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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549


FORM 10-Q


|                                                          |  |                                                                                         
|--------------------------------------------------------- |  | ----------------------------------------------------------------------------------------
|(Mark One)                                               
|(X)                                                       |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|For the quarterly period ended March 31, 2003.           
|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                                                         |  | 92-0009235                          
|(State or other jurisdiction of
incorporation or organization) |  | (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 [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). 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
March 31, 2003.





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TABLE OF CONTENTS



|                             |                                                                                               |  |  |  |  |  |  | 
|---------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I. FINANCIAL STATEMENTS
|                             | ITEM 1. Financial Statements                                                                 
|                             | ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                             | ITEM 3. Quantitative and Qualitative Disclosure about Market Risk                            
|                             | ITEM 4. Controls and Procedures                                                              
|PART II. OTHER INFORMATION  
|                             | ITEM 1. Legal Proceedings                                                                    
|                             | ITEM 6. Exhibits and Reports on Form 8-K                                                     
|Signatures                  
|EXHIBIT 99.1                
|EXHIBIT 99.2                
|EXHIBIT 99.3                
|EXHIBIT 99.4                



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PART I. FINANCIAL STATEMENTS

ITEM 1. Financial Statements


BALANCE SHEETS (unaudited)


Alaska Airlines, Inc.


|                                               |  |              |         |           |  |   |         | 
|---------------------------------------------- |  | ------------ | ------- | --------- |  | - | ------- | 
|ASSETS                                         |  |              |         |           |  |   |         | 
|                                               |  | December 31, |         | March 31,
|(In Millions)                                  |  | 2002         |         | 2003     
|                                               |  |              |         |          
|Current Assets                                 |  |              |         |           |  |   |         | 
|Cash and cash equivalents                      |  | $            | 268.9   |           |  | $ | 205.5   | 
|Marketable securities                          |  |              | 366.8   |           |  |   | 409.8   | 
|Receivables from related companies             |  |              | 126.7   |           |  |   | 191.2   | 
|Receivables  net                              |  |              | 81.8    |           |  |   | 86.8    | 
|Inventories and supplies  net                 |  |              | 38.3    |           |  |   | 35.0    | 
|Prepaid expenses and other current assets      |  |              | 107.7   |           |  |   | 115.4   | 
|                                               |  |              |         |           |  |   |         | 
|Total Current Assets                           |  |              | 990.2   |           |  |   | 1,043.7 | 
|                                               |  |              |         |           |  |   |         | 
|Property and Equipment                         |  |              |         |           |  |   |         | 
|Flight equipment                               |  |              | 1,945.5 |           |  |   | 2,030.0 | 
|Other property and equipment                   |  |              | 359.3   |           |  |   | 360.9   | 
|Deposits for future flight equipment           |  |              | 64.7    |           |  |   | 52.4    | 
|                                               |  |              |         |           |  |   |         | 
|                                               |  |              | 2,369.5 |           |  |   | 2,443.3 | 
|Less accumulated depreciation and amortization |  |              | 709.4   |           |  |   | 734.3   | 
|                                               |  |              |         |           |  |   |         | 
|Total Property and Equipment  Net             |  |              | 1,660.1 |           |  |   | 1,709.0 | 
|                                               |  |              |         |           |  |   |         | 
|Intangible Assets                              |  |              | 50.9    |           |  |   | 50.9    | 
|                                               |  |              |         |           |  |   |         | 
|Other Assets                                   |  |              | 49.9    |           |  |   | 49.9    | 
|                                               |  |              |         |           |  |   |         | 
|Total Assets                                   |  | $            | 2,751.1 |           |  | $ | 2,853.5 | 
|                                               |  |              |         |           |  |   |         | 

See accompanying notes to financial statements.

2



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BALANCE SHEETS (unaudited)

Alaska Airlines, Inc.


|                                                                |                                    |              |         |           |  |   |         |       | 
|--------------------------------------------------------------- | ---------------------------------- | ------------ | ------- | --------- |  | - | ------- | ----- | 
|LIABILITIES AND SHAREHOLDER'S EQUITY                            |                                    |              |         |           |  |   |         |      
|                                                                |                                    | December 31, |         | March 31,
|(In Millions)                                                   |                                    | 2002         |         | 2003     
|                                                                |                                    |              |         |          
|Current Liabilities                                             |                                    |              |         |           |  |   |         |      
|Accounts payable                                                |                                    | $            | 118.5   |           |  | $ | 120.3   |      
|Payables to related companies                                   |                                    |              | 1.7     |           |  |   | 1.9     |      
|Accrued aircraft rent                                           |                                    |              | 67.5    |           |  |   | 56.2    |      
|Accrued wages, vacation and payroll taxes                       |                                    |              | 76.3    |           |  |   | 77.8    |      
|Other accrued liabilities                                       |                                    |              | 226.5   |           |  |   | 250.4   |      
|Air traffic liability                                           |                                    |              | 211.1   |           |  |   | 257.2   |      
|Current portion of long-term debt and
capital lease obligations |                                    |              | 48.6    |           |  |   | 39.9    |      
|                                                                |                                    |              |         |           |  |   |         |      
|Total Current Liabilities                                       |                                    |              | 750.2   |           |  |   | 803.7   |      
|                                                                |                                    |              |         |           |  |   |         |      
|Long-Term Debt and Capital Lease Obligations                    |                                    |              | 856.7   |           |  |   | 892.6   |      
|                                                                |                                    |              |         |           |  |   |         |      
|Other Liabilities and Credits                                   |                                    |              |         |           |  |   |         |      
|Deferred income taxes                                           |                                    |              | 153.7   |           |  |   | 140.6   |      
|Deferred revenue                                                |                                    |              | 224.5   |           |  |   | 226.2   |      
|Other liabilities                                               |                                    |              | 196.3   |           |  |   | 205.0   |      
|                                                                |                                    |              |         |           |  |   |         |      
|                                                                |                                    |              | 574.5   |           |  |   | 571.8   |      
|                                                                |                                    |              |         |           |  |   |         |      
|Shareholders Equity                                            |                                    |              |         |           |  |   |         |      
|Common stock, $1 par value                                      |                                    |              |         |           |  |   |         |      
|                                                                | Authorized: 1,000 shares           |              |         |           |  |   |         |       | 
|                                                                | Issued: 2002 and 2003 - 500 shares |              |         |          |  |   |         |      | 
|                                                                | Capital in excess of par value     |              |         | 324.8     |  |   |         | 384.8 | 
|Accumulated other comprehensive income (loss)                   |                                    |              | (82.0   | )         |  |   | (81.2   | )    
|Retained earnings                                               |                                    |              | 326.9   |           |  |   | 281.8   |      
|                                                                |                                    |              |         |           |  |   |         |      
|                                                                |                                    |              | 569.7   |           |  |   | 585.4   |      
|                                                                |                                    |              |         |           |  |   |         |      
|Total Liabilities and Shareholders Equity                      |                                    | $            | 2,751.1 |           |  | $ | 2,853.5 |      
|                                                                |                                    |              |         |           |  |   |         |      

See accompanying notes to financial statements.

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STATEMENTS OF OPERATIONS (unaudited)

Alaska Airlines, Inc.


|                                                   |  |      |       |      |  |   |       |  
|-------------------------------------------------- |  | ---- | ----- | ---- |  | - | ----- | -
|Three Months Ended March 31                        |  |      |       |      |  |   |       |  
|(In Millions)                                      |  | 2002 |       | 2003
|                                                   |  |      |       |     
|Operating Revenues                                 |  |      |       |      |  |   |       |  
|Passenger                                          |  | $    | 374.0 |      |  | $ | 387.0 |  
|Freight and mail                                   |  |      | 15.9  |      |  |   | 17.4  |  
|Other  net                                        |  |      | 22.3  |      |  |   | 22.6  |  
|                                                   |  |      |       |      |  |   |       |  
|Total Operating Revenues                           |  |      | 412.2 |      |  |   | 427.0 |  
|                                                   |  |      |       |      |  |   |       |  
|Operating Expenses                                 |  |      |       |      |  |   |       |  
|Wages and benefits                                 |  |      | 165.7 |      |  |   | 188.0 |  
|Contracted services                                |  |      | 21.8  |      |  |   | 20.7  |  
|Aircraft fuel                                      |  |      | 55.2  |      |  |   | 76.9  |  
|Aircraft maintenance                               |  |      | 35.6  |      |  |   | 37.9  |  
|Aircraft rent                                      |  |      | 31.8  |      |  |   | 30.5  |  
|Food and beverage service                          |  |      | 13.9  |      |  |   | 12.9  |  
|Commissions                                        |  |      | 14.2  |      |  |   | 8.2   |  
|Other selling expenses                             |  |      | 24.9  |      |  |   | 21.9  |  
|Depreciation and amortization                      |  |      | 28.2  |      |  |   | 28.5  |  
|Loss on sale of assets                             |  |      |      |      |  |   | 0.3   |  
|Landing fees and other rentals                     |  |      | 23.6  |      |  |   | 28.7  |  
|Other                                              |  |      | 36.3  |      |  |   | 34.1  |  
|                                                   |  |      |       |      |  |   |       |  
|Total Operating Expenses                           |  |      | 451.2 |      |  |   | 488.6 |  
|                                                   |  |      |       |      |  |   |       |  
|Operating Loss                                     |  |      | (39.0 | )    |  |   | (61.6 | )
|                                                   |  |      |       |      |  |   |       |  
|Nonoperating Income (Expense)                      |  |      |       |      |  |   |       |  
|Interest income                                    |  |      | 5.0   |      |  |   | 1.2   |  
|Interest expense                                   |  |      | (11.9 | )    |  |   | (11.3 | )
|Interest capitalized                               |  |      | 0.1   |      |  |   | 0.7   |  
|Other  net                                        |  |      | 4.1   |      |  |   | 0.4   |  
|                                                   |  |      |       |      |  |   |       |  
|                                                   |  |      | (2.7  | )    |  |   | (9.0  | )
|                                                   |  |      |       |      |  |   |       |  
|Loss before income tax and accounting change       |  |      | (41.7 | )    |  |   | (70.6 | )
|Income tax benefit                                 |  |      | (14.9 | )    |  |   | (25.5 | )
|                                                   |  |      |       |      |  |   |       |  
|Loss before cumulative effect of accounting change |  |      | (26.8 | )    |  |   | (45.1 | )
|Cumulative effect of accounting change             |  |      | (12.5 | )    |  |   |      |  
|                                                   |  |      |       |      |  |   |       |  
|Net Loss                                           |  | $    | (39.3 | )    |  | $ | (45.1 | )
|                                                   |  |      |       |      |  |   |       |  

See accompanying notes to financial statements.

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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, 2002                      |                         | $                            |  |           |  | $             | 324.8 |               |  | $        | (82.0 | )           |      | $ | 326.9 |   |  | $ | 569.7 |  
|                                                   |                         |                              |   |           |  |               |       |               |  |          |       |             |      |   |       |   |  |   |       |  
|Net loss for the three months
ended March 31, 2003 |                         |                              |   |           |  |               |       |               |  |          |       |             |      |   | (45.1 | ) |  |   | (45.1 | )
|Other comprehensive income (loss)                  |                         |                              |   |           |  |               |       |               |  |          |       |             |      |   |       |   |  |   |       |  
|Related to marketable securities:                  |                         |                              |   |           |  |               |       |               |  |          |       |             |      |   |       |   |  |   |       |  
|                                                   |                         | Change in fair value         |   |           |  |               |       |               |  |          |       |             | 2.9  |   |       |   |  |   |       |   |  | 
|                                                   |                         | Reclassification to earnings |   |           |  |               |       |               |  |          |       |             | (0.1 | ) |       |   |  |   |       |   |  | 
|                                                   |                         | Income tax effect            |   |           |  |               |       |               |  |          |       |             | (1.1 | ) |       |   |  |   |       |   |  | 
|                                                   |                         |                              |   |           |  |               |       |               |  |          |       |             |      |   |       |   |  |   |       |  
|                                                   |                         |                              |   |           |  |               |       |               |  |          | 1.7   |             |      |   |       |   |  |   | 1.7   |  
|                                                   |                         |                              |   |           |  |               |       |               |  |          |       |             |      |   |       |   |  |   |       |  
|                                                   | Related to fuel hedges: |                              |   |           |  |               |       |               |  |          |       |             |      |   |       |   |  |   |       |   | 
|                                                   |                         | Change in fair value         |   |           |  |               |       |               |  |          |       |             | 6.2  |   |       |   |  |   |       |   |  | 
|                                                   |                         | Reclassification to earnings |   |           |  |               |       |               |  |          |       |             | (7.8 | ) |       |   |  |   |       |   |  | 
|                                                   |                         | Income tax effect            |   |           |  |               |       |               |  |          |       |             | 0.7  |   |       |   |  |   |       |   |  | 
|                                                   |                         |                              |   |           |  |               |       |               |  |          |       |             |      |   |       |   |  |   |       |  
|                                                   |                         |                              |   |           |  |               |       |               |  |          | 0.9   |             |      |   |       |   |  |   | 0.9   |  
|                                                   |                         |                              |   |           |  |               |       |               |  |          |       |             |      |   |       |   |  |   |       |  
|Total comprehensive loss                           |                         |                              |   |           |  |               |       |               |  |          |       |             |      |   |       |   |  |   | (44.3 | )
|Capital contribution from Air Group                |                         |                              |   |           |  |               | 60.0  |               |  |          |       |             |      |   |       |   |  |   | 60.0  |  
|                                                   |                         |                              |   |           |  |               |       |               |  |          |       |             |      |   |       |   |  |   |       |  
|Balances at March 31, 2003                         |                         | $                            |  |           |  | $             | 384.8 |               |  | $        | (81.2 | )           |      | $ | 281.8 |   |  | $ | 585.4 |  
|                                                   |                         |                              |   |           |  |               |       |               |  |          |       |             |      |   |       |   |  |   |       |  

See accompanying notes to financial statements.

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STATEMENTS OF CASH FLOWS (unaudited)

Alaska Airlines, Inc.


|                                                                                          |                            |                                                  |        |       |       |   |        |       |       |  
|----------------------------------------------------------------------------------------- | -------------------------- | ------------------------------------------------ | ------ | ----- | ----- | - | ------ | ----- | ----- | -
|Three Months Ended March 31 (In Millions)                                                 |                            | 2002                                             |        | 2003 
|                                                                                          |                            |                                                  |        |      
|Cash flows from operating activities:                                                     |                            |                                                  |        |       |       |   |        |      
|Net loss                                                                                  |                            | $                                                | (39.3  | )     |       | $ | (45.1  | )    
|Adjustments to reconcile net loss to net cash
provided by (used in) operating activities: |                            |                                                  |        |       |       |   |        |      
|                                                                                          |                            | Cumulative effect of accounting change           |        |       | 12.5  |   |        |       |      |  
|                                                                                          |                            | Depreciation and amortization                    |        |       | 28.2  |   |        |       | 28.5  |  
|                                                                                          |                            | Amortization of airframe and engine overhauls    |        |       | 14.4  |   |        |       | 14.2  |  
|                                                                                          |                            | Loss (gain) on marketable securities             |        |       | 1.0   |   |        |       | (1.7  | )
|                                                                                          |                            | Changes in derivative fair values                |        |       | (3.0  | ) |        |       | 1.2   |  
|                                                                                          |                            | Loss on sale of assets                           |        |       |      |   |        |       | 0.3   |  
|                                                                                          |                            | Decrease in deferred income taxes                |        |       | (8.2  | ) |        |       | (25.4 | )
|                                                                                          |                            | Increase in accounts receivable                  |        |       | (50.8 | ) |        |       | (69.7 | )
|                                                                                          |                            | Decrease in other current assets                 |        |       | 0.1   |   |        |       | 5.5   |  
|                                                                                          |                            | Increase in air traffic liability                |        |       | 50.4  |   |        |       | 46.1  |  
|                                                                                          |                            | Increase (decrease) in other current liabilities |        |       | (34.8 | ) |        |       | 13.0  |  
|                                                                                          |                            | Increase in deferred revenue and other-net       |        |       | 11.9  |   |        |       | 13.1  |  
|                                                                                          |                            |                                                  |        |       |       |   |        |      
|Net cash used in operating activities                                                     |                            |                                                  | (17.6  | )     |       |   | (20.0  | )    
|                                                                                          |                            |                                                  |        |       |       |   |        |      
|Cash flows from investing activities:                                                     |                            |                                                  |        |       |       |   |        |      
|Proceeds from disposition of assets                                                       |                            |                                                  | 0.9    |       |       |   | 0.5    |      
|Purchases of marketable securities                                                        |                            |                                                  | (117.7 | )     |       |   | (171.8 | )    
|Sales and maturities of marketable securities                                             |                            |                                                  | 22.2   |       |       |   | 131.6  |      
|Property and equipment additions:                                                         |                            |                                                  |        |       |       |   |        |      
|                                                                                          | Aircraft purchase deposits |                                                  |        |      |       |   |        | (0.9  | )    
|                                                                                          | Capitalized overhauls      |                                                  |        | (11.6 | )     |   |        | (18.5 | )    
|                                                                                          | Aircraft                   |                                                  |        |      |       |   |        | (59.3 | )    
|                                                                                          | Other flight equipment     |                                                  |        | (3.2  | )     |   |        | (8.3  | )    
|                                                                                          | Other property             |                                                  |        | (7.2  | )     |   |        | (5.1  | )    
|Aircraft deposits returned                                                                |                            |                                                  | 7.4    |       |       |   | 1.2    |      
|Restricted deposits                                                                       |                            |                                                  | (2.2   | )     |       |   | (0.1   | )    
|                                                                                          |                            |                                                  |        |       |       |   |        |      
|Net cash used in investing activities                                                     |                            |                                                  | (111.4 | )     |       |   | (130.7 | )    
|                                                                                          |                            |                                                  |        |       |       |   |        |      
|Cash flows from financing activities:                                                     |                            |                                                  |        |       |       |   |        |      
|Proceeds from issuance of intercompany long-term debt                                     |                            |                                                  |       |       |       |   | 63.6   |      
|Long-term debt and capital lease payments                                                 |                            |                                                  | (7.6   | )     |       |   | (36.3  | )    
|Capital contribution from Air Group                                                       |                            |                                                  |       |       |       |   | 60.0   |      
|                                                                                          |                            |                                                  |        |       |       |   |        |      
|Net cash provided by (used in) financing activities                                       |                            |                                                  | (7.6   | )     |       |   | 87.3   |      
|                                                                                          |                            |                                                  |        |       |       |   |        |      
|Net change in cash and cash equivalents                                                   |                            |                                                  | (136.6 | )     |       |   | (63.4  | )    
|Cash and cash equivalents at beginning of period                                          |                            |                                                  | 490.7  |       |       |   | 268.9  |      
|                                                                                          |                            |                                                  |        |       |       |   |        |      
|Cash and cash equivalents at end of period                                                |                            | $                                                | 354.1  |       |       | $ | 205.5  |      
|                                                                                          |                            |                                                  |        |       |       |   |        |      
|Supplemental disclosure of cash paid during the period for:                               |                            |                                                  |        |       |       |   |        |      
|                                                                                          | Interest                   |                                                  | $      | 9.9   |       |   | $      | 7.9   |      
|                                                                                          | Income taxes               |                                                  |        |      |       |   |        |      |      
|Noncash investing and financing activities                                                |                            | None                                             |        | None 

See accompanying notes to financial statements.

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NOTES TO FINANCIAL STATEMENTS (unaudited)

Alaska Airlines, Inc.


Note 1. Basis of Presentation and Significant Accounting Policies
The accompanying unaudited interim financial statements of Alaska
Airlines, Inc. (the Company or Alaska), should be read in conjunction
with the financial statements in the Companys annual report on Form
10-K for the year ended December 31, 2002. In the opinion of management, all adjustments
have been made which are necessary to present fairly the financial
position of the Company as of March 31, 2003, as well as the results of
our operations for the three months ended March 31, 2003 and 2002.
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.

These financial statements have been prepared in conformity with accounting
principles generally accepted in the United States of America (GAAP) and
require 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 the amounts of certain accrued liabilities. Actual results may
differ from these estimates.

Change in Accounting Principle
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets.
In connection with the adoption of this statement, the Company determined that
all of its goodwill was impaired. As a result, effective January 1, 2002, the
Company recorded a one-time, non-cash charge of $12.5 million to write-off its goodwill.
This charge is reflected as a cumulative effect of accounting change in the statement of
operations for the three months ended March 31, 2002.

New Accounting Standards
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 January 1, 2003. The adoption of this statement did not have a
material impact on the Companys financial position, results of operations or
cash flows.

In November 2002, the FASB issued Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. This Interpretation elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees. Additionally, this
Interpretation clarifies the requirements for recognizing a liability at the
inception of the guarantee equal to the fair value of the obligation undertaken
in issuing the guarantee and incorporates the guidance in FASB Interpretation
No. 34, Disclosure of Indirect Guarantees of Indebtedness
of Others. Disclosures under Interpretation No. 45 are effective for financial statements
issued after December 15, 2002.

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While the Company has various guarantees
included in contracts in the normal course of business, primarily in the form
of indemnities, the adoption of the liability recognition provision of
Interpretation No. 45 had no significant impact on the financial
condition and results of operations of the Company.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities which requires the consolidation of variable
interest entities, as defined. This Interpretation is applicable to variable
interest entities created after January 31, 2003. Variable interest entities
created prior to February 1, 2003, must be consolidated effective July 1, 2003.
Disclosures are required currently if the Company expects to consolidate any
variable interest entities. The Company does not currently believe that any
entities will be consolidated as a result of Interpretation No. 46.

In April 2003, the FASB issued Statement of Financial Accounting Standards No.
149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities (SFAS No. 149). SFAS No. 149 amends and clarifies certain
derivative instruments embedded in other contracts, and for hedging activities
under Statement 133. SFAS No. 149 is effective for certain contracts entered
into or modified by the Company after June 30, 2003. The Company is currently
evaluating SFAS No. 149 to determine its impact on the financial condition and
results of operations of the Company.

Note 2. Frequent Flyer Program
Alaskas Mileage Plan liabilities are included under the following balance sheet captions (in millions):

|                               |  |                   |       |                |  |   |       | 
|------------------------------ |  | ----------------- | ----- | -------------- |  | - | ----- | 
|                               |  | December 31, 2002 |       | March 31, 2003
|                               |  |                   |       |               
|Current Liabilities:           |  |                   |       |                |  |   |       | 
|Other accrued liabilities      |  | $                 | 87.0  |                |  | $ | 98.5  | 
|Other Liabilities and Credits: |  |                   |       |                |  |   |       | 
|Deferred revenue               |  |                   | 183.9 |                |  |   | 186.8 | 
|Other liabilities              |  |                   | 32.1  |                |  |   | 26.0  | 
|                               |  |                   |       |                |  |   |       | 
|Total                          |  | $                 | 303.0 |                |  | $ | 311.3 | 
|                               |  |                   |       |                |  |   |       | 

Note 3. Long-Term Debt and Capital Lease Obligations
At December 31, 2002, and March 31, 2003, long-term debt and capital lease obligations were as follows (in millions):

|                                             |  |              |       |           |  |  |       |  
|-------------------------------------------- |  | ------------ | ----- | --------- |  |  | ----- | -
|                                             |  | December 31, |       | March 31,
|                                             |  | 2002         |       | 2003     
|                                             |  |              |       |          
|Fixed rate notes payable due through 2015    |  |              | 439.9 |           |  |  | 410.0 |  
|Variable rate notes payable due through 2018 |  |              | 453.6 |           |  |  | 448.8 |  
|Note payable to parent                       |  |              |      |           |  |  | 63.6  |  
|                                             |  |              |       |           |  |  |       |  
|Long-term debt                               |  |              | 893.5 |           |  |  | 922.4 |  
|Capital lease obligations                    |  |              | 11.8  |           |  |  | 10.1  |  
|Less current portion                         |  |              | (48.6 | )         |  |  | (39.9 | )
|                                             |  |              |       |           |  |  |       |  
|                                             |  |              | 856.7 |           |  |  | 892.6 |  
|                                             |  |              |       |           |  |  |       |  

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On March 21, 2003, the Company
received $63.6 million under a note with Air Group in
connection with the issuance of senior notes due 2023 (the Notes). The Notes
bear quarterly cash interest at a variable rate of interest of 3-month LIBOR
plus 2.5% (3.79% at March 31, 2003) for the first five years from date of
issuance. Thereafter, the Notes will cease bearing cash interest. Instead,
from such date, the original principal amount of each note will increase daily
by the variable yield, which will equal the variable interest rate, up to a
maximum of 5.25%, to produce the variable principal amount.

The Company may redeem all or a portion of the Notes for cash at any time on or
after the third anniversary of the issuance of the Notes. In addition, Air
Group may require the Company to purchase all or a portion of the Notes on the
5th, 10th and 15th anniversaries of the issuance of the Notes and upon the
occurrence of a change of control or tax event at principal plus accrued
interest.

The Notes are senior unsecured obligations and rank equally with the Companys
existing and future senior unsecured indebtedness.

Note 4. Related Company Transactions
On March 21, 2003, the Company received a capital contribution of $60.0 million
from Air Group which is reflected in
capital in excess of par value in the Companys March 31, 2003 balance sheet.

During 2000, Alaska transferred a flight simulator to Alaska Air Group Leasing,
Inc. (AAGL), a subsidiary of Air Group, in exchange for a $2.4 million note receivable from AAGL and a $0.6
million reduction in its payable to Air Group. The loan has repayment terms of
12 years at 6.5% interest. AAGL is leasing the simulator to Alaska for 12
years.

Alaska performs all ticket processing for Horizon. Horizons ticket sales are
recorded by Alaska as air traffic liability and remitted to Horizon when
transportation is provided.

Alaskas Mileage Plan participants may redeem miles on Horizon flights.
Additionally, participants who fly on Horizon may earn miles in Alaskas
Mileage Plan. Alaska does not pay nor receive any amounts from Horizon for its
participation in the plan.

The Company periodically loans Horizon funds at varying interest rates. All
amounts are payable on demand. Interest income recognized related to the
Horizon loans totaled $0.5 million for the quarters ended
March 31, 2002, and 2003. At March 31, 2003, receivables from related companies include
$132.2 million from Horizon, $10.1 million from AAGL and $48.9 million from
Air Group.

Alaska has an agreement with Horizon, the Incentive Payment Program (IPP), to
provide revenue sharing on certain markets. Under the IPP, Alaska makes a
monthly payment to Horizon for markets which provide connecting traffic to
Alaska but create losses for Horizon (the incentive markets). The payment is
based on full-allocated cost for Horizon to provide the transportation service,
plus a 5% mark-up. Incentive markets are analyzed quarterly and the monthly
reimbursement amount is adjusted to reflect the prior quarters actual
performance. Alaska made incentive payments to Horizon of
$5.5 million during each of the quarters ended March 31, 2002, and 2003, which are reflected
as commission expense in the statements of operations.

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Alaska also provides certain services to Horizon for which Alaska receives
payment from Horizon based on the cost of the services, including personnel
expenses related to development and maintenance of alaskaair.com, the
maintenance of telecommunications lines and related software, personnel and
systems expenses to process Horizons revenue transactions, and printing and
graphics services. Alaska also pays certain leasing and other facilities costs
on Horizons behalf which are reimbursed monthly by Horizon. Total amounts
received by Alaska from Horizon were $1.0 million for the
quarter ended March 31, 2002.
Amounts received during the period ended March 31, 2003 were de minimis.

In the normal course of business, Alaska and Horizon provide certain ground
handling services to the other company. For the quarters ended
March 31, 2002 and 2003, charges for ground services provided by Alaska to Horizon totaled $0.3 million
and $0.6 million, respectively.
For the quarters ended
March 31, 2002 and 2003, charges for ground services provided by Horizon
to Alaska totaled $0.7 million and $0.9 million, respectively.

Note 5. Contingencies
Oakland Maintenance Investigation
In December 1998, the U.S. Attorney for the Northern District of California
initiated a grand jury investigation concerning certain 1998 maintenance
activities at Alaskas Oakland maintenance base. In January 2000, the
investigation was expanded to include the aircraft involved in the loss of
Flight 261. The Federal Aviation Administration (FAA) separately proposed a
civil penalty in connection with the 1998 maintenance activities, which Alaska
and the FAA have settled for an agreed amount. In December 2001, the U.S.
Attorney notified Alaska that the evidence it had gathered relative to the 1998
maintenance activities did not warrant the filing of criminal charges, and
closed that part of the investigation. The U.S. Attorney also placed the
portion of its investigation related to Flight 261 on inactive status, with the
possibility of reactivating and reviewing the matter when the National
Transportation Safety Board (NTSB) issued its final report on the accident.
Accordingly, following the final NTSB hearing on the Flight 261 investigation
in December 2002, the U.S. Attorneys Office reactivated the matter in order to
review it in light of the final NTSB report.

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 were
originally filed in various state and federal courts in Alaska, California,
Washington and Illinois. Since then, they have all been consolidated in the
U.S. District Court for the Northern District of California. 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 the majority of these cases and
continues in its efforts to settle the remaining ones. Trial on the remaining
cases is set for July 2003. Consistent with industry standards, the Company
maintains insurance against aircraft accidents.

Management believes the ultimate disposition of the above matters 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.

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##### Table of Contents



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.

Note 6. Other Subsequent Events
On April 16, 2003, the Emergency Wartime Supplemental Appropriations Act (the
Act) was signed into legislation. The Act includes a $2.3 billion one-time
cash payment which will be allocated to air carriers based on each carriers
share of security fees remitted and carrier fees paid to the Transportation
Security Administration (TSA) since its inception in February 2002. The
Company believes its share of the grant will range between $40.0 million and
$50.0 million, and is expected to be received during the second quarter of
2003.

11



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##### Table of Contents



Alaska Airlines Financial and Statistical Data

|                                             |  |                             |        |      |  |        |        |   |  |        |       |  
|-------------------------------------------- |  | --------------------------- | ------ | ---- |  | ------ | ------ | - |  | ------ | ----- | -
|                                             |  | Three Months Ended March 31
|                                             |  |                            
|                                             |  |                             |        |      |  |        |        |   |  | %     
|Financial Data (in millions):                |  | 2002                        |        | 2003 |  | Change
|                                             |  |                             |        |      |  |       
|Operating Revenues:                          |  |                             |        |      |  |        |        |   |  |        |       |  
|Passenger                                    |  | $                           | 374.0  |      |  | $      | 387.0  |   |  |        | 3.5   | %
|Freight and mail                             |  |                             | 15.9   |      |  |        | 17.4   |   |  |        | 9.4   | %
|Other  net                                  |  |                             | 22.3   |      |  |        | 22.6   |   |  |        | 1.3   | %
|                                             |  |                             |        |      |  |        |        |   |  |        |       |  
|Total Operating Revenues                     |  |                             | 412.2  |      |  |        | 427.0  |   |  |        | 3.6   | %
|                                             |  |                             |        |      |  |        |        |   |  |        |       |  
|Operating Expenses:                          |  |                             |        |      |  |        |        |   |  |        |       |  
|Wages and benefits                           |  |                             | 165.7  |      |  |        | 188.0  |   |  |        | 13.5  | %
|Contracted services                          |  |                             | 21.8   |      |  |        | 20.7   |   |  |        | -5.0  | %
|Aircraft fuel                                |  |                             | 55.2   |      |  |        | 76.9   |   |  |        | 39.3  | %
|Aircraft maintenance                         |  |                             | 35.6   |      |  |        | 37.9   |   |  |        | 6.5   | %
|Aircraft rent                                |  |                             | 31.8   |      |  |        | 30.5   |   |  |        | -4.1  | %
|Food and beverage service                    |  |                             | 13.9   |      |  |        | 12.9   |   |  |        | -7.2  | %
|Commissions                                  |  |                             | 14.2   |      |  |        | 8.2    |   |  |        | -42.3 | %
|Other selling expenses                       |  |                             | 24.9   |      |  |        | 21.9   |   |  |        | -12.0 | %
|Depreciation and amortization                |  |                             | 28.2   |      |  |        | 28.5   |   |  |        | 1.1   | %
|Loss on sale of assets                       |  |                             |       |      |  |        | 0.3    |   |  | NM    
|Landing fees and other rentals               |  |                             | 23.6   |      |  |        | 28.7   |   |  |        | 21.6  | %
|Other                                        |  |                             | 36.3   |      |  |        | 34.1   |   |  |        | -6.1  | %
|                                             |  |                             |        |      |  |        |        |   |  |        |       |  
|Total Operating Expenses                     |  |                             | 451.2  |      |  |        | 488.6  |   |  |        | 8.3   | %
|                                             |  |                             |        |      |  |        |        |   |  |        |       |  
|Operating Loss                               |  |                             | (39.0  | )    |  |        | (61.6  | ) |  |        | 57.9  | %
|                                             |  |                             |        |      |  |        |        |   |  |        |       |  
|Interest income                              |  |                             | 5.0    |      |  |        | 1.2    |   |  |        |       |  
|Interest expense                             |  |                             | (11.9  | )    |  |        | (11.3  | ) |  |        |       |  
|Interest capitalized                         |  |                             | 0.1    |      |  |        | 0.7    |   |  |        |       |  
|Other  net                                  |  |                             | 4.1    |      |  |        | 0.4    |   |  |        |       |  
|                                             |  |                             |        |      |  |        |        |   |  |        |       |  
|                                             |  |                             | (2.7   | )    |  |        | (9.0   | ) |  |        |       |  
|                                             |  |                             |        |      |  |        |        |   |  |        |       |  
|Loss Before Income Tax and Accounting Change |  | $                           | (41.7  | )    |  | $      | (70.6  | ) |  |        | 69.3  | %
|                                             |  |                             |        |      |  |        |        |   |  |        |       |  
|Operating Statistics:                        |  |                             |        |      |  |        |        |   |  |        |       |  
|Revenue passengers (000)                     |  |                             | 3,193  |      |  |        | 3,258  |   |  |        | 2.0   | %
|RPMs (000,000)                               |  |                             | 2,977  |      |  |        | 3,143  |   |  |        | 5.6   | %
|ASMs (000,000)                               |  |                             | 4,467  |      |  |        | 4,708  |   |  |        | 5.4   | %
|Passenger load factor                        |  |                             | 66.7   | %    |  |        | 66.7   | % |  | 0.0pts
|Breakeven load factor                        |  |                             | 76.0   | %    |  |        | 80.5   | % |  | 4.5pts
|Yield per passenger mile                     |  |                             | 12.56¢ |      |  |        | 12.31¢ |   |  |        | -2.0  | %
|Operating revenue per ASM                    |  |                             | 9.23¢  |      |  |        | 9.07¢  |   |  |        | -1.7  | %
|Operating expenses per ASM                   |  |                             | 10.10¢ |      |  |        | 10.38¢ |   |  |        | 2.7   | %
|Operating
expenses per ASM excluding fuel    |  |                             | 8.87¢  |      |  |        | 8.75¢  |   |  |        | -1.3  | %
|Fuel cost per gallon                         |  |                             | 73.6¢  |      |  |        | 99.1¢  |   |  |        | 34.7  | %
|Fuel gallons (000,000)                       |  |                             | 75.0   |      |  |        | 77.6   |   |  |        | 3.5   | %
|Average number of employees                  |  |                             | 9,815  |      |  |        | 9,988  |   |  |        | 1.8   | %
|Aircraft utilization (blk hrs/day)           |  |                             | 10.1   |      |  |        | 10.3   |   |  |        | 2.4   | %
|Operating fleet at period-end                |  |                             | 102    |      |  |        | 106    |   |  |        | 3.9   | %

NM = Not Meaningful

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. 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, 2002.

Results of Operations
First Quarter 2003 Compared with First Quarter 2002
During the first quarter of 2003, the Companys financial performance continued
to be adversely affected by weak economic conditions and a continued negative
impact from the 2001 terrorist attacks. In addition, the U.S. war in Iraq
further adversely affected the financial performance of Alaska and the airline
industry. Net loss for the first quarter of 2003 was $45.1 million compared
with a loss of $39.3 million in 2002. The 2002 net loss includes the write-off
of all of the Companys goodwill ($12.5 million), in accordance with Statement
of Financial Accounting Standards (SFAS) No. 142. (See Note 1 to the financial
statements). Excluding this goodwill write-off, net loss for 2002 was $26.8
million. The operating loss for the first quarter of 2003 was $61.6 million
compared with an operating loss of $39.0 million for 2002. Financial and
statistical data is shown on page 12. A discussion of this data follows.

Revenues
Operating revenue increased $14.8 million, or 3.6%, during 2003 as compared to
2002. Available seat miles (ASMs or Capacity) increased 12.2% in January, 2.8%
in February and 1.7% in March as compared to the same periods in 2002. For the
quarter, capacity increased 5.4% and revenue passenger miles (RPMs or Traffic)
increased 5.6% as compared to the same period in 2002. The capacity increases
are primarily due to the addition of service to new cities (Boston, Denver,
Newark and Miami) and an increase in service in the Mexican and Canadian
markets, partially offset by lower capacity in virtually all other markets.
Traffic increases primarily reflect service to new cities and traffic increases
between the U.S. mainland and Mexico, Canada and Anchorage/Fairbanks, partially
offset by decreases in traffic in Northern California, Southern California and
Arizona. Passenger load factor remained consistent in 2003 compared to 2002 at
66.7%.

Yield per passenger mile was down 2.0% due to a combination of fewer business
fares and a drop off in demand caused by the U.S. war in Iraq and a continued
slow U.S. economy. Higher traffic combined with lower yields resulted in a
$13.0 million, or 3.5% increase in passenger revenues.

Freight and mail revenues increased
$1.5 million, or 9.4%, due to higher freight
and mail volumes attributable to a reduction of security restrictions.
Other-net revenues increased $0.3 million, or 1.3%, due largely to increased
revenue from the sale of miles in Alaskas frequent flyer program.

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##### Table of Contents



Operating Expenses
For the quarter, total operating expenses increased $37.4 million, or 8.3%, as
compared to the same period in 2002. This increase is due largely to a 5.4%
increase in ASMs combined with higher fuel and wage and benefit costs.
Operating expenses per ASM excluding fuel decreased 1.3% as compared to the same
period in 2002. Explanations of significant period-over-period changes in the
components of operating expenses are as follows:



| |  |  | Wages and benefits increased $22.3 million, or 13.5%, due to an
11.5% increase in average wages and benefits per employee combined with
a 1.8% increase in the average number of employees. The increase in
average wages and benefits per employee is due principally to higher
pension costs related to our defined benefit plans, higher health
insurance and workers compensation costs and scale and step increases
for employees represented under collective bargaining agreements.                                                            
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Aircraft fuel increased $21.7 million, or 39.3%, due to a 34.7%
increase in the fuel cost per gallon and a 3.5% increase in fuel
gallons consumed. Air Groups fuel hedging program resulted in Alaska
recognizing $8.5 million in hedging gains during the first quarter of
2003, of which $7.8 million is reflected in aircraft fuel and $0.7
million is reflected in other-net. For the remainder of 2003, Air
Group has fuel hedges in place for 35% of its expected fuel
consumption, principally crude oil swaps at prices below $22 per
barrel.
|
| |  |  | Aircraft maintenance increased $2.3 million, or 6.5%, due to
increases in the number of airframe checks and outside repairs on major
aircraft components.                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  |  | Commissions decreased $6.0 million, or 42.3%, due primarily to the
elimination of travel agent base commissions starting in June 2002, and
the continuing shift to direct sales channels. In 2003, 46.2% of Air
Group ticket sales were made through traditional travel agents,
compared to 53.1% in 2002. In 2003, 24.9% of the ticket sales were
made through Alaskas Internet web site compared to 18.8% in 2002.                                                                                                                                 
|
| |  |  | Other selling expenses decreased $3.0 million, or 12.0%, due to
lower customer reservation system costs and Mileage Plan selling costs
partially offset by increases in credit card commissions and
advertising expenses.                                                                                                                                                                                                                                                                                                                             
|
| |  |  | Landing fees and other rentals increased $5.1 million, or 21.6%.
The 2002 results include a $2.2 million credit from adjusting a
December 2001 accrual due to a year-end airport assessment coming in
lower than expected. Absent this amount, landing fees and other
rentals increased 11.2%. The higher rates reflect modest volume growth
and an increase in airports cost of operations including facility
expansion initiatives and increased costs for security.                                                                               
|
| |  |  | Other expense decreased $2.2 million, or 6.1%, primarily reflecting
lower expenditures for insurance, supplies, data and communications and
foreign exchange gains, partially offset by an increase in expenditures
for property taxes, professional services and per diems. Insurance
expense decreases are a reflection of several factors including
additional coverage                                                                                                                                                                            

14



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##### Table of Contents





| |  |  | from government aviation insurance programs and
competitive pressures in the aviation insurance market. However,
aviation insurance remains substantially higher than before September
11, 2001.
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Nonoperating Income (Expense)
Net nonoperating items were $9.0 million expense in 2003 compared to $2.7
million expense in 2002. Interest income decreased $3.8 million due to lower
interest rates and an adjustment of premium and discount amortization on the
Companys marketable securities portfolio, while interest expense (net of
capitalized interest) was down $1.2 million due to decreases in variable
interest rates in 2003. Other-net includes $1.8 million and $0.7 million in
gains resulting from hedge ineffectiveness on fuel hedging contracts in 2002
and 2003, respectively. In 2002, the Company received a $1.4 million insurance
recovery and a $0.9 million gain on conversion of Equant N.V. shares (a
telecommunications network company owned by many airlines).

Income Tax Benefit
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
air fares 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 36.1% tax rate for the first quarter of 2003, we
considered a variety of factors, including the U.S. federal rate of 35%,
estimates of nondeductible expenses and state income taxes, and our forecast of
pretax income for the full year. We evaluate this rate each quarter and make
adjustments when 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,
2002.

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

|                                                                                                   |  |                         |        |                |  |        |        |   |  |    |       |  
|-------------------------------------------------------------------------------------------------- |  | ----------------------- | ------ | -------------- |  | ------ | ------ | - |  | -- | ----- | -
|                                                                                                   |  | December 31, 2002       |        | March 31, 2003 |  | Change
|                                                                                                   |  |                         |        |                |  |       
|                                                                                                   |  | (In millions,           |        |                |  |        |        |   |  |   
|                                                                                                   |  | except debt-to-capital) |        |                |  |        |        |   |  |   
|Cash and marketable securities                                                                     |  | $                       | 635.7  |                |  | $      | 615.3  |   |  | $  | (20.4 | )
|Working capital                                                                                    |  |                         | 240.0  |                |  |        | 240.0  |   |  |    |      |  
|Long-term debt and
capital lease obligations*                                                      |  |                         | 856.7  |                |  |        | 892.6  |   |  |    | 35.9  |  
|Shareholders equity                                                                               |  |                         | 569.7  |                |  |        | 585.4  |   |  |    | 15.7  |  
|Debt-to-capital*                                                                                   |  |                         | 60%:40 | %              |  |        | 60%:40 | % |  | NA
|Debt-to-capital assuming aircraft
operating leases are capitalized
at seven times annualized rent* |  |                         | 75%:25 | %              |  |        | 75%:25 | % |  | NA

*Excludes current portion of long-term debt and capital lease obligations

The Company has various options available to meet its capital and operating
commitments in 2003, including cash and marketable securities on hand at March
31, 2003 of $615.3 million. In addition, to

15



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##### Table of Contents



supplement cash requirements, the
Company periodically considers various borrowing or leasing options. In the
first quarter of 2003, the Company received $60.0 million and $63.6 million,
respectively, from Air Group in connection with a capital contribution and
issuance of senior notes due 2023 (see discussion in Note 3, Long-term Debt
and Capital Lease Obligations and Note 4, Related Company Transactions in
the Notes to the Financial Statements). Funds from these transactions are
expected to provide additional liquidity to be used in the Companys
operations.

During the first quarter of 2003,
shareholders equity increased $15.7 million,
reflecting the $60 million capital contribution from Air Group, partially
offset by the Companys net loss of $45.1 million.

Cash Used in Operating and Investing Activities
During the first quarter of 2003, net cash used in operating activities was
$20.0 million, primarily reflecting the first quarter net loss of $45.1
million. Cash used in investing activities totaled $130.7 million, primarily
reflecting capital expenditures of $90.9 million and purchases of marketable
securities of $171.8 million, partially offset by sales and maturities of
marketable securities of $131.6 million and cash provided by disposition of
assets of $0.5 million.

Cash Provided by Financing Activities
In 2003, cash provided by financing activities was $87.3 million, reflecting a
capital contribution received from Air Group of $60.0 million
and intercompany debt
issuance of $63.6 million, partially offset by long-term debt and capital
lease payments of $36.3 million. On March 21, 2003, the Company received $63.6
million from Air Group in connection with the issuance of senior notes due
2023. See Note 3, Long-term Debt and Capital Lease Obligations in the Notes
to Financial Statements.

CommitmentsAs of March 31, 2003, the Company had firm orders for 14 aircraft
requiring aggregate payments of approximately $236.2 million, as set forth
below. In addition, Alaska has options to acquire 26 additional B737s. Alaska
expects to finance the new planes with either leases, long-term debt or
internally generated cash.

|                    |  |                               |       |      |  |      |       |       |  |  |   |  |  |   |       | 
|------------------- |  | ----------------------------- | ----- | ---- |  | ---- | ----- | ----- |  |  | - |  |  | - | ----- | 
|                    |  | Delivery Period - Firm Orders
|                    |  |                              
|Aircraft            |  | 2003                          |       | 2004 |  | 2005 |       | Total
|                    |  |                               |       |      |  |      |       |      
|Boeing B737-700     |  |                               | 6     |      |  |      |      |       |  |  |  |  |  |   | 6     | 
|Boeing B737-900     |  |                               | 5     |      |  |      | 3     |       |  |  |  |  |  |   | 8     | 
|                    |  |                               |       |      |  |      |       |       |  |  |   |  |  |   |       | 
|Total               |  |                               | 11    |      |  |      | 3     |       |  |  |  |  |  |   | 14    | 
|                    |  |                               |       |      |  |      |       |       |  |  |   |  |  |   |       | 
|Payments (Millions) |  | $                             | 133.5 |      |  | $    | 102.7 |       |  |  |  |  |  | $ | 236.2 | 
|                    |  |                               |       |      |  |      |       |       |  |  |   |  |  |   |       | 

The Company has a purchase commitment that may trigger a liability under
certain events of default. The executory contract for the purchase commitment
is not an obligation of the Company until the aircraft is delivered. As a
result, the purchase commitment is not included in current and long-term debt
or deposits for future flight equipment in the balance sheet.

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The following table is a summary of the Companys material contractual
obligations as of March 31, 2003 for the remainder of 2003 and by fiscal year:

|                              |  |                                    |       |      |  |      |       |      |  |      |       |      |  |       |       |  |  |   |       |  |  |        |         |  |  |   |         | 
|----------------------------- |  | ---------------------------------- | ----- | ---- |  | ---- | ----- | ---- |  | ---- | ----- | ---- |  | ----- | ----- |  |  | - | ----- |  |  | ------ | ------- |  |  | - | ------- | 
|                              |  | Contractual Payments Due by Period
|                              |  |                                   
|                              |  |                                    |       |      |  |      |       |      |  |      |       |      |  |       |       |  |  |   |       |  |  | Beyond |         |  |  |  
|(in millions)                 |  | 2003                               |       | 2004 |  | 2005 |       | 2006 |  | 2007 |       | 2007 |  | Total
|                              |  |                                    |       |      |  |      |       |      |  |      |       |      |  |      
|Long-term debt                |  | $                                  | 25.3  |      |  | $    | 185.7 |      |  | $    | 38.8  |      |  | $     | 41.6  |  |  | $ | 44.5  |  |  | $      | 580.4   |  |  | $ | 916.3   | 
|Capital lease obligations     |  |                                    | 1.7   |      |  |      | 8.0   |      |  |      |      |      |  |       |      |  |  |   |      |  |  |        |        |  |  |   | 9.7     | 
|Operating lease commitments   |  |                                    | 107.0 |      |  |      | 135.8 |      |  |      | 123.7 |      |  |       | 113.9 |  |  |   | 96.3  |  |  |        | 654.9   |  |  |   | 1,231.6 | 
|Aircraft purchase commitments |  |                                    | 133.5 |      |  |      | 102.7 |      |  |      |      |      |  |       |      |  |  |   |      |  |  |        |        |  |  |   | 236.2   | 
|                              |  |                                    |       |      |  |      |       |      |  |      |       |      |  |       |       |  |  |   |       |  |  |        |         |  |  |   |         | 
|Total                         |  | $                                  | 267.5 |      |  | $    | 432.2 |      |  | $    | 162.5 |      |  | $     | 155.5 |  |  | $ | 140.8 |  |  | $      | 1,235.3 |  |  | $ | 2,393.8 | 
|                              |  |                                    |       |      |  |      |       |      |  |      |       |      |  |       |       |  |  |   |       |  |  |        |         |  |  |   |         | 

New Accounting Standards 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 the Company
beginning January 1, 2003. The adoption of this statement did not have a
material impact on the Companys financial position, results of operations or
cash flows.

In November 2002, the FASB issued Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. This Interpretation elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees. Additionally, this
Interpretation clarifies the requirements for recognizing a liability at the
inception of the guarantee equal to the fair value of the obligation undertaken
in issuing the guarantee and incorporates the guidance in FASB Interpretation
No. 34, Disclosure of Indirect Guarantees of Indebtedness of Others.
Disclosures under Interpretation No. 45 are effective for financial statements
issued after December 15, 2002. While the Company has various guarantees
included in contracts in the normal course of business, primarily in the form
of indemnities, the adoption of the liability recognition provision
of Interpretation No. 45 had no significant impact on the
financial conditions and results of operations of the Company.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities which requires the consolidation of variable
interest entities, as defined. This Interpretation is applicable to variable
interest entities created after January 31, 2003. Variable interest entities
created prior to February 1, 2003, must be consolidated effective July 1, 2003.
Disclosures are required currently if the Company expects to consolidate any
variable interest entities. The Company does not currently believe that any
entities will be consolidated as a result of Interpretation No. 46.

In December 2002, the FASB issued Statement of Financial Accounting Standards
No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure
(SFAS No. 148). SFAS No. 148 amends the transition and disclosure provisions
of SFAS No. 123. During the fourth quarter of 2002, the Company adopted the
disclosure provisions of SFAS 148 and is currently evaluating SFAS

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No. 148 to
determine if it will adopt SFAS No. 123 to account for employee stock options
using the fair value method and, if so, when to transition to that method.

In April 2003, the FASB issued Statement of Financial Accounting Standards No.
149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities (SFAS No. 149). SFAS No. 149 amends and clarifies certain
derivative instruments embedded in other contracts, and for hedging activities
under Statement 133. SFAS No. 149 is effective for certain contracts entered
into or modified by the Company after June 30, 2003. The Company is currently
evaluating SFAS No. 149 to determine its impact on the Company.




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. At
March 31, 2003, the Company had hedge agreements in place to hedge
approximately 35% of its 2003 expected jet fuel requirements. Under SFAS No.
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 March 31,
2003 was a net asset of approximately $15.0 million, which is recorded in
prepaid expenses and other current assets in the balance sheet.

During the three months ended March 31, 2002, and 2003, the Company
recognized approximately $0.5 million in realized hedging losses and $7.8
million in realized hedging gains, respectively. These amounts are reflected in
aircraft fuel in the Statement of Operations. During the three months ended
March 31, 2002, and 2003, the Company recorded $1.8 million and $0.7
million, respectively, in income related to the ineffectiveness of the
Companys hedges. This amount is recorded as non-operating income (expense) in
other-net in the Statement of Operations.

At March 31, 2003, the fair value
of the Companys financial hedging
instruments was a net asset of approximately $12.8 million, which is reflected in prepaid expenses
and other current assets in the Consolidated Balance Sheet.

In the first quarter of 2003, the Company recorded unrealized losses of
$0.9 million net of tax. This amount is reflected in accumulated other
comprehensive income (loss) in the balance sheet.




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 and have reviewed significant changes in
internal control. 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 SEC) is
recorded, processed, summarized and reported within the time periods specified
by the SECs rules and forms, and that the information is communicated to the
certifying officers on a timely basis.

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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.







PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Oakland Maintenance Investigation
In December 1998, the U.S. Attorney for the Northern District of California
initiated a grand jury investigation concerning certain 1998 maintenance
activities at Alaskas Oakland maintenance base. In January 2000, the
investigation was expanded to include the aircraft involved in the loss of
Flight 261. The Federal Aviation Administration (FAA) separately proposed a
civil penalty in connection with the 1998 maintenance activities, which Alaska
and the FAA have settled for an agreed amount. In December 2001, the U.S.
Attorney notified Alaska that the evidence it had gathered relative to the 1998
maintenance activities did not warrant the filing of criminal charges, and
closed that part of the investigation. The U.S. Attorney also placed the
portion of its investigation related to Flight 261 on inactive status, with the
possibility of reactivating and reviewing the matter when the National
Transportation Safety Board (NTSB) issued its final report on the accident.
Accordingly, following the final NTSB hearing on the Flight 261 investigation
in December 2002, the U.S. Attorneys Office reactivated the matter in order to
review it in light of the final NTSB report.

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 were
originally filed in various state and federal courts in Alaska, California,
Washington and Illinois. Since then, they have all been consolidated in the
U.S. District Court for the Northern District of California. 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 the majority of these cases and
continues in its efforts to settle the remaining ones. Trial on the remaining
cases is set for July 2003. Consistent with industry standards, the Company
maintains insurance against aircraft accidents.

Management believes the ultimate disposition of the above matters 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.

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ITEM 6. Exhibits and Reports on Form 8-K
(a) No reports on Form 8-K were filed this quarter.

(b)  Exhibit 99.1- Section 906 Certification of Chief Executive Officer Pursuant
to 18 U.S.C. Section 1350

(c)  Exhibit 99.2- Section 906 Certification of Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350

(d)  Exhibit 99.3- Section 302 Certification of Chief Executive Officer Pursuant
to 18 U.S.C. Section 1350

(e)  Exhibit 99.4- Section 302 Certification of Chief Financial Officer Pursuant
to 18 U.S.C. Section 1350




Signatures
Pursuant to the requirements of the Securities Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.

|                                                            
|------------------------------------------------------------
|ALASKA AIRLINES, INC                                        
|                                                            
|Registrant                                                  
|                                                            
|Date: May 14, 2003                                          
|                                                            
|/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

20