##### Table of Contents



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 1934

For the quarterly period ended September 30, 2002.

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

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.)

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

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

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
October 31, 2002.

1



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TABLE OF CONTENTS



|                              |                                                                                                                           |                                                        |  |  |  |  |  | 
|----------------------------- | ------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------ |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | ITEM 1. Financial Statements                                                                                             
|                              |                                                                                                                           | BALANCE SHEETS (unaudited)                            
|                              |                                                                                                                           | STATEMENTS OF INCOME (unaudited)                      
|                              |                                                                                                                           | STATEMENTS OF CASH FLOWS (unaudited)                  
|                              |                                                                                                                           | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
|                              | ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Information
|                              | ITEM 3. Quantitative and Qualitative Disclosure about Market Risk                                                        
|                              | ITEM 4. Controls and Procedures                                                                                          
|PART II. OTHER INFORMATION   
|                              | ITEM 1. Legal Proceedings                                                                                                
|                              | ITEM 5. Other Information                                                                                                
|                              | ITEM 6. Exhibits and Reports on Form 8-K                                                                                 
|CERTIFICATIONS               
|EXHIBIT 99.1                 
|EXHIBIT 99.2                 



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##### Table of Contents












PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
BALANCE SHEETS (unaudited)
Alaska Airlines, Inc.

|                                               |  |              |         |               |  |   |         | 
|---------------------------------------------- |  | ------------ | ------- | ------------- |  | - | ------- | 
|                                               |  | Restated     |         |               |  |  
|                                               |  | December 31, |         | September 30,
|(In Millions)                                  |  | 2001         |         | 2002         
|                                               |  |              |         |              
|ASSETS                                         |  |              |         |               |  |   |         | 
|                                              
|                                              
|                                              
|                                              
|Current Assets                                 |  |              |         |               |  |   |         | 
|                                              
|                                              
|                                              
|                                              
|Cash and cash equivalents                      |  | $            | 490.2   |               |  | $ | 308.1   | 
|                                              
|                                              
|                                              
|                                              
|Marketable securities                          |  |              | 170.4   |               |  |   | 354.4   | 
|                                              
|                                              
|                                              
|                                              
|Receivables from related companies             |  |              | 71.2    |               |  |   | 83.9    | 
|                                              
|                                              
|                                              
|                                              
|Receivables  net                              |  |              | 67.0    |               |  |   | 84.6    | 
|                                              
|                                              
|                                              
|                                              
|Inventories and supplies  net                 |  |              | 37.8    |               |  |   | 39.3    | 
|                                              
|                                              
|                                              
|                                              
|Prepaid expenses and other assets              |  |              | 92.4    |               |  |   | 87.2    | 
|                                               |  |              |         |               |  |   |         | 
|Total Current Assets                           |  |              | 929.0   |               |  |   | 957.5   | 
|                                               |  |              |         |               |  |   |         | 
|Property and Equipment                         |  |              |         |               |  |   |         | 
|                                              
|                                              
|                                              
|                                              
|Flight equipment                               |  |              | 1,888.0 |               |  |   | 1,922.3 | 
|                                              
|                                              
|                                              
|                                              
|Other property and equipment                   |  |              | 326.7   |               |  |   | 362.7   | 
|                                              
|                                              
|                                              
|                                              
|Deposits for future flight equipment           |  |              | 71.6    |               |  |   | 61.2    | 
|                                               |  |              |         |               |  |   |         | 
|                                               |  |              | 2,286.3 |               |  |   | 2,346.2 | 
|                                              
|                                              
|                                              
|                                              
|Less accumulated depreciation and amortization |  |              | 609.1   |               |  |   | 688.5   | 
|                                               |  |              |         |               |  |   |         | 
|Total Property and Equipment  Net             |  |              | 1,677.2 |               |  |   | 1,657.7 | 
|                                               |  |              |         |               |  |   |         | 
|Goodwill                                       |  |              | 12.5    |               |  |   | 12.5    | 
|                                               |  |              |         |               |  |   |         | 
|Other Assets                                   |  |              | 131.7   |               |  |   | 138.9   | 
|                                               |  |              |         |               |  |   |         | 
|Total Assets                                   |  | $            | 2,750.4 |               |  | $ | 2,766.6 | 
|                                               |  |              |         |               |  |   |         | 

See accompanying notes to financial statements.

2



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##### Table of Contents



BALANCE SHEETS (unaudited)
Alaska Airlines, Inc.

|                                                                                       |                                |      |              |       |               |   |         |       | 
|-------------------------------------------------------------------------------------- | ------------------------------ | ---- | ------------ | ----- | ------------- | - | ------- | ----- | 
|                                                                                       |                                |      | Restated     |       |               |   |        
|                                                                                       |                                |      | December 31, |       | September 30,
|(In Millions Except Share Amounts)                                                     |                                | 2001 |              | 2002 
|                                                                                       |                                |      |              |      
|LIABILITIES AND SHAREHOLDERS EQUITY                                                   |                                |      |              |       |               |   |         |      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Current Liabilities                                                                    |                                |      |              |       |               |   |         |      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Accounts payable                                                                       |                                | $    | 96.1         |       |               | $ | 115.3   |      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Payables to related companies                                                          |                                |      | 4.4          |       |               |   | 4.0     |      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Accrued aircraft rent                                                                  |                                |      | 81.7         |       |               |   | 72.5    |      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Accrued wages, vacation and payroll taxes                                              |                                |      | 70.1         |       |               |   | 75.2    |      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Other accrued liabilities                                                              |                                |      | 191.4        |       |               |   | 166.9   |      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Air traffic liability                                                                  |                                |      | 218.7        |       |               |   | 232.6   |      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Current portion of long-term debt and
capital lease obligations                        |                                |      | 43.2         |       |               |   | 46.2    |      
|                                                                                       |                                |      |              |       |               |   |         |      
|Total Current Liabilities                                                              |                                |      | 705.6        |       |               |   | 712.7   |      
|                                                                                       |                                |      |              |       |               |   |         |      
|Long-Term Debt and Capital Lease Obligations                                           |                                |      | 847.9        |       |               |   | 843.7   |      
|                                                                                       |                                |      |              |       |               |   |         |      
|Other Liabilities and Credits                                                          |                                |      |              |       |               |   |         |      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Deferred income taxes                                                                  |                                |      | 188.9        |       |               |   | 182.7   |      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Deferred revenue                                                                       |                                |      | 165.8        |       |               |   | 165.9   |      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Other liabilities                                                                      |                                |      | 124.4        |       |               |   | 154.3   |      
|                                                                                       |                                |      |              |       |               |   |         |      
|                                                                                       |                                |      | 479.1        |       |               |   | 502.9   |      
|                                                                                       |                                |      |              |       |               |   |         |      
|Shareholders Equity                                                                   |                                |      |              |       |               |   |         |      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Common stock, $1 par value
Authorized: 1,000 shares
Issued: 2001 and 2002 - 500 shares |                                |      |             |       |               |   | -       |      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       | Capital in excess of par value |      |              | 324.8 |               |   |         | 324.8 | 
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Accumulated other comprehensive income (loss)                                          |                                |      | (3.1         | )     |               |   | 9.0     |      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Retained earnings                                                                      |                                |      | 396.1        |       |               |   | 373.5   |      
|                                                                                       |                                |      |              |       |               |   |         |      
|                                                                                       |                                |      | 717.8        |       |               |   | 707.3   |      
|                                                                                       |                                |      |              |       |               |   |         |      
|Total Liabilities and Shareholders Equity                                             |                                | $    | 2,750.4      |       |               | $ | 2,766.6 |      
|                                                                                       |                                |      |              |       |               |   |         |      

See accompanying notes to financial statements.

3



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##### Table of Contents






STATEMENTS OF INCOME (unaudited)
Alaska Airlines, Inc.

|                                |  |          |       |      |  |   |       |  
|------------------------------- |  | -------- | ----- | ---- |  | - | ----- | -
|Three Months Ended September 30 |  | Restated |       |      |  |  
|(In Millions)                   |  | 2001     |       | 2002
|                                |  |          |       |     
|Operating Revenues              |  |          |       |      |  |   |       |  
|                               
|                               
|                               
|                               
|Passenger                       |  | $        | 441.8 |      |  | $ | 467.1 |  
|                               
|                               
|                               
|                               
|Freight and mail                |  |          | 20.8  |      |  |   | 19.7  |  
|                               
|                               
|                               
|                               
|Other  net                     |  |          | 22.0  |      |  |   | 25.2  |  
|                                |  |          |       |      |  |   |       |  
|Total Operating Revenues        |  |          | 484.6 |      |  |   | 512.0 |  
|                                |  |          |       |      |  |   |       |  
|Operating Expenses              |  |          |       |      |  |   |       |  
|                               
|                               
|                               
|                               
|Wages and benefits              |  |          | 166.5 |      |  |   | 186.0 |  
|                               
|                               
|                               
|                               
|Contracted services             |  |          | 19.0  |      |  |   | 19.0  |  
|                               
|                               
|                               
|                               
|Aircraft fuel                   |  |          | 71.7  |      |  |   | 70.7  |  
|                               
|                               
|                               
|                               
|Aircraft maintenance            |  |          | 32.5  |      |  |   | 31.6  |  
|                               
|                               
|                               
|                               
|Aircraft rent                   |  |          | 33.7  |      |  |   | 32.1  |  
|                               
|                               
|                               
|                               
|Food and beverage service       |  |          | 14.5  |      |  |   | 17.8  |  
|                               
|                               
|                               
|                               
|Commissions                     |  |          | 16.3  |      |  |   | 12.1  |  
|                               
|                               
|                               
|                               
|Other selling expenses          |  |          | 26.3  |      |  |   | 26.1  |  
|                               
|                               
|                               
|                               
|Depreciation and amortization   |  |          | 27.4  |      |  |   | 29.5  |  
|                               
|                               
|                               
|                               
|Loss on sale of assets          |  |          | 0.6   |      |  |   | 0.5   |  
|                               
|                               
|                               
|                               
|Landing fees and other rentals  |  |          | 25.9  |      |  |   | 30.2  |  
|                               
|                               
|                               
|                               
|Other                           |  |          | 34.0  |      |  |   | 39.5  |  
|                                |  |          |       |      |  |   |       |  
|Total Operating Expenses        |  |          | 468.4 |      |  |   | 495.1 |  
|                                |  |          |       |      |  |   |       |  
|Operating Income                |  |          | 16.2  |      |  |   | 16.9  |  
|                                |  |          |       |      |  |   |       |  
|Nonoperating Income (Expense)   |  |          |       |      |  |   |       |  
|                               
|                               
|                               
|                               
|Interest income                 |  |          | 7.9   |      |  |   | 6.3   |  
|                               
|                               
|                               
|                               
|Interest expense, net           |  |          | (10.9 | )    |  |   | (10.8 | )
|                               
|                               
|                               
|                               
|U.S. government compensation    |  |          | 18.7  |      |  |   | 0.3   |  
|                               
|                               
|                               
|                               
|Other  net                     |  |          | (0.3  | )    |  |   | (2.3  | )
|                                |  |          |       |      |  |   |       |  
|                                |  |          | 15.4  |      |  |   | (6.5  | )
|                                |  |          |       |      |  |   |       |  
|Income before income tax        |  |          | 31.6  |      |  |   | 10.4  |  
|                               
|                               
|                               
|                               
|Income tax expense              |  |          | (10.2 | )    |  |   | (3.2  | )
|                                |  |          |       |      |  |   |       |  
|Net Income                      |  | $        | 21.4  |      |  | $ | 7.2   |  
|                                |  |          |       |      |  |   |       |  

See accompanying notes to financial statements.

4



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##### Table of Contents



STATEMENTS OF INCOME (unaudited)
Alaska Airlines, Inc.

|                                |  |          |         |      |  |   |         |  
|------------------------------- |  | -------- | ------- | ---- |  | - | ------- | -
|Nine Months Ended September 30  |  | Restated |         |      |  |  
|(In Millions)                   |  | 2001     |         | 2002
|                                |  |          |         |     
|Operating Revenues              |  |          |         |      |  |   |         |  
|                               
|                               
|                               
|                               
|Passenger                       |  | $        | 1,261.6 |      |  | $ | 1,274.9 |  
|                               
|                               
|                               
|                               
|Freight and mail                |  |          | 60.5    |      |  |   | 55.6    |  
|                               
|                               
|                               
|                               
|Other  net                     |  |          | 58.6    |      |  |   | 73.0    |  
|                                |  |          |         |      |  |   |         |  
|Total Operating Revenues        |  |          | 1,380.7 |      |  |   | 1,403.5 |  
|                                |  |          |         |      |  |   |         |  
|Operating Expenses              |  |          |         |      |  |   |         |  
|                               
|                               
|                               
|                               
|Wages and benefits              |  |          | 479.0   |      |  |   | 529.1   |  
|                               
|                               
|                               
|                               
|Contracted services             |  |          | 57.0    |      |  |   | 59.9    |  
|                               
|                               
|                               
|                               
|Aircraft fuel                   |  |          | 219.8   |      |  |   | 190.1   |  
|                               
|                               
|                               
|                               
|Aircraft maintenance            |  |          | 100.0   |      |  |   | 103.3   |  
|                               
|                               
|                               
|                               
|Aircraft rent                   |  |          | 104.0   |      |  |   | 95.7    |  
|                               
|                               
|                               
|                               
|Food and beverage service       |  |          | 42.4    |      |  |   | 47.9    |  
|                               
|                               
|                               
|                               
|Commissions                     |  |          | 50.4    |      |  |   | 40.6    |  
|                               
|                               
|                               
|                               
|Other selling expenses          |  |          | 78.9    |      |  |   | 78.8    |  
|                               
|                               
|                               
|                               
|Depreciation and amortization   |  |          | 76.5    |      |  |   | 86.8    |  
|                               
|                               
|                               
|                               
|Loss on sale of assets          |  |          | 1.8     |      |  |   | 0.7     |  
|                               
|                               
|                               
|                               
|Landing fees and other rentals  |  |          | 70.7    |      |  |   | 82.3    |  
|                               
|                               
|                               
|                               
|Other                           |  |          | 108.4   |      |  |   | 114.0   |  
|                                |  |          |         |      |  |   |         |  
|Total Operating Expenses        |  |          | 1,388.9 |      |  |   | 1,429.2 |  
|                                |  |          |         |      |  |   |         |  
|Operating Loss                  |  |          | (8.2    | )    |  |   | (25.7   | )
|                                |  |          |         |      |  |   |         |  
|Nonoperating Income (Expense)   |  |          |         |      |  |   |         |  
|                               
|                               
|                               
|                               
|Interest income                 |  |          | 24.2    |      |  |   | 17.4    |  
|                               
|                               
|                               
|                               
|Interest expense, net           |  |          | (29.8   | )    |  |   | (33.8   | )
|                               
|                               
|                               
|                               
|U.S. government compensation    |  |          | 18.7    |      |  |   | 0.3     |  
|                               
|                               
|                               
|                               
|Other  net                     |  |          | (1.7    | )    |  |   | 7.0     |  
|                                |  |          |         |      |  |   |         |  
|                                |  |          | 11.4    |      |  |   | (9.1    | )
|                                |  |          |         |      |  |   |         |  
|Income (loss) before income tax |  |          | 3.2     |      |  |   | (34.8   | )
|                               
|                               
|                               
|                               
|Income tax (expense) benefit    |  |          | (0.5    | )    |  |   | 12.2    |  
|                                |  |          |         |      |  |   |         |  
|Net
Income (Loss)               |  | $        | 2.7     |      |  | $ | (22.6   | )
|                                |  |          |         |      |  |   |         |  

See accompanying notes to financial statements.

5



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##### Table of Contents



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

|                                                      |                              |       |        |           |           |               |               |          |          |       |             |      |   |   |       |   |  |   |       |   | 
|----------------------------------------------------- | ---------------------------- | ----- | ------ | --------- | --------- | ------------- | ------------- | -------- | -------- | ----- | ----------- | ---- | - | - | ----- | - |  | - | ----- | - | 
|                                                      |                              |       |        |           |           |               |               |          |          |       | Accumulated |      |   |   |       |   |  |   |      
|                                                      |                              |       |        |           |           |               | Capital in    |          | Other    |       |             |      |   |   |       |   | 
|                                                      |                              |       | Common |           | Excess of |               | Comprehensive |          | Retained |       |             |      |  
|(In Millions)                                         |                              | Stock |        | Par Value |           | Income (Loss) |               | Earnings |          | Total
|                                                      |                              |       |        |           |           |               |               |          |          |      
|Balances at December 31, 2001:                        |                              |       |        |           |           |               |               |          |          |       |             |      |   |   |       |   |  |   |       |  
|                                                     
|                                                     
|                                                     
|                                                     
|As previously reported                                |                              | $     |       |           |           | $             | 324.8         |          |          | $     | (3.1        | )    |   | $ | 368.7 |   |  | $ | 690.4 |  
|                                                     
|                                                     
|                                                     
|                                                     
|Prior period adjustment (see Note 2)                  |                              |       |        |           |           |               |               |          |          |       |             |      |   |   | 27.4  |   |  |   | 27.4  |  
|                                                      |                              |       |        |           |           |               |               |          |          |       |             |      |   |   |       |   |  |   |       |  
|As restated                                           |                              |       |       |           |           |               | 324.8         |          |          |       | (3.1        | )    |   |   | 396.1 |   |  |   | 717.8 |  
|                                                      |                              |       |        |           |           |               |               |          |          |       |             |      |   |   |       |   |  |   |       |  
|Net loss for the nine months
ended September 30, 2002 |                              |       |        |           |           |               |               |          |          |       |             |      |   |   | (22.6 | ) |  |   | (22.6 | )
|                                                     
|                                                     
|                                                     
|                                                     
|Other comprehensive income (loss):                    |                              |       |        |           |           |               |               |          |          |       |             |      |   |   |       |   |  |   |       |  
|                                                     
|                                                     
|                                                     
|                                                     
|Related to fuel hedges:                               |                              |       |        |           |           |               |               |          |          |       |             |      |   |   |       |   |  |   |       |  
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Change in fair value         |       |        |           |           |               |               |          |          |       |             | 21.1 |   |   |       |   |  |   |       |   | 
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Reclassification to earnings |       |        |           |           |               |               |          |          |       |             | (4.4 | ) |   |       |   |  |   |       |   | 
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Income tax effect            |       |        |           |           |               |               |          |          |       |             | (6.6 | ) |   |       |   |  |   |       |   | 
|                                                      |                              |       |        |           |           |               |               |          |          |       |             |      |   |   |       |   |  |   |       |  
|                                                      |                              |       |        |           |           |               |               |          |          |       | 10.1        |      |   |   |       |   |  |   | 10.1  |  
|                                                      |                              |       |        |           |           |               |               |          |          |       |             |      |   |   |       |   |  |   |       |  
|Related to marketable securities:                     |                              |       |        |           |           |               |               |          |          |       |             |      |   |   |       |   |  |   |       |  
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Change in fair value         |       |        |           |           |               |               |          |          |       |             | 1.9  |   |   |       |   |  |   |       |   | 
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Reclassification to earnings |       |        |           |           |               |               |          |          |       |             | 0.7  |   |   |       |   |  |   |       |   | 
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Income tax effect            |       |        |           |           |               |               |          |          |       |             | (0.6 | ) |   |       |   |  |   |       |   | 
|                                                      |                              |       |        |           |           |               |               |          |          |       |             |      |   |   |       |   |  |   |       |  
|                                                      |                              |       |        |           |           |               |               |          |          |       | 2.0         |      |   |   |       |   |  |   | 2.0   |  
|                                                      |                              |       |        |           |           |               |               |          |          |       |             |      |   |   |       |   |  |   |       |  
|Total comprehensive loss                              |                              |       |        |           |           |               |               |          |          |       |             |      |   |   |       |   |  |   | (10.5 | )
|                                                      |                              |       |        |           |           |               |               |          |          |       |             |      |   |   |       |   |  |   |       |  
|Balances at September 30, 2002                        |                              | $     |       |           |           | $             | 324.8         |          |          | $     | 9.0         |      |   | $ | 373.5 |   |  | $ | 707.3 |  
|                                                      |                              |       |        |           |           |               |               |          |          |       |             |      |   |   |       |   |  |   |       |  

See accompanying notes to financial statements.

6



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##### Table of Contents






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

|                                                                                |                                      |                                                  |        |          |      |   |        |       |       |  
|------------------------------------------------------------------------------- | ------------------------------------ | ------------------------------------------------ | ------ | -------- | ---- | - | ------ | ----- | ----- | -
|                                                                                |                                      |                                                  |        | Restated |      |   |        |      
|Nine Months Ended September 30 (In millions)                                    |                                      | 2001                                             |        | 2002    
|                                                                                |                                      |                                                  |        |         
|Cash flows from operating activities:                                           |                                      |                                                  |        |          |      |   |        |      
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Net loss                                                                        |                                      | $                                                | 2.7    |          |      |   | ($22.6 | )    
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Adjustments to reconcile net loss to
net cash provided by operating activities: |                                      |                                                  |        |          |      |   |        |      
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                |                                      | Depreciation and amortization                    |        |          | 76.5 |   |        |       | 86.8  |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                |                                      | Amortization of airframe and engine overhauls    |        |          | 41.9 |   |        |       | 44.8  |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                |                                      | Changes in derivative fair values                |        |          | 2.5  |   |        |       | (4.2  | )
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                |                                      | Loss on disposition of assets                    |        |          | 1.8  |   |        |       | .7    |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                |                                      | Increase (decrease) in deferred income taxes     |        |          | 17.8 |   |        |       | (13.3 | )
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                |                                      | Increase in accounts receivable  net            |        |          | (3.7 | ) |        |       | (30.7 | )
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                |                                      | Decrease in other current assets                 |        |          | 23.1 |   |        |       | 13.9  |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                |                                      | Increase in air traffic liability                |        |          | 26.0 |   |        |       | 13.8  |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                |                                      | Increase (decrease) in other current liabilities |        |          | 41.9 |   |        |       | (4.2  | )
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                |                                      | Increase in other liabilities                    |        |          | 16.4 |   |        |       | 26.8  |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                |                                      | Increase in deferred revenue                     |        |          | 21.0 |   |        |       | .2    |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Other, net                           |                                                  |        | (2.1     | )    |   |        | 7.6   |      
|                                                                                |                                      |                                                  |        |          |      |   |        |      
|Net cash provided by operating activities                                       |                                      |                                                  | 265.8  |          |      |   | 119.6  |      
|                                                                                |                                      |                                                  |        |          |      |   |        |      
|Cash flows from investing activities:                                           |                                      |                                                  |        |          |      |   |        |      
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Proceeds from disposition of assets                                             |                                      |                                                  | .2     |          |      |   | 1.0    |      
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Purchases of marketable securities                                              |                                      |                                                  | (670.6 | )        |      |   | (457.1 | )    
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Sales and maturities of marketable securities                                   |                                      |                                                  | 394.5  |          |      |   | 275.7  |      
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Property and equipment additions:                                               |                                      |                                                  |        |          |      |   |        |      
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Aircraft purchase deposits           |                                                  |        | (32.0    | )    |   |        | (18.6 | )    
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Capitalized overhauls                |                                                  |        | (37.5    | )    |   |        | (35.6 | )    
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Aircraft                             |                                                  |        | (253.4   | )    |   |        | (36.8 | )    
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Other flight equipment               |                                                  |        | (29.9    | )    |   |        | (5.8  | )    
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Other property                       |                                                  |        | (28.6    | )    |   |        | (32.2 | )    
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Aircraft deposits returned           |                                                  |        | 20.5     |      |   |        | 22.4  |      
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Restricted deposits and other                                                   |                                      |                                                  | (1.3   | )        |      |   | (13.4  | )    
|                                                                                |                                      |                                                  |        |          |      |   |        |      
|Net cash used in investing activities                                           |                                      |                                                  | (638.1 | )        |      |   | (300.4 | )    
|                                                                                |                                      |                                                  |        |          |      |   |        |      
|Cash flows from financing activities:                                           |                                      |                                                  |        |          |      |   |        |      
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Proceeds from issuance of long-term debt                                        |                                      |                                                  | 359.5  |          |      |   | 25.5   |      
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Long-term debt and capital lease payments                                       |                                      |                                                  | (57.8  | )        |      |   | (26.8  | )    
|                                                                                |                                      |                                                  |        |          |      |   |        |      
|Net cash provided by (used in) financing activities                             |                                      |                                                  | 301.7  |          |      |   | (1.3   | )    
|                                                                                |                                      |                                                  |        |          |      |   |        |      
|Net change in cash and cash equivalents                                         |                                      |                                                  | (70.6  | )        |      |   | (182.1 | )    
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Cash and cash equivalents at beginning of period                                |                                      |                                                  | 101.0  |          |      |   | 490.2  |      
|                                                                                |                                      |                                                  |        |          |      |   |        |      
|Cash and cash equivalents at end of period                                      |                                      | $                                                | 30.4   |          |      | $ | 308.1  |      
|                                                                                |                                      |                                                  |        |          |      |   |        |      
|Supplemental disclosure of cash paid (refunded) during the period for:          |                                      |                                                  |        |          |      |   |        |      
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Interest (net of amount capitalized) |                                                  | $      | 34.8     |      |   | $      | 32.1  |      
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Income taxes                         |                                                  |        | (0.1     | )    |   |        | (16.1 | )    
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Noncash investing and financing activities                                      |                                      | None                                             |        | None    

See accompanying notes to financial statements.

7



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##### Table of Contents






NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
Alaska Airlines, Inc.

Note 1. Basis of Presentation and Significant Accounting Policies

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, 2001, subject to the restatement described in Note 2 below In the
opinion of management, all adjustments (consisting only of normal recurring
accruals) have been made which are necessary to present fairly the financial
position of the Company as of September 30, 2002, as well as the results of its
operations for the three and nine months ended September 30, 2002 and 2001.
Except for the restatement of the prior years financial statements as
described below, the adjustments made were of a normal recurring nature.
Certain reclassifications have been made in the prior years restated financial
statements to conform to the 2002 presentation.

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. (Horizon).

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America (GAAP) requires
management 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 include
assumptions used to record liabilities, expenses and revenue associated with
the Companys Mileage Plan, estimated useful lives of property and equipment
and intangible assets, and the amounts of certain accrued liabilities. Actual
results may differ from these estimates.

As further discussed in Note 2, in June 2002, the Company restated its
financial statements for the year ended December 31, 2001 and its unaudited
financial statements for the quarterly period ended March 31, 2002 and for all
quarterly periods during the year ended December 31, 2001. The Company expects
to file an amendment to its Annual Report on Form 10-K for the year ended
December 31, 2001 which will include its restated financial statements.

Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets.
Under this statement, the Companys goodwill will no longer be amortized, but
instead will be tested for impairment on a minimum of an annual basis. The
impact of discontinuing amortization of existing goodwill has resulted in an
increase of net income of $0.4 million for the nine months ended September 30,
2002. During the second quarter of 2002, the Company completed the first step
of its impairment test related to its $12.5 million of goodwill. Results of
the test indicate that there may be an impairment as it was determined that the
Companys net book value exceeded its fair value. As a result, the Company is
in the process of completing the second step of the impairment test to
determine the amount of impairment, if any. The Company is unable to estimate
the amount of the possible impairment, but is expected to complete the second
step of the impairment test during the fourth quarter of 2002.

In August 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 143, Accounting for Asset Retirement Obligations, which requires
that the fair value of a liability for an asset retirement obligation be
recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. The statement also requires that the associated asset
retirement costs be capitalized as part of the carrying amount of the
long-lived asset. This statement is effective for financial statements issued
for fiscal years beginning after June 15, 2002. The adoption of this statement,
is not expected to have a material impact on the Companys financial position,
results of operations or cash flows.

8



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##### Table of Contents



In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. This statement supersedes SFAS
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of and APB Opinion No. 30, Reporting the Results of
Operations  Reporting the Effects of Disposal of a Segment of Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions.
Adoption of this statement, in the fiscal year beginning January 1, 2002, did
not have a material impact on the Companys financial position, results of
operations or cash flows.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. This statement requires that only certain debt extinguishment
transactions be classified as extraordinary items. Additionally, under this
statement, capital leases that are modified so that the resulting agreement is
an operating lease, shall be accounted for under the sale-leaseback provisions
of SFAS No. 98. SFAS No. 145 also includes minor modifications to existing
GAAP literature. SFAS No. 145 is generally effective for financial statements
issued for fiscal years beginning after May 15, 2002. The adoption of this
statement is not expected to have a material impact on the Companys financial
position, results of operations or cash flows.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. This statement addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies EITF Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). The statement requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. The statement is effective for the
Company for transactions on or after January 1, 2003 and is not expected to
have a material impact on the Companys financial position, results of
operations or cash flows.

Note 2. Restatement of Financial Statements

In June 2002, the Company changed its accounting policies relating to the
accrual for certain lease return costs and the capitalization of software
development costs, and restated its previously issued consolidated financial
statements for the year ended December 31, 2001, including the interim periods
within that year. The effect of these changes is as shown below and results in
an increase in Shareholders equity of $27.4 million as of
December 31, 2001. In addition, the Company changed its accounting for aircraft
purchase commitments assumed by a third party, and made a reclassification of
deferred income taxes, neither of which impacted previously reported equity or
earnings. These changes are more fully described below. Because the
former
methods are not considered to be in compliance with GAAP, the financial
statements have been restated to give retroactive effect to these changes.

Leased Aircraft Return Costs

The Company leases many of its aircraft under relatively long-term
operating lease agreements. These aircraft are subject to periodic airframe
and engine overhauls based on the Companys maintenance program. The Companys
previous policy was to capitalize these overhauls and amortize the costs over
the estimated lives of the overhauls. Separately, many of the Companys lease
agreements contain provisions which require that at the end of the lease,
either certain minimum times remain until the next overhaul or the Company make
a cash payment to the lessor. At the inception of the lease, the Company does
not know the balance between actual time remaining to the next overhaul and
cash payments that will be used to satisfy its return commitments. Under the
previous method, the Company accrued the costs of returning leased aircraft,
including any cash payments due to lessors and any unamortized overhauls, on a
straight-line basis over the lives of the leases. Airframe and engine
overhauls are now capitalized and amortized over the remaining lease term, if
shorter than the life of the overhaul. Additionally, under the new method,
since the amount of cash payments by themselves cannot be

9



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##### Table of Contents

"

reasonably predicted at the inception of the lease, the Company will accrue
cash payments expected to be made to lessors over the last few years of the
lease when probable and estimable, versus over the entire lease term.

Internally Developed Software

The Company also revised its accounting practices for certain costs of
internally developed software. These costs were previously charged to expense
as they were incurred, and they are now capitalized and amortized over the
estimated lives of the software.

Aircraft Purchase Commitments

The Company has a purchase commitment that may trigger a liability under
certain events of default. The Company previously recognized a portion of this
commitment which was funded by a third party as a liability, and related
aircraft purchase deposits, on its balance sheet. Since the executory contract
for the purchase commitment is not an obligation of the Company until the
aircraft is delivered, this commitment will be disclosed as a purchase
commitment and not included in long-term debt or deposits for future flight
equipment.

The effect of the restatement for the three and nine months ended September 30,
2001 is as follows:

|                         |  |                    |       |                    |  |          |       |               |  |   |         |  |  |   |         | 
|------------------------ |  | ------------------ | ----- | ------------------ |  | -------- | ----- | ------------- |  | - | ------- |  |  | - | ------- | 
|                         |  | Three Months Ended |       | Nine Months Ended 
|                         |  | September 30, 2001 |       | September 30, 2001
|                         |  |                    |       |                   
|                         |  | As Previously      |       |                    |  |          |       | As Previously |  |   |         | 
|                         |  | Reported           |       | Restated           |  | Reported |       | Restated     
|                         |  |                    |       |                    |  |          |       |              
|                         |  | (in millions)      |       |                    |  |         
|Total Operating Expenses |  | $                  | 464.1 |                    |  | $        | 468.4 |               |  | $ | 1,374.9 |  |  | $ | 1,388.9 | 
|                        
|                        
|                        
|                        
|Net Income               |  | $                  | 21.2  |                    |  | $        | 21.4  |               |  | $ | 4.4     |  |  | $ | 2.7     | 

The effect of the restatement on selected balance sheet items is as follows as
of December 31, 2001:

|                           |  |                   |         |          |  |   |         | 
|-------------------------- |  | ----------------- | ------- | -------- |  | - | ------- | 
|                           |  | December 31, 2001
|                           |  |                  
|                           |  | As Previously     |         |          |  |  
|                           |  | Reported          |         | Restated
|                           |  |                   |         |         
|                           |  | (in millions)    
|Current Assets             |  | $                 | 904.7   |          |  | $ | 929.0   | 
|                          
|                          
|                          
|                          
|Property and Equipment-Net |  | $                 | 1,692.8 |          |  | $ | 1,677.2 | 
|                          
|                          
|                          
|                          
|Current Liabilities        |  | $                 | 700.2   |          |  | $ | 705.6   | 
|                          
|                          
|                          
|                          
|Long-Term Debt             |  | $                 | 863.3   |          |  | $ | 847.9   | 
|                          
|                          
|                          
|                          
|Shareholders Equity       |  | $                 | 690.4   |          |  | $ | 717.8   | 
|                           |  |                   |         |          |  |   |         | 

Note 3. Frequent Flyer Program

Alaskas Mileage Plan liabilities are included under the following balance sheet captions:

|                               |  |                   |       |                    |  |   |       | 
|------------------------------ |  | ----------------- | ----- | ------------------ |  | - | ----- | 
|                               |  | December 31, 2001 |       | September 30, 2002
|                               |  |                   |       |                   
|                               |  | (in millions)    
|Current Liabilities:           |  |                   |       |                    |  |   |       | 
|                              
|                              
|                              
|                              
|Other accrued liabilities      |  | $                 | 67.3  |                    |  | $ | 77.5  | 
|                              
|                              
|                              
|                              
|Other Liabilities and Credits: |  |                   |       |                    |  |   |       | 
|                              
|                              
|                              
|                              
|Deferred revenue               |  |                   | 123.0 |                    |  |   | 126.0 | 
|                              
|                              
|                              
|                              
|Other liabilities              |  |                   | 58.0  |                    |  |   | 80.0  | 
|                               |  |                   |       |                    |  |   |       | 
|Total                          |  | $                 | 248.3 |                    |  | $ | 283.5 | 
|                               |  |                   |       |                    |  |   |       | 

10



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##### Table of Contents



Note 4. Other Assets

At December 31, 2001 and September 30, 2002, other assets included prepaid
pension cost of $98.4 million and $90.2 million, respectively.

Note 5. U.S. Government Compensation

In September 2001, the U.S. Government passed the Air Transportation
Safety and System Stabilization Act to compensate the airlines for direct and
incremental losses as a result of the September 11 terrorist attacks. In the
second quarter of 2002, Alaska submitted the final application to the
Department of Transportation (DOT) based on the Companys losses. During the
third quarter of 2002, the DOT completed its review procedures and remitted a
final compensation payment to the Company of $0.3 million. This amount is
reflected in the statement of income during the three months ended September
30, 2002.

11



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##### Table of Contents



ALASKA AIRLINES FINANCIAL AND STATISTICAL DATA (unaudited)

|                                   |  |                                 |        |                                |  |        |        |      |  |          |       |        |       |   |         |   |       |   |         |         |  |    |       |  
|---------------------------------- |  | ------------------------------- | ------ | ------------------------------ |  | ------ | ------ | ---- |  | -------- | ----- | ------ | ----- | - | ------- | - | ----- | - | ------- | ------- |  | -- | ----- | -
|                                   |  | Three Months Ended September 30 |        | Nine Months Ended September 30
|                                   |  |                                 |        |                               
|                                   |  | Restated                        |        |                                |  |        |        | %    |  | Restated |       |        |       |   |         | %
|Financial Data (in millions):      |  | 2001                            |        | 2002                           |  | Change |        | 2001 |  | 2002     |       | Change
|                                   |  |                                 |        |                                |  |        |        |      |  |          |       |       
|Operating Revenues:                |  |                                 |        |                                |  |        |        |      |  |          |       |        |       |   |         |   |       |   |         |         |  |    |       |  
|                                  
|                                  
|                                  
|                                  
|Passenger                          |  | $                               | 441.8  |                                |  | $      | 467.1  |      |  |          | 5.7   | %      |       | $ | 1,261.6 |   |       | $ | 1,274.9 |         |  |    | 1.1   | %
|                                  
|                                  
|                                  
|                                  
|Freight and mail                   |  |                                 | 20.8   |                                |  |        | 19.7   |      |  |          | -5.3  | %      |       |   | 60.5    |   |       |   | 55.6    |         |  |    | -8.1  | %
|                                  
|                                  
|                                  
|                                  
|Other  net                        |  |                                 | 22.0   |                                |  |        | 25.2   |      |  |          | 14.5  | %      |       |   | 58.6    |   |       |   | 73.0    |         |  |    | 24.6  | %
|                                   |  |                                 |        |                                |  |        |        |      |  |          |       |        |       |   |         |   |       |   |         |         |  |    |       |  
|Total Operating Revenues           |  |                                 | 484.6  |                                |  |        | 512.0  |      |  |          | 5.7   | %      |       |   | 1,380.7 |   |       |   | 1,403.5 |         |  |    | 1.7   | %
|                                   |  |                                 |        |                                |  |        |        |      |  |          |       |        |       |   |         |   |       |   |         |         |  |    |       |  
|Operating Expenses:                |  |                                 |        |                                |  |        |        |      |  |          |       |        |       |   |         |   |       |   |         |         |  |    |       |  
|                                  
|                                  
|                                  
|                                  
|Wages and benefits                 |  |                                 | 166.5  |                                |  |        | 186.0  |      |  |          | 11.7  | %      |       |   | 479.0   |   |       |   | 529.1   |         |  |    | 10.5  | %
|                                  
|                                  
|                                  
|                                  
|Contracted services                |  |                                 | 19.0   |                                |  |        | 19.0   |      |  |          | 0.0   | %      |       |   | 57.0    |   |       |   | 59.9    |         |  |    | 5.1   | %
|                                  
|                                  
|                                  
|                                  
|Aircraft fuel                      |  |                                 | 71.7   |                                |  |        | 70.7   |      |  |          | -1.4  | %      |       |   | 219.8   |   |       |   | 190.1   |         |  |    | -13.5 | %
|                                  
|                                  
|                                  
|                                  
|Aircraft maintenance               |  |                                 | 32.5   |                                |  |        | 31.6   |      |  |          | -2.8  | %      |       |   | 100.0   |   |       |   | 103.3   |         |  |    | 3.3   | %
|                                  
|                                  
|                                  
|                                  
|Aircraft rent                      |  |                                 | 33.7   |                                |  |        | 32.1   |      |  |          | -4.7  | %      |       |   | 104.0   |   |       |   | 95.7    |         |  |    | -8.0  | %
|                                  
|                                  
|                                  
|                                  
|Food and beverage service          |  |                                 | 14.5   |                                |  |        | 17.8   |      |  |          | 22.8  | %      |       |   | 42.4    |   |       |   | 47.9    |         |  |    | 13.0  | %
|                                  
|                                  
|                                  
|                                  
|Commissions                        |  |                                 | 16.3   |                                |  |        | 12.1   |      |  |          | -25.8 | %      |       |   | 50.4    |   |       |   | 40.6    |         |  |    | -19.4 | %
|                                  
|                                  
|                                  
|                                  
|Other selling expenses             |  |                                 | 26.3   |                                |  |        | 26.1   |      |  |          | -0.8  | %      |       |   | 78.9    |   |       |   | 78.8    |         |  |    | -0.1  | %
|                                  
|                                  
|                                  
|                                  
|Depreciation and amortization      |  |                                 | 27.4   |                                |  |        | 29.5   |      |  |          | 7.7   | %      |       |   | 76.5    |   |       |   | 86.8    |         |  |    | 13.5  | %
|                                  
|                                  
|                                  
|                                  
|Loss on sale of assets             |  |                                 | 0.6    |                                |  |        | 0.5    |      |  |          | -16.7 | %      |       |   | 1.8     |   |       |   | 0.7     |         |  |    | -61.1 | %
|                                  
|                                  
|                                  
|                                  
|Landing fees and other rentals     |  |                                 | 25.9   |                                |  |        | 30.2   |      |  |          | 16.6  | %      |       |   | 70.7    |   |       |   | 82.3    |         |  |    | 16.4  | %
|                                  
|                                  
|                                  
|                                  
|Other                              |  |                                 | 34.0   |                                |  |        | 39.5   |      |  |          | 16.2  | %      |       |   | 108.4   |   |       |   | 114.0   |         |  |    | 5.2   | %
|                                   |  |                                 |        |                                |  |        |        |      |  |          |       |        |       |   |         |   |       |   |         |         |  |    |       |  
|Total Operating Expenses           |  |                                 | 468.4  |                                |  |        | 495.1  |      |  |          | 5.7   | %      |       |   | 1,388.9 |   |       |   | 1,429.2 |         |  |    | 2.9   | %
|                                   |  |                                 |        |                                |  |        |        |      |  |          |       |        |       |   |         |   |       |   |         |         |  |    |       |  
|Operating Income (Loss)            |  |                                 | 16.2   |                                |  |        | 16.9   |      |  |          | 4.3   | %      |       |   | (8.2    | ) |       |   | (25.7   | )       |  | NM
|                                   |  |                                 |        |                                |  |        |        |      |  |          |       |        |       |   |         |   |       |   |         |         |  |    |       |  
|Interest income                    |  |                                 | 7.9    |                                |  |        | 6.3    |      |  |          |       |        |       |   | 24.2    |   |       |   | 17.4    |         |  |    |       |  
|                                  
|                                  
|                                  
|                                  
|Interest expense                   |  |                                 | (11.9  | )                              |  |        | (11.3  | )    |  |          |       |        |       |   | (34.6   | ) |       |   | (34.8   | )       |  |    |       |  
|                                  
|                                  
|                                  
|                                  
|Interest capitalized               |  |                                 | 1.0    |                                |  |        | 0.5    |      |  |          |       |        |       |   | 4.8     |   |       |   | 1.0     |         |  |    |       |  
|                                  
|                                  
|                                  
|                                  
|U.S. government compensation       |  |                                 | 18.7   |                                |  |        | 0.3    |      |  |          |       |        |       |   | 18.7    |   |       |   | 0.3     |         |  |    |       |  
|                                  
|                                  
|                                  
|                                  
|Other  net                        |  |                                 | (0.3   | )                              |  |        | (2.3   | )    |  |          |       |        |       |   | (1.7    | ) |       |   | 7.0     |         |  |    |       |  
|                                   |  |                                 |        |                                |  |        |        |      |  |          |       |        |       |   |         |   |       |   |         |         |  |    |       |  
|                                   |  |                                 | 15.4   |                                |  |        | (6.5   | )    |  |          |       |        |       |   | 11.4    |   |       |   | (9.1    | )       |  |    |       |  
|                                   |  |                                 |        |                                |  |        |        |      |  |          |       |        |       |   |         |   |       |   |         |         |  |    |       |  
|Income (Loss) Before Income Tax    |  | $                               | 31.6   |                                |  | $      | 10.4   |      |  | NM       |       | $      | 3.2   |   |         | $ | (34.8 | ) |         | NM     
|                                   |  |                                 |        |                                |  |        |        |      |  |          |       |        |       |   |         |   |       |   |         |         |  |    |       |  
|Operating Statistics:              |  |                                 |        |                                |  |        |        |      |  |          |       |        |       |   |         |   |       |   |         |         |  |    |       |  
|                                  
|                                  
|                                  
|                                  
|Revenue passengers (000)           |  |                                 | 3,747  |                                |  |        | 3,978  |      |  |          | 6.2   | %      |       |   | 10,643  |   |       |   | 10,787  |         |  |    | 1.4   | %
|                                  
|                                  
|                                  
|                                  
|RPMs (000,000)                     |  |                                 | 3,328  |                                |  |        | 3,673  |      |  |          | 10.4  | %      |       |   | 9,514   |   |       |   | 10,022  |         |  |    | 5.3   | %
|                                  
|                                  
|                                  
|                                  
|ASMs (000,000)                     |  |                                 | 4,687  |                                |  |        | 5,207  |      |  |          | 11.1  | %      |       |   | 13,798  |   |       |   | 14,602  |         |  |    | 5.8   | %
|                                  
|                                  
|                                  
|                                  
|Passenger load factor              |  |                                 | 71.0%  |                                |  |        | 70.5%  |      |  | -0.5pts  |       |        | 69.0% |   |         |   | 68.6% |   |         | -0.4pts
|                                  
|                                  
|                                  
|                                  
|Breakeven load factor              |  |                                 | 70.0%  |                                |  |        | 69.8%  |      |  | -0.2pts  |       |        | 71.2% |   |         |   | 71.8% |   |         | 0.6pts 
|                                  
|                                  
|                                  
|                                  
|Yield per passenger mile           |  |                                 | 13.27¢ |                                |  |        | 12.72¢ |      |  |          | -4.2  | %      |       |   | 13.26¢  |   |       |   | 12.72¢  |         |  |    | -4.1  | %
|                                  
|                                  
|                                  
|                                  
|Operating revenue per ASM          |  |                                 | 10.34¢ |                                |  |        | 9.83¢  |      |  |          | -4.9  | %      |       |   | 10.01¢  |   |       |   | 9.61¢   |         |  |    | -4.0  | %
|                                  
|                                  
|                                  
|                                  
|Operating expenses per ASM         |  |                                 | 10.00¢ |                                |  |        | 9.51¢  |      |  |          | -4.9  | %      |       |   | 10.07¢  |   |       |   | 9.79¢   |         |  |    | -2.8  | %
|                                  
|                                  
|                                  
|                                  
|Expense per ASM excluding fuel     |  |                                 | 8.46¢  |                                |  |        | 8.15¢  |      |  |          | -3.7  | %      |       |   | 8.47¢   |   |       |   | 8.49¢   |         |  |    | 0.2   | %
|                                  
|                                  
|                                  
|                                  
|Fuel cost per gallon               |  |                                 | 90.1¢  |                                |  |        | 81.6¢  |      |  |          | -9.4  | %      |       |   | 93.1¢   |   |       |   | 77.9¢   |         |  |    | -16.3 | %
|                                  
|                                  
|                                  
|                                  
|Fuel gallons (000,000)             |  |                                 | 79.6   |                                |  |        | 86.6   |      |  |          | 8.8   | %      |       |   | 236.1   |   |       |   | 243.9   |         |  |    | 3.3   | %
|                                  
|                                  
|                                  
|                                  
|Average number of employees        |  |                                 | 10,222 |                                |  |        | 10,465 |      |  |          | 2.4   | %      |       |   | 10,209  |   |       |   | 10,167  |         |  |    | -0.4  | %
|                                  
|                                  
|                                  
|                                  
|Aircraft utilization (blk hrs/day) |  |                                 | 10.3   |                                |  |        | 11.2   |      |  |          | 8.2   | %      |       |   | 10.8    |   |       |   | 10.7    |         |  |    | -0.9  | %
|                                  
|                                  
|                                  
|                                  
|Operating fleet at period-end      |  |                                 | 102    |                                |  |        | 102    |      |  |          | 0.0   | %      |       |   | 102     |   |       |   | 102     |         |  |    | 0.0   | %



---

|NM | = | Not Meaningful
|-- | - | --------------

Note:

Certain reclassifications have been made to the September 30, 2001 restated statements
of income to conform to the September 30, 2002 presentation.

12



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##### Table of Contents






ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations 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, including without limitation
statements relating to the Companys expectations regarding financing new
aircraft commitments 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, 2001.

As discussed in Note 2 to the financial statements, in June 2002 the
Company restated its financial statements for the year ended December 31, 2001
and the interim periods within that year. The accompanying managements
discussion and analysis gives effect to the restatement.

Results of Operations
Third Quarter 2002 Compared with Third Quarter 2001

Revenues

Our capacity increased 11.1% during the three months ended September 30,
2002 when compared to the same period in 2001. This increase resulted largely
from service to new markets (Seattle to Washington D.C., Boston and Denver; Los
Angeles to Cancun and Calgary), partially offset by reduced service in existing
markets, especially the Pacific Northwest to Northern California. Traffic grew
by 10.4%, while passenger load factor decreased 0.5 percentage points. The new
Washington D.C., Boston and Denver markets experienced load factors exceeding
the system average. Virtually all other markets experienced reductions in load
factor. For 2001, capacity, traffic and load factors were adversely impacted
by the September 11th terrorist attacks. Passenger yields decreased 4.2% for
the quarter compared to 2001 due to a combination of fewer business passengers,
a drop off in demand due to the September 11, 2001 terrorist attacks and the
slowing economy, and fare sales offered to stimulate demand. Yields were down
in all major markets except the Pacific Northwest to Southern California
market. The lower yield combined with the lower load factor resulted in a 4.9%
decrease in revenue per available seat mile (ASM). The higher traffic combined
with the lower yield resulted in a 5.7% increase in passenger revenue.

Freight and mail revenues decreased 5.3% during the three months ended
September 30, 2002 when compared to comparable periods in 2001. This decrease
is primarily a result of increases in freight revenues offset by certain
decreases in mail revenues.

Other-net revenues increased 14.5%, due largely to increased revenue
related to the sale of miles in Alaskas frequent flyer program, new security
fee reimbursement revenue and higher essential air service subsidy rates.

13



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##### Table of Contents



Expenses

Total operating expenses increased 5.7% during the three months ended
September 30, 2002 when compared to the same period in 2001, while our cost per
ASM decreased by 4.9%. Our cost per ASM excluding fuel decreased by 3.7%.
Explanations of significant period over period changes in the components of
operating expenses are as follows:



| |  |  | Wages and benefits increased $19.5 million, or 11.7% during the
three months ended September 30, 2002 as compared to the same period in
2001. This increase is due principally to increases of $7.6 million,
$6.3 million and $4.8 million in employee wages, pension costs and
higher costs associated with medical insurance and workers compensation
costs, respectively. Increases in wages resulted from pilot pay
increases (11% effective in June 2001 plus 5% effective in May 2002),
scale step increases for union employees and annual merit raises for
management employees.                                                                                                                                           
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Fuel expense decreased 1.4% due to a 9.4% decrease in the cost per
gallon of fuel combined with an 8.8% increase in gallons consumed.
Fuel hedging saved $4.6 million during the three months ended September
30, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  |  | Commission expense decreased 25.8%, despite of a 5.7% increase in
passenger revenue, due to the elimination of base commissions and the
continuing shift to direct sales channels. In June 2002, the Company
changed its travel agent commissions program to eliminate base
commissions and move to a 100% incentive-based program. This change
reduced commissions expense in the third quarter of 2002 by
approximately $7.6 million. During the three months ended September
30, 2002, 54.5% of Air Groups ticket sales were made through travel
agents, versus 57.7% in 2001. During the three months ended September
30, 2002, 22.6% of total ticket sales were made through Alaskas
Internet web site versus 17.5% in 2001.
|
| |  |  | Aircraft maintenance expense decreased $.9 million or 2.8% during
the three months ended September 30, 2002 when compared to the same
period in 2001. This decrease is due largely to lower major engine
repairs and overhauls. In the fourth quarter of 2002, the Company
expects a 30% increase in maintenance expense when compared to the same
period in 2001. This expected increase is a result of several
maintenance checks scheduled for the 4th quarter of 2001 that were
postponed until first quarter of 2002 while the Company assessed its
operating needs in the aftermath of September 11th.                                                                                                                       
|
| |  |  | Landing fees and other rentals increased 16.6%, primarily due to
higher rates as a result of airport construction projects, ground rents
on our four new routes and 6.6% more departures during the three months
ended September 30, 2002 as compared to the same period in 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  |  | Other expense increased 16.2% due to higher insurance costs,
partially offset by lower costs for property taxes, legal services,
utilities, supplies and passenger remuneration costs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

14



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##### Table of Contents



Nonoperating Income (Expense)

Net nonoperating income (expense) during the three months ended September
30, 2002 and 2001 includes $0.3 million and $18.7 million, respectively of U.S.
government compensation received in connection with the September 11th
terrorists attacks. Excluding these amounts, net nonoperating items were $6.8
million expense during the three months ended September 30, 2002 compared to
$3.3 million expense during the same period in 2001. The $3.5 million change
was due largely to a $2.5 million loss due to losses resulting from hedge
ineffectiveness on certain fuel hedging contracts in 2002. The remaining
decrease is a result of decreases in interest income resulting from overall
decreases in interest rates in 2002.

Nine Months 2002 Compared with Nine Months 2001

Revenues

The operating loss widened by $17.5 million to $25.7 million during the
nine months ended September 30, 2002. Capacity increased 5.8% for the first
nine months of 2002 compared to 2001. This increase is attributable to service
to new markets which commenced in late 2001 (Seattle to Washington D.C. and Los
Angeles to Cancun), the first quarter of 2002 (Los Angeles to Calgary), and in
April 2002 (Seattle to Denver and Boston). The increase was partially offset
by reduced service in existing markets, primarily the Pacific Northwest to
Southern and Northern California markets. Traffic increased by 5.3% compared
to 2001, and our passenger load factor decreased 0.4 percentage points. The
new Washington D.C., Boston and Denver markets have experienced load factors
which exceed the system average year to date. Passenger yields decreased 4.1%
during the nine months ended September 30, 2002 compared to the same period in
2001, due to a combination of fewer business passengers, a drop off in demand
due to the September 11th terrorist attacks, the slowing economy and fare sales
offered to stimulate demand. The lower yield combined with the lower load
factor resulted in a 4.0% decrease in revenue per ASM. The higher traffic
combined with the lower yield resulted in a 1.1% increase in passenger revenue.

Freight and mail revenue decreased 8.1% due to lower freight volumes
attributable to increased security restrictions and a slower economy.

Other-net revenues increased 24.6% primarily due to increased revenue
related to the sale of miles in Alaskas frequent flyer program, new security
fee reimbursement revenue and higher essential air service subsidy rates.

Expenses

Total operating expenses increased 2.9% during the nine months ended
September 30, 2002 when compared to the same period in 2001. Cost per ASM
decreased 2.8% and cost per ASM excluding fuel increased slightly by 0.2
percentage points. Explanations of significant year-over-year changes in the
components of operating expenses are as follows:



| |  |  | Wages and benefits increased $50.1 million, or 10.5% during the
nine months ended September 30, 2002 as compared to the same period in
2001. This increase is due principally to an increase in average wages
and benefits per employee combined with an overall decrease in the
number of employees. Average wages and benefits per employee increased
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

15



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##### Table of Contents





| |   |  | due to pilot pay increases (11% effective in June 2001 plus 5%
effective in May 2002), scale
and step increases for union employees,
annual merit raises for management employees, and higher pension and
health insurance costs for all employees.                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Fuel expense decreased 13.5% due to a 16.3% decrease in the cost
per gallon of fuel combined with a 3.3% increase in gallons consumed.
Fuel hedging saved $5.4 million during the nine months ended September
30, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  |  | Commission expense decreased 19.4%, despite a 1.1% increase in
passenger revenue, due to elimination of base commissions and the
continuing shift to direct sales channels. In June 2002, the Company
changed its travel agent commissions program to eliminate base
commissions and move to a 100% incentive-based program. During the
nine months ended September 30, 2002, 57.0% of the Companys ticket
sales were made through travel agents, versus 60.5% during the same
period in 2001. During the nine months ended September 30, 2002, 20.6%
of total ticket sales were made through Alaskas Internet web site
versus 16.0% during the same period in 2001.
|
| |  |  | Depreciation and amortization increased 13.5%, due principally to
equipment added during the year. In addition, Alaska owns one more
737-900 and 737-200 Combi this year when compared to the same period in
2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  |  | Landing fees and other rentals increased 16.4%, primarily due to
higher rates as a result of airport construction projects, ground rents
on our four new routes and more departures during the nine months ended
September 30, 2002 as compared to the same period in 2001.                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  |  | Other expense increased 5.2% due to higher insurance costs,
partially offset by lower costs for property taxes, legal expenses,
utilities, supplies, personnel and passenger remuneration costs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

Nonoperating Income (Expense)

Net nonoperating income (expense) during the nine months ended September
30, 2002 and 2001 includes $0.3 million and $18.7 million, respectively, of
U.S. government compensation received in connection with the September 11th
terrorist attacks. Excluding these amounts, net nonoperating items were $9.4
million expense in 2002 compared to $7.3 million expense in 2001. The $2.1
million net change was due principally to an increase in gains resulting from
hedge ineffectiveness on certain fuel hedging contracts in 2002 offset by lower
interest income and higher interest expense resulting from new debt incurred in
the past year.

Income Tax Benefit (Expense)

Accounting standards require us to provide for income taxes each quarter
based on our estimate of the effective tax rate for the full year. 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. In estimating the 35.0% tax rate for the first nine
months of 2002, we considered a variety of factors, including the U.S. federal

16



---



##### Table of Contents



rate of 35%, estimates of nondeductible expenses and state income taxes and our
forecast of pretax loss for the full year. We evaluate this effective rate
each quarter and make adjustments if necessary.

Critical Accounting Policies

For more information on the Companys critical accounting policies, see
Item 7 of the Companys Annual Report on Form 10-K for the year ended December
31, 2001. In June 2002, the Company revised its accounting practices with
respect to aircraft lease return costs. This change is more fully described in
Note 2 to the financial statements.

Liquidity and Capital Resources

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

|                                                                                                  |  |                                       |        |               |  |        |        |   |  |    |       |  
|------------------------------------------------------------------------------------------------- |  | ------------------------------------- | ------ | ------------- |  | ------ | ------ | - |  | -- | ----- | -
|                                                                                                  |  | December 31,                          |        | September 30, |  |        |        |  
|                                                                                                  |  | 2001 Restated                         |        | 2002          |  | Change
|                                                                                                  |  |                                       |        |               |  |       
|                                                                                                  |  | (In millions, except debt-to-capital)
|Cash and marketable securities                                                                    |  | $                                     | 660.6  |               |  | $      | 662.5  |   |  | $  | 1.9   |  
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Working capital                                                                                   |  |                                       | 223.4  |               |  |        | 244.8  |   |  |    | 21.4  |  
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Long-term debt and
capital lease obligations, net of current                                      |  |                                       | 847.9  |               |  |        | 843.7  |   |  |    | (4.2  | )
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Shareholders equity                                                                              |  |                                       | 717.8  |               |  |        | 707.3  |   |  |    | (10.5 | )
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Debt-to-capital                                                                                   |  |                                       | 54%:46 | %             |  |        | 54%:46 | % |  | NA
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Debt-to-capital assuming aircraft
operating leases are capitalized
at seven times annualized rent |  |                                       | 71%:29 | %             |  |        | 71%:29 | % |  | NA
|                                                                                                  |  |                                       |        |               |  |       

The Companys cash and marketable securities portfolio increased $1.9
million during the first nine months of 2002. Operating activities provided
$119.6 million of cash during this period. Additional cash was provided by the
issuance of $25.5 million of new debt. Cash outflows included $106.7 million
of capital expenditures, including the purchase of spare parts, airframe and
engine overhauls and $36.8 million for purchases of new aircraft. In addition,
the Company made $26.8 million of debt repayments.

Shareholders equity decreased $10.5 million due principally to the net
loss of $22.6 million, partially offset by an increase in accumulated other
comprehensive income of $12.1 million

Aircraft Purchase Commitments- At September 30, 2002, the Company had firm
orders for 14 aircraft requiring aggregate remaining payments of
approximately $259
million, as set forth below. In addition, Alaska has options to acquire an
additional 24 B737s. Alaska expects to finance five of the B737-700 deliveries
in 2003 with operating leases and the remainder of the new planes with
long-term debt or internally generated cash.

|                    |  |                               |    |      |  |      |     |       |  |   |    |  |  |   |     | 
|------------------- |  | ----------------------------- | -- | ---- |  | ---- | --- | ----- |  | - | -- |  |  | - | --- | 
|                    |  | Delivery Period - Firm Orders
|                    |  |                              
|Aircraft            |  | 2002                          |    | 2003 |  | 2004 |     | Total
|                    |  |                               |    |      |  |      |     |      
|Boeing 737-700      |  |                               |   |      |  |      | 6   |       |  |   |   |  |  |   | 6   | 
|                   
|                   
|                   
|                   
|Boeing 737-900      |  |                               |   |      |  |      | 5   |       |  |   | 3  |  |  |   | 8   | 
|                    |  |                               |    |      |  |      |     |       |  |   |    |  |  |   |     | 
|Total               |  |                               |   |      |  |      | 11  |       |  |   | 3  |  |  |   | 14  | 
|                    |  |                               |    |      |  |      |     |       |  |   |    |  |  |   |     | 
|Payments (Millions) |  | $                             | 27 |      |  | $    | 164 |       |  | $ | 68 |  |  | $ | 259 | 
|                    |  |                               |    |      |  |      |     |       |  |   |    |  |  |   |     | 

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New Accounting Standards Effective January 1, 2002, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other
Intangible Assets. Under this Statement, the Companys goodwill will no
longer be amortized, but instead will be tested for impairment on a minimum of
an annual basis. The impact of discontinuing amortization of existing goodwill
has resulted in an increase of net income of $0.4 million for the nine months
ended September 30, 2002. During the second quarter of 2002, the Company
completed the first step of its impairment test related to its $12.5 million of
goodwill. Results of the test indicate that there may be an impairment as it
was determined that the Companys net book value exceeded its fair value. As a
result, the Company is in the process of completing the second step of the
impairment test to determine the amount of impairment, if any. The Company is
unable to estimate the amount of the possible impairment, but is expected to
complete the second step of the impairment test during the fourth quarter of
2002.

The Company has a purchase commitment that may trigger a liability under
certain events of default. The Company previously recognized a portion of this
commitment, which was funded by a third party as a liability, and related
aircraft purchase deposits on its balance sheet. Since the executory contract
for the purchase commitment is not an obligation of the Company until the
aircraft is delivered, this commitment is now disclosed as a purchase
commitment and not included in long-term debt or deposits for future flight
equipment. See Note 2 to the financial statements.

In August 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 143, Accounting for Asset Retirement Obligations, which requires
that the fair value of a liability for an asset retirement obligation be
recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. The statement also requires that the associated asset
retirement costs are capitalized as part of the carrying amount of the
long-lived asset. This statement is effective for financial statements issued
for fiscal years beginning after June 15, 2002. The adoption of this statement
did not have a material impact on the Companys financial position, results of
operations or cash flows.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections (Statement 145). This Statement requires that only certain debt
extinguishment transactions be classified as extraordinary items.
Additionally, under this Statement, capital leases that are modified so that
the resulting agreement is an operating lease, shall accounted for under the
sale-leaseback provisions of SFAS No. 98. SFAS 145also includes minor
modifications to existing U.S. GAAP literature. The adoption of this statement
is not expected to have a material impact on the Companys financial position,
results of operations or cash flows.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. This Statement addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies EITF Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). The Statement requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. The Statement is effective for the
Company for transactions on or after January 1, 2003 and is not expected to
have a material impact on the Companys financial position, results of
operations or cash flows.

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ITEM 3. Quantitative and Qualitative Disclosure about Market Risk

The Company utilizes financial derivative instruments as hedges to
decrease its exposure to jet fuel price increases. The Company accounts for
its fuel hedge derivative instruments as cash flow hedges as defined by SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities, as
amended (SFAS 133). At September 30, 2002, the Company had hedge agreements in
place to hedge approximately 40% of its 2002 and 35% of its 2003 expected jet
fuel requirements. Under SFAS 133, all changes in fair value that are
considered to be effective are recorded in accumulated other comprehensive
income (loss) until the underlying jet fuel is consumed. The fair value of the
Companys hedge instruments at September 30, 2002 was a net asset of
approximately $17.3 million, which is recorded in prepaid expenses and other
assets in the balance sheet as of September 30, 2002.

During the three and nine months ended September 30, 2002, the Company
recognized approximately $4.6 million and $5.4 million in realized hedging
gains which are reflected in aircraft fuel in the statements of income. During
the three and nine months ended September 30, 2002, the Company recorded
expense of $2.5 million and income of $4.4 million, respectively, related to
the ineffectiveness of the Companys hedges. These amounts are recorded as
non-operating income (expense) in other-net in the statements of income.

As of September 30, 2002, the Company had unrealized gains, net of tax of
$10.1 million. These amounts are reflected in accumulated other comprehensive
income (loss) in the balance sheet as of September 30, 2002.




ITEM 4. Controls and Procedures

In the 90-day period before the filing of this report, the chief executive
officer and chief financial officer of the Company (collectively, the
certifying officers) have evaluated the effectiveness of the Companys
disclosure controls and procedures. These disclosure controls and procedures
are designed to ensure that the information required to be disclosed by the
Company in its periodic reports filed with the Securities and Exchange
Commission (the Commission) is recorded, processed, summarized and reported,
within the time periods specified by the Commissions rules and forms, and that
the information is communicated to the certifying officers on a timely basis.

The certifying officers concluded, based on their evaluation, that the
Companys disclosure controls and procedures are effective for the Company,
taking into consideration the size and nature of the Companys business and
operations.

No significant changes in the Companys internal controls or in other
factors were detected that could significantly affect the Companys internal
controls subsequent to the date when the internal controls were evaluated.

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PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Flight 261 Litigation

Alaska is a defendant in a number of lawsuits relating to the loss of
Flight 261 on January 31, 2000. Representatives of all 88 passengers and crew
on board have filed cases against Alaska, the Boeing Company, and others. The
suits seek unspecified compensatory and punitive damages. In May 2001, the
judge presiding over the majority of the cases ruled that punitive damages are
not available against Alaska. Alaska has settled a number of these cases and
continues in its efforts to settle the remaining ones. Consistent with industry
standards, the Company maintains insurance against aircraft accidents.

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

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




ITEM 5. Other Information

Employees

Alaska has two major labor contracts becoming amendable in 2002.
Negotiations are continuing with the International Association of Machinists
and Aerospace Workers regarding the Clerical, Office and Passenger Service
(COPS) employee group. The COPS contract became amendable on October 29, 2002.
During the third quarter of 2002, negotiations started with the Aircraft
Mechanics Fraternal Association (AMFA) regarding the mechanics, inspectors and
cleaners employee group. The AMFA contract is amendable December 25, 2002.

Alaska
has a labor contract with the Transit Workers Union (TWU), which
covers 29 dispatchers. The contract was amendable on August 9,
2002. During the third quarter 2002, the Company and TWU agreed to a
five-year contract term on all issues except hourly wage rate and
certain wage-related issues. By agreement of both parties, those
issues were submitted to interest arbitration to determine wages for
a three-year period. The Company hopes to have resolution to these
issues in the fourth quarter of 2002.




ITEM 6. Exhibits and Reports on Form 8-K

Exhibits

Exhibit 99.1-
Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350

Exhibit 99.2-
Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350


Reports on Form 8-K

None

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Signatures

Pursuant to the requirements of the Securities Exchange 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 14, 2002

/s/ Terri K. Maupin
Terri K. Maupin
Staff Vice President/Finance and Controller

/s/ Bradley D. Tilden
Bradley D. Tilden
Executive Vice President/Finance and Chief Financial Officer

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CERTIFICATIONS

I, William S. Ayer, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of Alaska Airlines,
Inc.;                                                                                                                                                                                                                                                  
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;                   
|  
|4. |  | The registrants other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:                                                                                                     



| |  | a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | b) evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the Evaluation Date); and                                                                                                  
|
| |  | c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrants
auditors and the audit committee of registrants board of directors
(or persons performing the equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material weaknesses
in internal controls; and
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        



|6. |  | The registrants other certifying officers and I have indicated
in this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                  |  |                                                             
|----------------- |  | ------------------------------------------------------------
|November 13, 2002 |  | By /s/ William
S. AyerWilliam S. AyerChief Executive Officer

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##### Table of Contents



I, Bradley D. Tilden, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of Alaska Air Group,
Inc.;                                                                                                                                                                                                                                                 
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;                   
|  
|4. |  | The registrants other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:                                                                                                     



| |  | a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | b) evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the Evaluation Date); and                                                                                                  
|
| |  | c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrants auditors and
the audit committee of registrants board of directors (or persons
performing the equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material
weaknesses in internal controls; and
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        



|6. |  | The registrants other certifying officers and I have indicated
in this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                  |  |                                                                 
|----------------- |  | ----------------------------------------------------------------
|November 13, 2002 |  |                                                                 
|                 
|                 
|                 
|                 
|                  |  | By /s/ Bradley
D. TildenBradley D. TildenChief Financial Officer

23