which may be followed by proposed civil
penalties. The Company has not been informed what further actions, if any, the FAA intends to take with respect to these matters.

The
Company cannot predict the outcome of any of the pending civil or potential criminal proceedings described above. As a result, the Company can give no assurance that these
proceedings, if determined adversely to Alaska, would not have a material adverse effect on the financial position or results of operations of the Company.

ITEM 5. Other Information

Alliances with Other Airlines

In August 2000, due to its merger with Air Canada, Canadian Airlines canceled its marketing alliance with Alaska and Horizon.

ITEM 6. Exhibits and Reports on Form 8-K



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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.
Registrant                                                         |  |  |  | 
|---------------------------------------------------------------------------------------- |  |  |  | 
|Date: November 3, 2000                                                                   |  |  |  | 
|/s/JOHN F. KELLYJohn F. Kelly Chairman and Chief Executive Officer                       |  |  |  | 
|/s/BRADLEY D. TILDENBradley D. Tilden Vice President/Finance and Chief Financial Officer |  |  |  | 

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