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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, 2008.

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 000-19978

ALASKA AIRLINES, INC.

(Exact name
of registrant as specified in its charter)



|                                                              |  |                                    
|------------------------------------------------------------- |  | -----------------------------------
|Alaska                                                        |  | 92-0009235                         
|(State or other jurisdiction ofincorporation or organization) |  | (I.R.S. EmployerIdentification No.)

19300 International Boulevard, Seattle, Washington 98188

(Address of principal executive offices)

Registrants telephone number, including area code: (206) 392-5040

Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.    Yesx    No   ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the
definitions of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer   ̈            Accelerated filer   ̈

Non-accelerated filer  x            Smaller reporting company   ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):     Yes   ̈    No  x

The registrant meets the conditions specified
in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format.

The registrant is
a wholly owned subsidiary of Alaska Air Group, Inc., a Delaware corporation, and there is no market for the registrants common stock, par value $1.00 per share. As of March 31, 2008, shares of common stock outstanding totaled 500.









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ALASKA AIRLINES, INC.

Quarterly Report on Form 10-Q for the three months ended March 31, 2008

TABLE OF CONTENTS



|                              |  |                                                                                       |  |   
|----------------------------- |  | ------------------------------------------------------------------------------------- |  | --
|PART I. FINANCIAL INFORMATION |  | 4                                                                                    
|ITEM 1.                       |  | CONDENSED FINANCIAL STATEMENTS                                                        |  | 4 
|ITEM 2.                       |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |  | 17
|ITEM 4.                       |  | CONTROLS AND PROCEDURES                                                               |  | 25
|                              | 
|PART II. OTHER INFORMATION    |  | 25                                                                                   
|ITEM 1.                       |  | LEGAL PROCEEDINGS                                                                     |  | 25
|ITEM 1A.                      |  | RISK FACTORS                                                                          |  | 26
|ITEM 5.                       |  | OTHER INFORMATION                                                                     |  | 26
|ITEM 6.                       |  | EXHIBITS                                                                              |  | 26
|                              | 
|Signatures                    |  | 26                                                                                   
|                              | 
|EXHIBIT INDEX                 |  | 27                                                                                   



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As used in this Form 10-Q, the terms Alaska, our, we and the Company
refer to Alaska Airlines, Inc., unless the context indicates otherwise.

Cautionary Note Regarding Forward-Looking Statements

In addition to historical information, this Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act
of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. Forward-looking statements are those that predict or describe future events or trends and that do not
relate solely to historical matters. You can generally identify forward-looking statements as statements containing the words believe, expect, will, anticipate, intend,
estimate, project, assume or other similar expressions, although not all forward-looking statements contain these identifying words. Forward-looking statements involve risks and uncertainties that could cause
actual results to differ materially from historical experience or the Companys present expectations. Some of the things that could cause our actual results to differ from our expectations are:



| |  |  | the competitive environment in our industry;
| | - |  | --------------------------------------------



| |  |  | changes in our operating costs, including fuel, which can be volatile;
| | - |  | ----------------------------------------------------------------------



| |  |  | labor disputes and our ability to attract and retain qualified personnel;
| | - |  | -------------------------------------------------------------------------



| |  |  | the amounts of potential lease termination payments with lessors for our remaining MD-80 leased aircraft and related sublease payments from sublessees, if
applicable;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our significant indebtedness;
| | - |  | -----------------------------



| |  |  | compliance with our financial covenants;
| | - |  | ----------------------------------------



| |  |  | potential downgrades of our credit ratings and the availability of financing;
| | - |  | -----------------------------------------------------------------------------



| |  |  | our ability to meet our cost reduction goals;
| | - |  | ---------------------------------------------



| |  |  | operational disruptions;
| | - |  | ------------------------



| |  |  | general economic conditions, as well as economic conditions in the geographic regions we serve;
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | the concentration of our revenue from a few key markets;
| | - |  | --------------------------------------------------------



| |  |  | actual or threatened terrorist attacks, global instability and potential U.S. military actions or activities;
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | insurance costs;
| | - |  | ----------------



| |  |  | our inability to achieve or maintain profitability;
| | - |  | ---------------------------------------------------



| |  |  | fluctuations in our quarterly results;
| | - |  | --------------------------------------



| |  |  | an aircraft accident or incident;
| | - |  | ---------------------------------



| |  |  | liability and other claims asserted against us;
| | - |  | -----------------------------------------------



| |  |  | our reliance on automated systems and the risks associated with changes made to those systems;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | our reliance on third-party vendors and partners;
| | - |  | -------------------------------------------------



| |  |  | changes in laws and regulations; and
| | - |  | ------------------------------------



| |  |  | increases in government fees and taxes.
| | - |  | ---------------------------------------

You should
not place undue reliance on our forward-looking statements because the matters they describe are subject to known and unknown risks, uncertainties and other unpredictable factors, many of which are beyond our control. Our forward-looking statements
are based on the information currently available to us and speak only as of the date on which this report was filed with the SEC. We expressly disclaim any obligation to issue any updates or revisions to our forward-looking statements, even if
subsequent events cause our expectations to change regarding the matters discussed in those statements. Over time, our actual results, performance or achievements will likely differ from the anticipated results, performance or achievements that are
expressed or implied by our forward-looking statements, and such differences might be significant and materially adverse to our shareholders. For a discussion of these and other risk factors, see Item 1A: Risk Factors of the
Companys annual report on Form 10-K for the year ended December 31, 2007. Please consider our forward-looking statements in light of those risks as you read this report.



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PART I. FINANCIAL INFORMATION



|Item 1: | Condensed Financial Statements
|------- | ------------------------------

CONDENSED BALANCE SHEETS
(unaudited)

Alaska Airlines, Inc.



|                                               |  |               |         |                 |   |        
|---------------------------------------------- |  | ------------- | ------- | --------------- | - | -------
|ASSETS                                         |  |               |         |                 |   |        
|                                               |  |              
|(in millions)                                  |  | March 31,2008 |         | December31,2007
|Current Assets                                 |  |               |         |                 |   |        
|Cash and cash equivalents                      |  | $             | 211.8   |                 | $ | 204.3  
|Marketable securities                          |  |               | 709.9   |                 |   | 618.5  
|                                               |  |               |         |                 |   |        
|Total cash and marketable securities           |  |               | 921.7   |                 |   | 822.8  
|Securities lending collateral                  |  |               | 106.7   |                 |   | 111.9  
|Receivables from related companies             |  |               | 285.6   |                 |   | 366.0  
|Receivables - net                              |  |               | 150.9   |                 |   | 129.0  
|Inventories and supplies - net                 |  |               | 17.5    |                 |   | 18.1   
|Deferred income taxes                          |  |               | 101.3   |                 |   | 82.5   
|Fuel hedge contracts                           |  |               | 86.4    |                 |   | 84.6   
|Prepaid expenses and other current assets      |  |               | 41.8    |                 |   | 26.7   
|                                               |  |               |         |                 |   |        
|Total Current Assets                           |  |               | 1,711.9 |                 |   | 1,641.6
|                                               |  |               |         |                 |   |        
|Property and Equipment                         |  |               |         |                 |   |        
|Aircraft and other flight equipment            |  |               | 2,603.1 |                 |   | 2,488.6
|Other property and equipment                   |  |               | 493.0   |                 |   | 489.5  
|Deposits for future flight equipment           |  |               | 386.3   |                 |   | 389.2  
|                                               |  |               |         |                 |   |        
|                                               |  |               | 3,482.4 |                 |   | 3,367.3
|Less accumulated depreciation and amortization |  |               | 909.1   |                 |   | 878.2  
|                                               |  |               |         |                 |   |        
|Total Property and Equipment - Net             |  |               | 2,573.3 |                 |   | 2,489.1
|                                               |  |               |         |                 |   |        
|Fuel Hedge Contracts                           |  |               | 15.2    |                 |   | 9.9    
|                                               |  |               |         |                 |   |        
|Other Assets                                   |  |               | 79.4    |                 |   | 80.5   
|                                               |  |               |         |                 |   |        
|Total Assets                                   |  | $             | 4,379.8 |                 | $ | 4,221.1
|                                               |  |               |         |                 |   |        

See accompanying notes to condensed financial statements.



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CONDENSED BALANCE SHEETS (unaudited)

Alaska Airlines, Inc.



|                                           |  |               |         |   |                  |   |         |  
|------------------------------------------ |  | ------------- | ------- | - | ---------------- | - | ------- | -
|LIABILITIES AND SHAREHOLDERS EQUITY       |  |               |         |   |                  |   |         |  
|                                           |  |              
|(in millions except share amounts)         |  | March 31,2008 |         |   | December 31,2007 |  
|Current Liabilities                        |  |               |         |   |                  |   |         |  
|Accounts payable                           |  | $             | 81.2    |   |                  | $ | 82.8    |  
|Payables to related companies              |  |               | 48.2    |   |                  |   | 47.9    |  
|Accrued aircraft rent                      |  |               | 50.0    |   |                  |   | 54.1    |  
|Accrued wages, vacation and payroll taxes  |  |               | 80.9    |   |                  |   | 92.4    |  
|Other accrued liabilities                  |  |               | 520.5   |   |                  |   | 471.3   |  
|Air traffic liability                      |  |               | 473.6   |   |                  |   | 364.6   |  
|Securities lending obligation              |  |               | 106.7   |   |                  |   | 111.9   |  
|Current portion of long-term debt          |  |               | 137.3   |   |                  |   | 170.9   |  
|                                           |  |               |         |   |                  |   |         |  
|Total Current Liabilities                  |  |               | 1,498.4 |   |                  |   | 1,395.9 |  
|                                           |  |               |         |   |                  |   |         |  
|Long-Term Debt, Net of Current Portion     |  |               | 1,136.3 |   |                  |   | 1,061.5 |  
|                                           |  |               |         |   |                  |   |         |  
|Other Liabilities and Credits              |  |               |         |   |                  |   |         |  
|Deferred income taxes                      |  |               | 127.8   |   |                  |   | 119.4   |  
|Deferred revenue                           |  |               | 403.0   |   |                  |   | 387.8   |  
|Other liabilities                          |  |               | 355.1   |   |                  |   | 381.2   |  
|                                           |  |               |         |   |                  |   |         |  
|                                           |  |               | 885.9   |   |                  |   | 888.4   |  
|                                           |  |               |         |   |                  |   |         |  
|Commitments and Contingencies              |  |               |         |   |                  |   |         |  
|Shareholders Equity                       |  |               |         |   |                  |   |         |  
|Common stock, $1 par value                 |  |               |         |   |                  |   |         |  
|Authorized: 1,000 shares                   |  |               |         |   |                  |   |         |  
|Issued: 2008 and 2007 - 500 shares         |  |               |        |   |                  |   |        |  
|Capital in excess of par value             |  |               | 629.6   |   |                  |   | 626.8   |  
|Accumulated other comprehensive loss       |  |               | (127.8  | ) |                  |   | (133.3  | )
|Retained earnings                          |  |               | 357.4   |   |                  |   | 381.8   |  
|                                           |  |               |         |   |                  |   |         |  
|                                           |  |               | 859.2   |   |                  |   | 875.3   |  
|                                           |  |               |         |   |                  |   |         |  
|Total Liabilities and Shareholders Equity |  | $             | 4,379.8 |   |                  | $ | 4,221.1 |  
|                                           |  |               |         |   |                  |   |         |  

See accompanying notes to condensed financial statements.



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CONDENSED STATEMENTS OF OPERATIONS (unaudited)

Alaska Airlines, Inc.



|                                                                   |  |      |       |   |      |   |       |  
|------------------------------------------------------------------ |  | ---- | ----- | - | ---- | - | ----- | -
|Three Months Ended March 31 (in millions except per share amounts) |  | 2008 |       |   | 2007 |  
|Operating Revenues                                                 |  |      |       |   |      |   |       |  
|Passenger                                                          |  | $    | 607.3 |   |      | $ | 545.9 |  
|Freight and mail                                                   |  |      | 21.3  |   |      |   | 20.7  |  
|Other - net                                                        |  |      | 34.4  |   |      |   | 35.9  |  
|                                                                   |  |      |       |   |      |   |       |  
|Total mainline operating revenues                                  |  |      | 663.0 |   |      |   | 602.5 |  
|Passenger - purchased capacity                                     |  |      | 70.4  |   |      |   | 57.3  |  
|                                                                   |  |      |       |   |      |   |       |  
|Total Operating Revenues                                           |  |      | 733.4 |   |      |   | 659.8 |  
|                                                                   |  |      |       |   |      |   |       |  
|Operating Expenses                                                 |  |      |       |   |      |   |       |  
|Wages and benefits                                                 |  |      | 190.2 |   |      |   | 187.3 |  
|Variable incentive pay                                             |  |      | 2.6   |   |      |   | 7.7   |  
|Aircraft fuel, including hedging gains and losses                  |  |      | 233.7 |   |      |   | 157.6 |  
|Aircraft maintenance                                               |  |      | 42.1  |   |      |   | 34.3  |  
|Aircraft rent                                                      |  |      | 28.2  |   |      |   | 26.3  |  
|Landing fees and other rentals                                     |  |      | 41.9  |   |      |   | 41.8  |  
|Contracted services                                                |  |      | 34.7  |   |      |   | 29.4  |  
|Selling expenses                                                   |  |      | 26.5  |   |      |   | 31.6  |  
|Depreciation and amortization                                      |  |      | 38.8  |   |      |   | 35.4  |  
|Food and beverage service                                          |  |      | 11.7  |   |      |   | 10.6  |  
|Other                                                              |  |      | 41.8  |   |      |   | 39.8  |  
|                                                                   |  |      |       |   |      |   |       |  
|Total mainline operating expenses                                  |  |      | 692.2 |   |      |   | 601.8 |  
|Purchased capacity costs                                           |  |      | 76.7  |   |      |   | 67.4  |  
|                                                                   |  |      |       |   |      |   |       |  
|Total Operating Expenses                                           |  |      | 768.9 |   |      |   | 669.2 |  
|                                                                   |  |      |       |   |      |   |       |  
|Operating Loss                                                     |  |      | (35.5 | ) |      |   | (9.4  | )
|                                                                   |  |      |       |   |      |   |       |  
|Nonoperating Income (Expense)                                      |  |      |       |   |      |   |       |  
|Interest income                                                    |  |      | 13.1  |   |      |   | 15.9  |  
|Interest expense                                                   |  |      | (21.8 | ) |      |   | (20.4 | )
|Interest capitalized                                               |  |      | 5.9   |   |      |   | 6.3   |  
|Other - net                                                        |  |      | 0.4   |   |      |   | 0.1   |  
|                                                                   |  |      |       |   |      |   |       |  
|                                                                   |  |      | (2.4  | ) |      |   | 1.9   |  
|                                                                   |  |      |       |   |      |   |       |  
|Loss before income tax                                             |  |      | (37.9 | ) |      |   | (7.5  | )
|Income tax benefit                                                 |  |      | (13.5 | ) |      |   | (3.8  | )
|                                                                   |  |      |       |   |      |   |       |  
|Net Loss                                                           |  | $    | (24.4 | ) |      | $ | (3.7  | )
|                                                                   |  |      |       |   |      |   |       |  

See accompanying notes to condensed financial statements.



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CONDENSED STATEMENTS OF SHAREHOLDERS EQUITY (unaudited)

Alaska Airlines, Inc.



|                                                   |  |             |     |                              |   |                                   |  |   |                  |   |  |       |       |   |  |   |       |  
|-------------------------------------------------- |  | ----------- | --- | ---------------------------- | - | --------------------------------- |  | - | ---------------- | - |  | ----- | ----- | - |  | - | ----- | -
|(in millions)                                      |  | CommonStock |     | Capital inExcess ofPar Value |   | AccumulatedOtherComprehensiveLoss |  |   | RetainedEarnings |   |  | Total |      
|Balances at December 31, 2007                      |  | $           | 0.0 |                              | $ | 626.8                             |  | $ | (133.3           | ) |  | $     | 381.8 |   |  | $ | 875.3 |  
|                                                   |  |             |     |                              |   |                                   |  |   |                  |   |  |       |       |   |  |   |       |  
|Net loss for the three months ended March 31, 2008 |  |             |     |                              |   |                                   |  |   |                  |   |  |       | (24.4 | ) |  |   | (24.4 | )
|Other comprehensive income (loss):                 |  |             |     |                              |   |                                   |  |   |                  |   |  |       |       |   |  |   |       |  
|Related to marketable securities:                  |  |             |     |                              |   |                                   |  |   |                  |   |  |       |       |   |  |   |       |  
|Change in fair value                               |  |             |     |                              |   |                                   |  |   | 7.1              |   |  |       |       |   |  |   |       |  
|Reclassification to earnings                       |  |             |     |                              |   |                                   |  |   | (1.2             | ) |  |       |       |   |  |   |       |  
|Income tax effect                                  |  |             |     |                              |   |                                   |  |   | (2.2             | ) |  |       |       |   |  |   |       |  
|                                                   |  |             |     |                              |   |                                   |  |   |                  |   |  |       |       |   |  |   |       |  
|                                                   |  |             |     |                              |   |                                   |  |   | 3.7              |   |  |       |       |   |  |   | 3.7   |  
|                                                   |  |             |     |                              |   |                                   |  |   |                  |   |  |       |       |   |  |   |       |  
|Adjustments related to employee benefit plans:     |  |             |     |                              |   |                                   |  |   | 2.8              |   |  |       |       |   |  |   |       |  
|Income tax effect                                  |  |             |     |                              |   |                                   |  |   | (1.0             | ) |  |       |       |   |  |   |       |  
|                                                   |  |             |     |                              |   |                                   |  |   |                  |   |  |       |       |   |  |   |       |  
|                                                   |  |             |     |                              |   |                                   |  |   | 1.8              |   |  |       |       |   |  |   | 1.8   |  
|                                                   |  |             |     |                              |   |                                   |  |   |                  |   |  |       |       |   |  |   |       |  
|Total comprehensive loss                           |  |             |     |                              |   |                                   |  |   |                  |   |  |       |       |   |  |   | (18.9 | )
|                                                   |  |             |     |                              |   |                                   |  |   |                  |   |  |       |       |   |  |   |       |  
|Stock-based compensation                           |  |             |     |                              |   | 2.8                               |  |   |                  |   |  |       |       |   |  |   | 2.8   |  
|                                                   |  |             |     |                              |   |                                   |  |   |                  |   |  |       |       |   |  |   |       |  
|Balances at March 31, 2008                         |  | $           | 0.0 |                              | $ | 629.6                             |  | $ | (127.8           | ) |  | $     | 357.4 |   |  | $ | 859.2 |  
|                                                   |  |             |     |                              |   |                                   |  |   |                  |   |  |       |       |   |  |   |       |  

See accompanying notes to condensed financial statements.



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CONDENSED STATEMENTS OF CASH FLOWS (unaudited)

Alaska Airlines, Inc.



|                                                                                          |  |      |        |   |      |   |        |  
|----------------------------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|Three Months Ended March 31 (in millions)                                                 |  | 2008 |        |   | 2007 |  
|Cash flows from operating activities:                                                     |  |      |        |   |      |   |        |  
|Net loss                                                                                  |  | $    | (24.4  | ) |      | $ | (3.7   | )
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |  |      |        |   |      |   |        |  
|Depreciation and amortization                                                             |  |      | 38.8   |   |      |   | 35.4   |  
|Stock-based compensation                                                                  |  |      | 2.8    |   |      |   | 1.9    |  
|Changes in fair values of open fuel hedge contracts                                       |  |      | (7.1   | ) |      |   | (9.8   | )
|Changes in deferred income taxes                                                          |  |      | (14.1  | ) |      |   | (1.4   | )
|Change in receivables - net                                                               |  |      | 58.5   |   |      |   | (157.2 | )
|Increase in prepaid expenses and other current assets                                     |  |      | (15.2  | ) |      |   | (10.8  | )
|Increase in air traffic liability                                                         |  |      | 109.0  |   |      |   | 140.3  |  
|Increase in other current liabilities                                                     |  |      | 32.3   |   |      |   | 17.9   |  
|Decrease in deferred revenue and other-net                                                |  |      | (12.2  | ) |      |   | (15.9  | )
|                                                                                          |  |      |        |   |      |   |        |  
|Net cash provided by (used in) operating activities                                       |  |      | 168.4  |   |      |   | (3.3   | )
|                                                                                          |  |      |        |   |      |   |        |  
|Cash flows from investing activities:                                                     |  |      |        |   |      |   |        |  
|Property and equipment additions:                                                         |  |      |        |   |      |   |        |  
|Aircraft and aircraft purchase deposits                                                   |  |      | (103.6 | ) |      |   | (163.9 | )
|Other flight equipment                                                                    |  |      | (11.8  | ) |      |   | (11.6  | )
|Other property and equipment                                                              |  |      | (8.9   | ) |      |   | (7.1   | )
|                                                                                          |  |      |        |   |      |   |        |  
|Total property and equipment additions                                                    |  |      | (124.3 | ) |      |   | (182.6 | )
|Proceeds from disposition of assets                                                       |  |      | 5.3    |   |      |   | 1.9    |  
|Purchases of marketable securities                                                        |  |      | (259.2 | ) |      |   | (474.7 | )
|Sales and maturities of marketable securities                                             |  |      | 175.1  |   |      |   | 450.7  |  
|Restricted deposits and other                                                             |  |      | 1.0    |   |      |   | (0.4   | )
|                                                                                          |  |      |        |   |      |   |        |  
|Net cash used in investing activities                                                     |  |      | (202.1 | ) |      |   | (205.1 | )
|                                                                                          |  |      |        |   |      |   |        |  
|Cash flows from financing activities:                                                     |  |      |        |   |      |   |        |  
|Proceeds from issuance of long-term debt, net                                             |  |      | 98.0   |   |      |   | 163.5  |  
|Long-term debt payments                                                                   |  |      | (56.8  | ) |      |   | (24.6  | )
|                                                                                          |  |      |        |   |      |   |        |  
|Net cash provided by financing activities                                                 |  |      | 41.2   |   |      |   | 138.9  |  
|                                                                                          |  |      |        |   |      |   |        |  
|Net change in cash and cash equivalents                                                   |  |      | 7.5    |   |      |   | (69.5  | )
|Cash and cash equivalents at beginning of year                                            |  |      | 204.3  |   |      |   | 230.8  |  
|                                                                                          |  |      |        |   |      |   |        |  
|Cash and cash equivalents at end of period                                                |  | $    | 211.8  |   |      | $ | 161.3  |  
|                                                                                          |  |      |        |   |      |   |        |  
|Supplemental disclosure of cash paid during the period for:                               |  |      |        |   |      |   |        |  
|Interest (net of amount capitalized)                                                      |  | $    | 15.6   |   |      | $ | 10.7   |  
|Income taxes                                                                              |  |      | 0.9    |   |      |   | 0.8    |  

See accompanying notes to condensed financial statements.



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NOTES TO CONDENSED FINANCIAL STATEMENTS (unaudited)

Alaska Airlines, Inc.



|Note | 1. Basis of Presentation and Significant Accounting Policies
|---- | ------------------------------------------------------------

Organization and Basis of Presentation

The accompanying unaudited condensed financial statements of Alaska Airlines, Inc. (Alaska or the
Company) should be read in conjunction with the financial statements in the Companys Annual Report on Form 10-K for the year ended December 31, 2007. Alaska Airlines, Inc., an Alaska corporation, is a wholly-owned subsidiary of Alaska Air
Group, Inc. (Air Group), a Delaware corporation. In the opinion of management, all adjustments have been made which are necessary to present fairly the Companys financial position as of March 31, 2008, as well as the results of operations
for the three months ended March 31, 2008 and 2007. The adjustments made were of a normal recurring nature.

The Companys condensed financial
statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). In preparing these condensed financial statements, the Company is required to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities, as well as the reported amounts of revenues and expenses. Significant estimates made include assumptions used to record liabilities; expenses and
revenues associated with the Companys Mileage Plan; amounts paid to lessors upon aircraft lease terminations; the fair market value of surplus or impaired aircraft, engines and parts; assumptions used in the calculations of pension expense in
the Companys defined-benefit plans; and the amounts of certain accrued liabilities. Actual results may differ from the Companys estimates.

Securities Lending

The Company lends certain marketable securities to third parties for a time period of less than one year. During the
time period in which these securities are loaned to the third parties, the Company requires cash collateral for 102% of the daily market value of the loaned securities. As of March 31, 2008, the Company had $104.5 million of securities on loan
under the program. These affected securities are included as marketable securities under current assets on the balance sheets.

New Accounting
Pronouncements

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 157,
Fair Value Measurements (SFAS 157), which defines fair value, establishes a framework for measuring fair value and expands disclosure about fair-value measurements required under other accounting pronouncements. SFAS 157 does not change
existing guidance as to whether or not an instrument is carried at fair value. The Company adopted this standard for financial assets and liabilities as of January 1, 2008.

SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an
orderly transaction between market participants on the measurement date. SFAS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring
fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1 - Quoted prices in active markets for
identical assets or liabilities.

Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities;
quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

See below under Cash, Cash Equivalents, and Marketable Securities and Note 3 for further discussion.



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In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities, which allows entities the option to measure eligible financial instruments at fair value as of specified dates. Such election, which may be applied on an instrument-by-instrument basis, is typically irrevocable once elected. This
statement was effective beginning January 1, 2008. The Company did not elect the fair value option.

Cash, Cash Equivalents and Marketable
Securities

The Company uses the market approach in determining the fair value of its cash, cash equivalents and marketable securities. The
securities held by the Company are valued based on observable prices in active markets and considered to be liquid and easily tradable. Amounts measured at fair value as of March 31, 2008 are as follows:



|                          |  |         |       |         |   |         |  |      |   |       |   |       |  |   |      
|------------------------- |  | ------- | ----- | ------- | - | ------- |  | ---- | - | ----- | - | ----- |  | - | -----
|                          |  | Level 1 |       | Level 2 |   | Level 3 |  | Cash |   | Total
|Cash and cash equivalents |  | $       |      |         | $ | 18.0    |  | $    |  |       | $ | 193.8 |  | $ | 211.8
|Marketable securities     |  |         | 116.1 |         |   | 593.8   |  |      |  |       |   |      |  |   | 709.9
|                          |  |         |       |         |   |         |  |      |   |       |   |       |  |   |      
|Total                     |  | $       | 116.1 |         | $ | 611.8   |  | $    |  |       | $ | 193.8 |  | $ | 921.7
|                          |  |         |       |         |   |         |  |      |   |       |   |       |  |   |      



|Note | 2. Fleet Transition
|---- | -------------------

In March 2006, the Companys Board of
Directors approved a plan to accelerate the retirement of its MD-80 fleet (15 owned and 11 leased aircraft at the time) and remove those aircraft from service by the end of September 2008. At March 31, 2008, 10 MD-80s were in the fleet, all but
four of which are under short-term operating lease arrangements that expire in 2008.

Four MD-80 aircraft under long-term lease arrangements will cease to
be used well before the end of their respective lease terms. Management anticipates that once these aircraft have been removed from operations, the Company will store the aircraft at an aircraft storage facility or, if satisfactory arrangements can
be made, sublease them or acquire them from the lessor and sell them. The Company will record a charge in its statement of operations when any of these options occurs, although the amount and timing of any charge cannot be estimated at this time.

Note 3. Fuel Hedge Contracts

The Companys
operations are inherently dependent upon the price and availability of aircraft fuel. To manage economic risks associated with fluctuations in aircraft fuel prices, the Company periodically enters into call options, collar structures and swap
agreements for crude oil, among other initiatives.

The Company records derivative instruments, all of which are currently fuel hedge contracts, on the
balance sheet at their fair value. Changes in the fair value of these fuel hedge contracts are recorded each period in aircraft fuel expense.

The
following table summarizes the components of aircraft fuel expense for the three months ended March 31, 2008 and 2007 (in millions):



|                                                         |  |      |       |   |      |   |       |  
|-------------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|                                                         |  | 2008 |       |   | 2007 |  
|Raw or into-plane fuel cost                            |  | $    | 257.7 |   |      | $ | 165.9 |  
|Changes in value and settlements of fuel hedge contracts |  |      | (24.0 | ) |      |   | (8.3  | )
|                                                         |  |      |       |   |      |   |       |  
|Aircraft fuel expense                                    |  | $    | 233.7 |   |      | $ | 157.6 |  
|                                                         |  |      |       |   |      |   |       |  

The Company realized gains of $24.2 million and $1.5 million in the three months ended March 31, 2008 and
2007, respectively, on fuel hedge contracts that settled during the period.



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The Company uses the market approach in determining the fair value of its hedge portfolio. The Companys
fuel hedging contracts consist of over-the-counter contracts, which are not traded on an exchange. The fair value of these contracts are determined based on observable inputs that are readily available in active markets or can be derived from
information available in active quoted markets. Therefore, the Company has categorized these contracts as Level 2 in the fair value hierarchy described in SFAS 157.

Outstanding future fuel hedge positions are as follows:



|                    |  |                                           |  |                             |  |                                      
|------------------- |  | ----------------------------------------- |  | --------------------------- |  | -------------------------------------
|                    |  | Approximate % ofExpected FuelRequirements |  | Gallons Hedged(in millions) |  | Approximate CrudeOil Price per Barrel
|Second Quarter 2008 |  | 50%                                       |  | 43.6                        |  | $73                                  
|Third Quarter 2008  |  | 50%                                       |  | 46.9                        |  | $78                                  
|Fourth Quarter 2008 |  | 50%                                       |  | 42.7                        |  | $77                                  
|                    |  |                                           |  |                             |  |                                      
|Remainder of 2008   |  | 50%                                       |  | 133.2                       |  | $76                                  
|                    |  |                                           |  |                             |  |                                      
|First Quarter 2009  |  | 16%                                       |  | 13.9                        |  | $84                                  
|Second Quarter 2009 |  | 16%                                       |  | 14.5                        |  | $83                                  
|Third Quarter 2009  |  | 11%                                       |  | 10.4                        |  | $83                                  
|Fourth Quarter 2009 |  | 10%                                       |  | 8.8                         |  | $82                                  
|                    |  |                                           |  |                             |  |                                      
|Full Year 2009      |  | 13%                                       |  | 47.6                        |  | $83                                  
|                    |  |                                           |  |                             |  |                                      

As of March 31, 2008 and December 31, 2007, the fair values of the Companys fuel hedge positions
were $101.6 million and $94.5 million, respectively, including capitalized premiums of $33.4 million and $26.0 million, respectively, and are presented as both current and non-current assets in the condensed balance sheets.

Note 4. Long-term Debt

Long-term debt obligations were as follows
(in millions):



|                                               |  |                |         |   |                   |   |         |  
|---------------------------------------------- |  | -------------- | ------- | - | ----------------- | - | ------- | -
|                                               |  | March 31, 2008 |         |   | December 31, 2007 |  
|Fixed-rate notes payable due through 2022      |  | $              | 925.4   |   |                   | $ | 731.7   |  
|Variable-rate notes payable due through 2019   |  |                | 301.8   |   |                   |   | 414.9   |  
|Pre-delivery payment facility expiring in 2009 |  |                | 46.4    |   |                   |   | 85.8    |  
|                                               |  |                |         |   |                   |   |         |  
|Long-term debt                                 |  |                | 1,273.6 |   |                   |   | 1,232.4 |  
|Less current portion                           |  |                | (137.3  | ) |                   |   | (170.9  | )
|                                               |  |                |         |   |                   |   |         |  
|                                               |  | $              | 1,136.3 |   |                   | $ | 1,061.5 |  
|                                               |  |                |         |   |                   |   |         |  

During the first three months of 2008, the Company borrowed $98.0 million using fixed-rate debt secured by flight
equipment and made payments of $56.8 million, including $39.4 million on its pre-delivery payment facility.



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Note 5. Employee Benefit Plans

Pension Plans - Qualified Defined Benefit

Net pension expense for the three months ended March 31 included the
following components (in millions):



|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                |       |   |                   |   |       |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ----- | - | ----------------- | - | ----- | -
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  | 2008           |       |   | 2007              |  
|Service cost                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  | $              | 12.2  |   |                   | $ | 13.3  |  
|Interest cost                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  |                | 15.7  |   |                   |   | 15.0  |  
|Expected return on assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |                | (17.9 | ) |                   |   | (16.3 | )
|Amortization of prior service cost                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |                | 1.1   |   |                   |   | 1.0   |  
|Actuarial loss                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |                | 1.4   |   |                   |   | 3.0   |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                |       |   |                   |   |       |  
|Net pension expense                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  | $              | 12.5  |   |                   | $ | 16.0  |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                |       |   |                   |   |       |  
|The Company contributed $17.2 million to its qualified
defined-benefit plans during the three months ended March 31, 2008, and expects to contribute an additional $34.5 million to these plans during the remainder of 2008. The Company made $17.5 million in contributions to its defined-benefit
pension plans during the three months ended March 31, 2007.  Pension Plans -
Nonqualified Defined Benefit  Net pension expense for the unfunded, noncontributory
defined-benefit plans was $0.9 million for the three months ended March 31, 2008 and 2007.  Postretirement Medical Benefits  Net periodic benefit cost for the
postretirement medical plans for the three months ended March 31 included the following components: | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  | 2008           |       |   | 2007              |  
|Service cost                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  | $              | 1.1   |   |                   | $ | 1.2   |  
|Interest cost                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  |                | 1.5   |   |                   |   | 1.4   |  
|Amortization of prior service cost                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |                | (0.1  | ) |                   |   | (0.1  | )
|Actuarial loss                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |                | 0.3   |   |                   |   | 0.4   |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                |       |   |                   |   |       |  
|Net periodic benefit cost                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  | $              | 2.8   |   |                   | $ | 2.9   |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                |       |   |                   |   |       |  
|Note 6. Other Assets  Other assets consisted of the following (in millions):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  | March 31, 2008 |       |   | December 31, 2007 |  
|Restricted deposits (primarily restricted investments)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  | $              | 64.7  |   |                   | $ | 69.2  |  
|Deferred costs and other*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |                | 14.7  |   |                   |   | 11.3  |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                |       |   |                   |   |       |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  | $              | 79.4  |   |                   | $ | 80.5  |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                |       |   |                   |   |       |  



|* | Deferred costs and other includes deferred financing costs, long-term prepaid rent, lease deposits and other items.
|- | -------------------------------------------------------------------------------------------------------------------



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Note 7. Mileage Plan

The Companys Mileage Plan deferrals and liabilities are included under the following balance sheet captions (in millions):



|                                                                                                                                                    |  |                |       |                   |   |      
|--------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ----- | ----------------- | - | -----
|                                                                                                                                                    |  | March 31, 2008 |       | December 31, 2007
|Current Liabilities:                                                                                                                                |  |                |       |                   |   |      
|Other accrued liabilities                                                                                                                           |  | $              | 262.5 |                   | $ | 239.7
|Other Liabilities and Credits (non-current):                                                                                                        |  |                |       |                   |   |      
|Deferred revenue                                                                                                                                    |  |                | 403.0 |                   |   | 387.8
|Other liabilities                                                                                                                                   |  |                | 18.2  |                   |   | 21.0 
|                                                                                                                                                    |  |                |       |                   |   |      
|                                                                                                                                                    |  | $              | 683.7 |                   | $ | 648.5
|                                                                                                                                                    |  |                |       |                   |   |      
|Mileage Plan revenue is included under the following condensed
statements of operations captions for the three months ended March 31 (in millions):
|                                                                                                                                                    |  | 2008           |       | 2007             
|Passenger revenues                                                                                                                                  |  | $              | 25.3  |                   | $ | 28.3 
|Other - net revenues                                                                                                                                |  |                | 26.7  |                   |   | 27.9 
|                                                                                                                                                    |  |                |       |                   |   |      
|                                                                                                                                                    |  | $              | 52.0  |                   | $ | 56.2 
|                                                                                                                                                    |  |                |       |                   |   |      

Note 8. Stock-Based Compensation Plans

Stock-based compensation recorded by the Company relates to stock awards granted to Company employees by Air Group. As the Company does not have common stock that is traded on an exchange and all equity-based awards
are related to Air Group common stock, the disclosures below have been limited.

The Company accounts for stock-based awards using Statement of Financial
Accounting Standards SFAS No. 123R, Share-Based Payment: An Amendment of SFAS Nos. 123 and 95. All stock-based compensation expense is recorded in wages and benefits in the condensed statements of operations.

Stock Options

The Company has stock option awards outstanding under
a number of Air Groups long-term incentive equity plans, one of which continues to provide for the grant of stock options to purchase Air Groups common stock at market prices on the date of grant to directors, officers and employees of
the Company.

During the three months ended March 31, 2008, Air Group granted 253,924 options to the Companys employees with a weighted-average
fair value of $12.01 per share. During the same period in the prior year, Air Group granted 127,495 options to the Companys employees with a weighted-average fair value of $20.97 per share.

The Company recorded stock-based compensation expense related to stock options of $0.8 million ($0.5 million after tax) and $0.7 million ($0.4 million after tax) for the
three months ended March 31, 2008 and 2007, respectively. As of March 31, 2008, $8.5 million of compensation cost associated with unvested stock option awards attributable to future service had not yet been recognized. This amount will be
recognized as expense over a weighted-average period of 2.9 years.



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Restricted Stock Awards

During the three months ended March 31, 2008, Air Group awarded 129,067 restricted stock units (RSUs) to certain employees of the Company, with a weighted-average grant date fair value of $27.46. This amount reflects the value of the
total RSU awards at the grant date based on the closing price of Air Groups common stock. Compensation cost for RSUs is recognized over three years from the date of grant as the awards cliff vest after three years. The Company
recorded stock-based compensation expense related to RSUs of $1.2 million ($0.8 million after tax) and $1.0 million ($0.6 million after tax) for the three-month periods ended March 31, 2008 and 2007, respectively.

As of March 31, 2008, $7.4 million of compensation cost associated with unvested restricted stock awards attributable to future service had not yet been recognized.
This amount will be recognized as expense over a weighted-average period of 2.1 years.

Performance Stock Awards

During the first quarters of 2008 and 2007, Air Group awarded Performance Share Unit awards (PSUs) to certain executives of the Company. These award types are similar to
restricted stock units (RSUs), but vesting is based on a performance condition tied to Air Group achieving a specified pretax margin over a three-year period. The PSU Plan allows a portion of the PSUs to vest even if the specified pretax margin
falls below the target, and additional shares to be granted if the margin target is exceeded, subject to a maximum. The Company intends to regularly review its assumptions about meeting the performance goal and expected vesting, and to adjust the
related compensation expense accordingly. The Company recorded compensation expense related to PSUs of $0.2 million ($0.1 million after tax) and $0.1 million ($0.1 million after tax) during the three months ended March 31, 2008 and 2007,
respectively.

Employee Stock Purchase Plan

Compensation expense recognized by the Company under Air Groups Employee Stock Purchase Plan was $0.6 million and $0.1 million for the three months ended March 31, 2008 and 2007, respectively.

Summary of Stock-Based Compensation

The table below summarizes the
components of total stock-based compensation for the three months ended March 31, 2008 and 2007 (in millions):



|                               |  |      |     |      |   |    
|------------------------------ |  | ---- | --- | ---- | - | ---
|                               |  | 2008 |     | 2007
|Stock options                  |  | $    | 0.8 |      | $ | 0.7
|Restricted stock units         |  |      | 1.2 |      |   | 1.0
|Performance share units        |  |      | 0.2 |      |   | 0.1
|Employee stock purchase plan   |  |      | 0.6 |      |   | 0.1
|                               |  |      |     |      |   |    
|Total stock-based compensation |  | $    | 2.8 |      | $ | 1.9
|                               |  |      |     |      |   |    

Note 9. Related Party Transactions

Capacity Purchase Agreement

The Company has entered into a Capacity Purchase Agreement (CPA) with its sister
company, Horizon Air Industries, Inc. (Horizon), whereby the Company purchases capacity in certain routes (CPA markets) from Horizon as specified by the agreement. Under the CPA, the Company pays Horizon a contractual amount for the purchased
capacity in the CPA markets, regardless of the revenue collected on those flights. The amount paid to Horizon is generally based on Horizons operating costs, plus a margin.



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The Company establishes the scheduling, routes and pricing for the flights, and has the inventory and revenue risk in
those markets.

The Company paid $71.4 million and $62.3 million to Horizon under the CPA agreement during the three months ended March 31, 2008 and
2007, respectively.

Intercompany Services

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

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

The Company also provides certain services to Horizon for which
the Company receives payment from Horizon based on the cost of the services, including personnel expenses related to development and maintenance of certain information and communication systems, processing Horizons revenue transactions,
accounting and payroll services, and other administrative services. Additionally, the Company pays certain leasing and other facilities costs on Horizons behalf that are reimbursed monthly by Horizon. Total amounts received by the Company from
Horizon were $2.6 million and $2.7 million for the three months ended March 31, 2008 and 2007, respectively.

In the normal course of business, Alaska
and Horizon each provide certain ground handling services to the other company. Charges for ground services provided by the Company to Horizon totaled $2.5 million and $1.6 million during the three months ended March 31, 2008 and 2007,
respectively. Charges for ground services provided by Horizon to the Company totaled $2.4 million and $2.5 million for the three months ended March 31, 2008 and 2007, respectively.

The Company also advances Horizon funds at varying interest rates. All amounts are payable on demand. Interest income recognized related to the Horizon receivable totaled $2.9 million and $1.8 million for the three
months ended March 31, 2008 and 2007, respectively. Offsetting this amount is interest paid to Horizon on ticket sales processed by Alaska. Interest expense related to these ticket sales was $1.3 million and $0.8 million for the three months
ended March 31, 2008 and 2007, respectively.

At March 31, 2008, receivables from related companies include $150.2 million from Horizon, $7.8
million from Alaska Air Group Leasing (AAGL) and $127.6 million from Air Group. At March 31, 2008, payables to related companies include $1.2 million to Horizon, $0.7 million to AAGL and $46.3 million to Air Group. The receivable from Horizon
has declined significantly from December 31, 2007 as a result of Horizons financing of 13 Q400s for $193.6 million, which was used to pay down the amounts owed to the Company. Additionally, the receivable from Air Group has increased
significantly from December 31, 2007 as a result of Air Groups share repurchase program.

Note 10. Contingencies

Grievance with International Association of Machinists

In June 2005,
the International Association of Machinists (IAM) filed a grievance under its Collective Bargaining Agreement (CBA) with Alaska alleging that Alaska violated the CBA by, among other things, subcontracting the ramp service operation in Seattle. The
dispute was referred to an arbitrator and hearings on the grievance commenced in January 2007, with a final hearing date in August 2007. The Company expects, but has not yet received, a decision from the arbitrator in the first half of 2008.



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Other items

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

Management
believes the ultimate disposition of the matters discussed above is not likely to materially affect the Companys financial position or results of operations. This statement is based on managements current understanding of the relevant
law and facts, and 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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|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

OVERVIEW

The following Managements Discussion and Analysis of Financial Condition and Results of Operations
(MD&A) is intended to help the reader understand the Company, our operations and our present business environment. MD&A is provided as a supplement to  and should be read in conjunction with  our condensed financial statements
and the accompanying notes. All statements in the following discussion that are not statements of historical information or descriptions of current accounting policy are forward-looking statements. Please consider our forward-looking statements in
light of the risks referred to in this reports introductory cautionary note and the risks mentioned in the Companys filings with the Securities and Exchange Commission.

This MD&A includes our Results of Operations, which is an in-depth analysis of the results of operations for the three months ended March 31, 2008. We believe this analysis will help the reader better
understand our condensed statements of operations. Financial and statistical data are also included here. Because Alaska is a wholly-owned subsidiary of Alaska Air Group, Inc. (Air Group) and Air Group is a reporting company as defined by the
Securities and Exchange Act of 1934, and because Alaska meets other certain conditions as specified in General Instruction H(1)(a) and (b) of Form 10-Q, our disclosures in this MD&A are condensed as is allowed in the instructions to Form
10-Q. For the full discussion of our first quarter results and other disclosures, please refer to the Air Group Form 10-Q for the three months ended March 31, 2008.

Alaskas filings with the Securities and Exchange Commission, including its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports are accessible
free of charge at www.alaskaair.com. The information contained on our website is not a part of this quarterly report on Form 10-Q.

FIRST QUARTER
IN REVIEW AND CURRENT EVENTS

Our pretax loss was $37.9 million for the first quarter of 2008 compared to $7.5 million in the first quarter of 2007. The
first quarter of 2008 was characterized by escalating fuel prices. Fuel prices once again reached record levels at over $110 per barrel for crude oil, which resulted in a $91.8 million, or 55%, increase in our raw fuel cost over the first quarter of
2007, which far exceeded our $60.5 million increase in total mainline operating revenues. Other significant developments during the first quarter of 2008 are described below.

Fleet Transition

Our fleet transition continues to progress as planned. We now expect to remove all MD-80s from
service by the end of September 2008.

We currently have four MD-80 aircraft under long-term lease arrangements that we plan to cease operating before the
end of their respective lease terms. We anticipate that once these aircraft have been removed from operations, we will store the aircraft at an aircraft storage facility or, if satisfactory arrangements can be made, sublease them or acquire them
from the lessor and sell them. We will record an operating charge in our statement of operations if any of these occur although the amount and timing of any charge cannot be estimated at this time.



17



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##### Table of Contents

Fee Changes

We plan
to raise certain fees to better align those fees with the current costs of providing added services. These include increasing the charge for booking through reservations and airport sales agents from $10 to $15, raising the fee for overweight
baggage from $25 to $50, increasing the charge for transporting pets in the cabin from $75 to $100 one-way, and raising the unaccompanied minor fee from $30 to $75 for one-way nonstop flights and from $60 to $75 for connecting flights. The increases
are effective May 21, 2008.

By summer, the airlines also will begin charging $25 for a second checked bag. First class and top-tier Mileage Plan
members and customers on flights within the state of Alaska will be exempt from the new fee.

Operational Performance

Our core promise to our customers is to get them and their bags where we promise, safely and on time. We have not delivered on that promise over the past several years,
so we have made operational performance one of our top initiatives for 2008. Although we have more improvements to make, we are pleased with our progress so far in 2008. In each month of the first quarter, we have exceeded our prior-year performance
in both on-time arrivals and schedule completion rates.

New Markets

In the first quarter, we announced that we would begin service to our third Hawaiian island, Maui, on July 17, 2008. This service will include year-round daily flights from Seattle and seasonal flights twice
weekly from Anchorage.

Outlook

We currently expect
mainline capacity to increase by 2% in 2008 compared to 2007. The expected capacity increase is due primarily to the anticipated delivery of 17 new B737-800 aircraft in 2008 and the annualization of capacity additions that resulted from 14 B737-800
aircraft delivered in 2007, offset by the retirement of 15 MD-80 aircraft and, to a lesser extent, scheduled retirement of other aircraft. Although capacity is expected to increase, total departures are expected to decline nearly 5% compared to
2007.

We will continue to monitor our flight schedules to see if there are further opportunities to reduce capacity or unprofitable flying. In April 2008,
we eliminated our Oakland  Orange County route and Alaska shifted to Horizon its daily flights from Seattle to Reno and Boise in an effort to reduce costs and improve the results in these markets. We also shifted some of this capacity to
increase our service from Seattle to several California markets in response to increased competition on the West Coast. Air Group anticipates redeploying three to five percent of existing network capacity to other markets to generate new revenue in
the fall schedule.

RESULTS OF OPERATIONS

COMPARISON OF THREE MONTHS ENDED MARCH 31, 2008 TO THREE MONTHS ENDED MARCH 31, 2007

Our net loss was $24.4 million during the
first quarter of 2008 compared to a $3.7 million loss in the first quarter of 2007. The $20.7 million difference between the periods is primarily the result of the significant rise in fuel cost between the periods, higher purchased capacity costs
and higher maintenance costs, partially offset by increases in revenue.

Financial and statistical data is shown on the following page. An in-depth
discussion of the results begin on page 20.



18



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##### Table of Contents

Alaska Airlines Financial and Statistical Data (unaudited)



|                                                  |  |                             |       |   |      |   |       |         |  |       |    
|------------------------------------------------- |  | --------------------------- | ----- | - | ---- | - | ----- | ------- |  | ----- | ---
|                                                  |  | Three Months Ended March 31 |      
|Financial Data (in millions):                     |  | 2008                        |       |   | 2007 |   |       | %Change | 
|Operating Revenues:                               |  |                             |       |   |      |   |       |         |  |       |    
|Passenger                                         |  | $                           | 607.3 |   |      | $ | 545.9 |         |  | 11.2  |    
|Freight and mail                                  |  |                             | 21.3  |   |      |   | 20.7  |         |  | 2.9   |    
|Other - net                                       |  |                             | 34.4  |   |      |   | 35.9  |         |  | (4.2  | )  
|                                                  |  |                             |       |   |      |   |       |         |  |       |    
|Total mainline operating revenues                 |  |                             | 663.0 |   |      |   | 602.5 |         |  | 10.0  |    
|Passenger - purchased capacity                    |  |                             | 70.4  |   |      |   | 57.3  |         |  | 22.9  |    
|                                                  |  |                             |       |   |      |   |       |         |  |       |    
|Total Operating Revenues                          |  |                             | 733.4 |   |      |   | 659.8 |         |  | 11.2  |    
|                                                  |  |                             |       |   |      |   |       |         |  |       |    
|Operating Expenses:                               |  |                             |       |   |      |   |       |         |  |       |    
|Wages and benefits                                |  |                             | 190.2 |   |      |   | 187.3 |         |  | 1.5   |    
|Variable incentive pay                            |  |                             | 2.6   |   |      |   | 7.7   |         |  | (66.2 | )  
|Aircraft fuel, including hedging gains and losses |  |                             | 233.7 |   |      |   | 157.6 |         |  | 48.3  |    
|Aircraft maintenance                              |  |                             | 42.1  |   |      |   | 34.3  |         |  | 22.7  |    
|Aircraft rent                                     |  |                             | 28.2  |   |      |   | 26.3  |         |  | 7.2   |    
|Landing fees and other rentals                    |  |                             | 41.9  |   |      |   | 41.8  |         |  | 0.2   |    
|Contracted services                               |  |                             | 34.7  |   |      |   | 29.4  |         |  | 18.0  |    
|Selling expenses                                  |  |                             | 26.5  |   |      |   | 31.6  |         |  | (16.1 | )  
|Depreciation and amortization                     |  |                             | 38.8  |   |      |   | 35.4  |         |  | 9.6   |    
|Food and beverage service                         |  |                             | 11.7  |   |      |   | 10.6  |         |  | 10.4  |    
|Other                                             |  |                             | 41.8  |   |      |   | 39.8  |         |  | 5.0   |    
|                                                  |  |                             |       |   |      |   |       |         |  |       |    
|Total mainline operating expenses                 |  |                             | 692.2 |   |      |   | 601.8 |         |  | 15.0  |    
|Purchased capacity costs                          |  |                             | 76.7  |   |      |   | 67.4  |         |  | 13.8  |    
|                                                  |  |                             |       |   |      |   |       |         |  |       |    
|Total Operating Expenses                          |  |                             | 768.9 |   |      |   | 669.2 |         |  | 14.9  |    
|                                                  |  |                             |       |   |      |   |       |         |  |       |    
|Operating Loss                                    |  |                             | (35.5 | ) |      |   | (9.4  | )       |  | NM    |    
|                                                  |  |                             |       |   |      |   |       |         |  |       |    
|Interest income                                   |  |                             | 13.1  |   |      |   | 15.9  |         |  |       |    
|Interest expense                                  |  |                             | (21.8 | ) |      |   | (20.4 | )       |  |       |    
|Interest capitalized                              |  |                             | 5.9   |   |      |   | 6.3   |         |  |       |    
|Other - net                                       |  |                             | 0.4   |   |      |   | 0.1   |         |  |       |    
|                                                  |  |                             |       |   |      |   |       |         |  |       |    
|                                                  |  |                             | (2.4  | ) |      |   | 1.9   |         |  |       |    
|                                                  |  |                             |       |   |      |   |       |         |  |       |    
|Loss Before Income Tax                            |  | $                           | (37.9 | ) |      | $ | (7.5  | )       |  | NM    |    
|                                                  |  |                             |       |   |      |   |       |         |  |       |    
|Mainline Operating Statistics:                    |  |                             |       |   |      |   |       |         |  |       |    
|Revenue passengers (000)                          |  |                             | 4,080 |   |      |   | 3,862 |         |  | 5.6   |    
|RPMs (000,000) traffic                          |  |                             | 4,526 |   |      |   | 4,066 |         |  | 11.3  |    
|ASMs (000,000) capacity                         |  |                             | 6,084 |   |      |   | 5,694 |         |  | 6.8   |    
|Passenger load factor                             |  |                             | 74.4  | % |      |   | 71.4  | %       |  | 3.0   | pts
|Yield per passenger mile                          |  |                             | 13.42 | ¢ |      |   | 13.43 | ¢       |  | (0.1  | )  
|Operating revenue per ASM (RASM)                  |  |                             | 10.90 | ¢ |      |   | 10.58 | ¢       |  | 3.0   |    
|Passenger revenue per ASM                         |  |                             | 9.98  | ¢ |      |   | 9.59  | ¢       |  | 4.1   |    
|Operating expenses per ASM                        |  |                             | 11.38 | ¢ |      |   | 10.57 | ¢       |  | 7.6   |    
|Aircraft fuel cost per ASM                        |  |                             | 3.84  | ¢ |      |   | 2.77  | ¢       |  | 38.6  |    
|Aircraft fuel cost per gallon                     |  | $                           | 2.72  |   |      | $ | 1.87  |         |  | 45.4  |    
|Economic fuel cost per gallon                     |  | $                           | 2.72  |   |      | $ | 1.95  |         |  | 39.5  |    
|Fuel gallons (000,000)                            |  |                             | 85.9  |   |      |   | 84.2  |         |  | 2.0   |    
|Average number of full-time equivalent employees  |  |                             | 9,881 |   |      |   | 9,542 |         |  | 3.6   |    
|Aircraft utilization (blk hrs/day)                |  |                             | 10.8  |   |      |   | 10.8  |         |  |      |    
|Average aircraft stage length (miles)             |  |                             | 969   |   |      |   | 917   |         |  | 5.7   |    
|Operating fleet at period-end                     |  |                             | 115   |   |      |   | 114   |         |  | 1 a/c |    
|Regional Operating Statistics:                    |  |                             |       |   |      |   |       |         |  |       |    
|RPMs (000,000)                                    |  |                             | 267   |   |      |   | 220   |         |  | 21.4  |    
|ASMs (000,000)                                    |  |                             | 363   |   |      |   | 316   |         |  | 14.9  |    
|Passenger load factor                             |  |                             | 73.6  | % |      |   | 69.6  | %       |  | 4.0   | pts
|Yield per passenger mile                          |  |                             | 26.37 | ¢ |      |   | 26.05 | ¢       |  | 1.2   |    
|Operating revenue per ASM                         |  |                             | 19.39 | ¢ |      |   | 18.13 | ¢       |  | 7.0   |    
|Operating expenses per ASM                        |  |                             | 21.13 | ¢ |      |   | 21.33 | ¢       |  | (0.9  | )  

NM = Not Meaningful



19



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##### Table of Contents

REVENUES

Total operating revenues increased $73.6 million, or 11.2%, during the first quarter of 2008 as compared to the same period in 2007. The changes are summarized in the following table:



|                                       |  |                |       |                |   |          |  |      |  
|-------------------------------------- |  | -------------- | ----- | -------------- | - | -------- |  | ---- | -
|                                       |  | March 31, 2008 |       | March 31, 2007 |   | % Change | 
|Passenger Revenue - Mainline           |  | $              | 607.3 |                | $ | 545.9    |  | 11.2 |  
|Freight and mail                       |  |                | 21.3  |                |   | 20.7     |  | 2.9  |  
|Other - net                            |  |                | 34.4  |                |   | 35.9     |  | (4.2 | )
|                                       |  |                |       |                |   |          |  |      |  
|Total Mainline Revenues                |  | $              | 663.0 |                | $ | 602.5    |  | 10.0 |  
|                                       |  |                |       |                |   |          |  |      |  
|Passenger Revenue - purchased capacity |  |                | 70.4  |                |   | 57.3     |  | 22.9 |  
|                                       |  |                |       |                |   |          |  |      |  
|Total Operating Revenues               |  | $              | 733.4 |                | $ | 659.8    |  | 11.2 |  
|                                       |  |                |       |                |   |          |  |      |  

Operating Revenue  Mainline

Mainline passenger revenue increased 11.2% on a 6.8% increase in available seat miles and a 4.1% increase in passenger unit revenues. Passenger unit revenues were positively impacted by a 3.0 point increase in load
factor, from 71.4% to 74.4%; however, yields were relatively flat. Our average trip length has increased with the Hawaii service and other longer flights, putting downward pressure on yields. We estimate that the longer stage lengths impacted yields
by about 2%. Our load factor in April 2008 was 76.9%, which is flat compared to April 2007. Our advance bookings currently suggest that load factors will be up about 1 point in both May and June compared to the prior year.

Freight and mail revenue increased by $0.6 million, or 2.9%, primarily as a result of higher yields and fuel surcharges, offset by lower volumes.

Other  net revenues decreased $1.5 million, or 4.2%. Mileage Plan revenues represented $1.2 million of the decrease as revenue associated with redemptions on other
airlines declined compared to the first quarter of 2007. The decline was partially offset by an increase in Mileage Plan revenues resulting from higher commission revenue associated with an increase in the sale of mileage credits to our bank
partner. When we sell mileage credits, we defer the majority of the proceeds and recognize that revenue when award travel takes place. Commission revenue represents the difference between the proceeds from the sale of miles and the amount we defer.

Passenger Revenue  Purchased Capacity

Passenger revenue  purchased capacity increased by $13.1 million to $70.4 million because of a 21.4% increase in passenger traffic and a 7.0% increase in unit revenues compared to the prior year. Unit revenues increased due to a 4.0
point increase in load factor combined with a 1.2% increase in ticket yields. The Capacity Purchase Arrangement (CPA) with Horizon is the primary driver of the increase as more markets that were historically flown by Alaska aircraft are shifted to
the CPA.

During the first quarter, regional flying expenses exceeded regional passenger revenues by $6.3 million, compared to $10.1 million in the first
quarter of 2007. Revenues in these CPA markets are highly seasonal in nature. For example, purchased capacity operating margins by quarter were as follows in 2007:



|                          |  |         |       |   |         |   |      |         |  |         |     |  |   |      |  
|------------------------- |  | ------- | ----- | - | ------- | - | ---- | ------- |  | ------- | --- |  | - | ---- | -
|(in millions)             |  | Q1 2007 |       |   | Q2 2007 |   |      | Q3 2007 |  | Q4 2007 |    
|Purchased capacity margin |  | $       | (10.1 | ) |         | $ | (3.1 | )       |  | $       | 0.6 |  | $ | (8.8 | )



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##### Table of Contents

However, the reported results of purchased capacity flying do not reflect the total contribution of these flights to our
mainline operation as many of the flights feed traffic from smaller cities.

EXPENSES

For the quarter, total operating expenses increased $99.7 million compared to the same period in 2007 due to the significant increases in fuel expense, higher costs
associated with purchased capacity flying and higher maintenance costs. We believe it is useful to summarize operating expenses as follows, which is consistent with the way expenses are reported internally and evaluated by management:



|                                 |  |                |       |                |   |          |  |     
|-------------------------------- |  | -------------- | ----- | -------------- | - | -------- |  | ----
|Operating Expenses (in millions) |  | March 31, 2008 |       | March 31, 2007 |   | % Change
|Mainline operating expenses      |  | $              | 692.2 |                | $ | 601.8    |  | 15.0
|Purchased capacity costs         |  |                | 76.7  |                |   | 67.4     |  | 13.8
|                                 |  |                |       |                |   |          |  |     
|Total Operating Expenses         |  | $              | 768.9 |                | $ | 669.2    |  | 14.9
|                                 |  |                |       |                |   |          |  |     

Mainline Operating Expenses

Total mainline operating costs increased $90.4 million, or 15.0%, from the first quarter of 2007. The increase was primarily due to the $76.1 million increase in aircraft fuel expense from the first quarter of 2007
and increases in maintenance costs and contracted services. Significant variances from the first quarter of 2007 are described more fully below.

Variable Incentive Pay

Variable incentive pay declined from $7.7 million, or 66.2%, to $2.6 million. The decline reflects lower
year-over-year accruals for profit-based incentives that are based on estimated full-year results.

Aircraft Fuel

Aircraft fuel expense includes both raw fuel expense (as defined below) plus the effect of mark-to-market adjustments to our fuel hedge portfolio that we include in our
income statement as the value of the portfolio increases and decreases. By definition, our aircraft fuel expense is very volatile, even between quarters, because it includes these gains or losses when the underlying instrument increases or decreases
in value as crude oil prices increase or decrease. Raw fuel expense is defined as the price that we generally pay at the airport, or the into-plane price, including taxes and transportation charges. Raw fuel prices are impacted by world
oil prices and refining costs, which can vary by region in the U.S. Raw fuel expense approximates cash paid to suppliers.

Aircraft fuel expense increased
$76.1 million, or 48.3%, compared to the first quarter of 2007. The elements of the change are illustrated in the following table:



|                                                                                |  |                             |       |   |      |   |       |          |  |     
|------------------------------------------------------------------------------- |  | --------------------------- | ----- | - | ---- | - | ----- | -------- |  | ----
|                                                                                |  | Three Months Ended March 31
|(in millions, except per-gallon amounts)                                        |  | 2008                        |       |   | 2007 |   |       | % Change
|Fuel gallons consumed                                                           |  |                             | 85.9  |   |      |   | 84.2  |          |  | 2.0 
|Raw price per gallon                                                            |  | $                           | 3.00  |   |      | $ | 1.97  |          |  | 52.3
|                                                                                |  |                             |       |   |      |   |       |          |  |     
|Total raw fuel expense                                                          |  | $                           | 257.7 |   |      | $ | 165.9 |          |  | 55.3
|                                                                                |  |                             |       |   |      |   |       |          |  |     
|Impact on fuel expense from changes in value of the fuel hedge portfolio (gain) |  |                             | (24.0 | ) |      |   | (8.3  | )        |  | NM  
|                                                                                |  |                             |       |   |      |   |       |          |  |     
|Aircraft fuel expense                                                           |  | $                           | 233.7 |   |      | $ | 157.6 |          |  | 48.3
|                                                                                |  |                             |       |   |      |   |       |          |  |     



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##### Table of Contents

Fuel gallons consumed increased by 2% on a 6.8% increase in capacity because of the improved fuel efficiency of our fleet
as we transition out of the less-efficient MD-80 aircraft to newer, more-efficient B737-800 aircraft.

The raw fuel price per gallon increased by 52.3% as
a result of higher West Coast jet fuel prices driven by higher crude oil costs.

We also evaluateeconomic fuel expense, which we define as raw
fuel expense less the cash we receive from hedge counterparties for hedges that settle during the period, offset by the premium expense that we recognize. A key difference between aircraft fuel expense and economic fuel expense is
the timing of gain or loss recognition. When we refer to economic fuel expense, we include gains only when they are realized through a cash receipt from our hedge contract counterparties. We believe this is the best measure of the effect that
fuel prices are currently having on our business because it most closely approximates the net cash outflow associated with purchasing fuel for our operation. Accordingly, many industry analysts evaluate our results using this measure, and it is the
basis for most internal management reporting and incentive pay plans.

Our economic fuel expense is calculated as follows:



|                                         |  |                             |       |   |      |   |       |          |  |     
|---------------------------------------- |  | --------------------------- | ----- | - | ---- | - | ----- | -------- |  | ----
|                                         |  | Three Months Ended March 31
|(in millions, except per-gallon amounts) |  | 2008                        |       |   | 2007 |   |       | % Change
|Raw fuel expense                         |  | $                           | 257.7 |   |      | $ | 165.9 |          |  | 55.3
|Less: cash received from settled hedges  |  |                             | (24.2 | ) |      |   | (1.5  | )        |  | NM  
|                                         |  |                             |       |   |      |   |       |          |  |     
|Economic fuel expense                    |  | $                           | 233.5 |   |      | $ | 164.4 |          |  | 42.0
|                                         |  |                             |       |   |      |   |       |          |  |     
|Fuel gallons consumed                    |  |                             | 85.9  |   |      |   | 84.2  |          |  | 2.0 
|                                         |  |                             |       |   |      |   |       |          |  |     
|Economic fuel cost per gallon            |  | $                           | 2.72  |   |      | $ | 1.95  |          |  | 39.5
|                                         |  |                             |       |   |      |   |       |          |  |     

NM = Not meaningful

The total cash benefit from hedges that settled during the period increased to $24.2 million in 2008 up from $1.5 million in 2007. The increase is primarily due to the dramatic increase in crude oil prices since the first quarter of 2007.

We currently expect economic fuel expense to be significantly higher for the full year of 2008 than in 2007 because of higher crude oil prices and
refinery margins for jet fuel.

Aircraft Maintenance

Aircraft maintenance increased by $7.8 million, or 22.7%, compared to the prior-year quarter because of an increase in the number of engine and airframe maintenance events, partially offset by the benefits of our fleet transition plan as we
replace our aging MD-80s with newer B737-800s. Our current expectation is that aircraft maintenance costs will be higher for the balance of 2008 compared to 2007 because of the timing of certain required maintenance events.

Contracted Services

Contracted services increased by $5.3 million,
or 18.0%, compared to the first quarter of 2007 as a result of higher vendor costs at our Seattle station in order to help improve our operational performance.

Selling Expenses

Selling expenses declined by $5.1 million, or 16.1%, compared to the first quarter of 2007 as a result of lower Mileage
Plan selling costs, primarily because of a favorable adjustment to the estimated liability to a partner airline for award travel, and lower ticket distribution costs resulting from revised contracts. The declines were partially offset by an increase
in credit card commissions due to the increase in revenue.



22



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##### Table of Contents

Depreciation and Amortization

Depreciation and amortization increased $3.4 million, or 9.6%, compared to the first quarter of 2007. This is primarily due to the additional B737-800 aircraft delivered in 2007 and in the first quarter of 2008, partially offset by lower
depreciation and amortization expense associated with our MD-80 fleet.

Mainline Unit Costs per Available Seat Mile

Operating costs per ASM (CASM) is an important metric in the industry and we use it to gauge the effectiveness of our cost-reduction efforts. Our effort to reduce unit
cost focuses not only on controlling the actual dollars we spend, but also on the ability to increase our capacity without adding a commensurate amount of cost.

Our mainline operating costs per ASM are summarized below:



|                                                 |  |                             |   |  |       |   |  |         
|------------------------------------------------ |  | --------------------------- | - |  | ----- | - |  | --------
|                                                 |  | Three Months Ended March 31
|                                                 |  | 2008                        |   |  | 2007  |   |  | % Change
|Total mainline operating expenses per ASM (CASM) |  | 11.38                       | ¢ |  | 10.57 | ¢ |  | 7.6     
|CASM includes the following components:          |  |                             |   |  |       |   |  |         
|Aircraft fuel cost per ASM                       |  | 3.84                        | ¢ |  | 2.77  | ¢ |  | 38.6    

We have separately listed in the above table our fuel costs per ASM. These amounts are included in CASM, but for
internal purposes we consistently use unit cost metrics that exclude fuel and certain special items to measure our cost-reduction progress. We believe that such analysis may be important to investors and other readers of these financial statements
for the following reasons:



| |  |  | Mainline cost per ASM excluding fuel is one of the most important measures used by management and by the Air Group Board of Directors in assessing quarterly and
annual cost performance. For Alaska Airlines, these decision-makers evaluate operating results of the mainline operation, which includes the operation of the B737 and MD-80 aircraft fleets branded in Alaska Airlines livery. The revenues
and expenses associated with purchased capacity are evaluated separately.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Mainline cost per ASM excluding fuel (and other items as specified in our governing documents) is an important metric for the employee incentive plan that covers
company management and executives.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | By eliminating fuel expense from our unit cost metrics, we believe that we have better visibility into the results of our non-fuel cost-reduction initiatives. Our
industry is highly competitive and is characterized by high fixed costs, so even a small reduction in non-fuel operating costs can result in a significant improvement in operating results. In addition, we believe that all domestic carriers are
similarly impacted by changes in jet fuel costs over the long run, so it is important for management (and thus investors) to understand the impact of (and trends in) company-specific cost drivers such as labor rates and productivity, airport costs,
maintenance costs, etc., which are more controllable by management.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



23



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##### Table of Contents

| |  |  | Mainline cost per ASM excluding fuel is a measure commonly used by industry analysts, and we believe it is the basis by which they compare our airlines to others in
the industry. The measure is also the subject of frequent questions from holders of our common stock.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Disclosure of the individual impact of certain noted items provides investors the ability to measure and monitor performance both with and without these special
items. We believe that disclosing the impact of certain items such as fleet transition costs and restructuring charges, is important because it provides information on significant items that are not necessarily indicative of future performance.
Industry analysts and investors consistently measure the Companys performance without these items for better comparability between periods and among other airlines.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Although we disclose our mainline passenger unit revenues, we do not (nor are we able to) evaluate mainline unit revenues excluding the impact that
rising fuel costs have had on ticket prices. Fuel represents approximately 30% of our total mainline operating expenses, and fluctuations in our fuel prices often drive changes in unit revenues in the mid-to-long term. Although we believe it is
useful to evaluate non-fuel unit costs for the reasons noted above, we would caution readers of these financial statements not to place undue reliance on unit costs excluding fuel as a measure or predictor of future profitability because of the
significant impact of fuel costs on our business.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We currently forecast our mainline costs per ASM excluding fuel for the second quarter
and full year of 2008 to be up 4% to 5% and flat, respectively, compared to 2007. Our primary goal for 2008 continues to be to improve our operational reliability, including our on-time performance, completion of scheduled flights, and baggage
delivery metrics, with a special focus on our Seattle operations.

Purchased Capacity Costs

Purchased capacity costs increased $9.3 million, or 13.8%, from the first quarter of 2007 to $76.7 million in the first quarter of 2008. Of the total, $71.4 million was
paid to Horizon under the CPA for 344 million ASMs. The balance includes amounts paid to a third party for the Dutch Harbor flying (which approximated the amount paid in 2007) and certain administrative and information technology costs borne by
Alaska allocated to the purchased capacity flying costs. The increase was primarily due to the 15.8% capacity increase under the Horizon CPA and the increasing cost of fuel.

Nonoperating Income (Expense)

Net nonoperating income (expense) was $(2.4)
million in the first quarter of 2008 compared to $1.9 million in the first quarter of 2007. Interest income declined $2.8 million compared to the first quarter of 2007 as a result of lower average portfolio returns and a lower average cash and
marketable securities balance.

Interest expense increased $1.4 million primarily resulting from new debt arrangements in 2007 and the first quarter of
2008, partially offset by lower interest rates on our variable-rate debt.

Income Tax Expense (Benefit)

We provide for income taxes each quarter based on either our estimate of the effective tax rate for the full year or the actual year-to-date effective tax rate if it is
our best estimate of our annual expectation. For the first quarter of 2008, we used the actual year-to-date effective tax rate, as we believe it to be our best estimate of the full-year rate at this time because of the difficulty in estimating the
full-year pretax income or loss and our resulting effective income tax rate. Our effective income tax benefit rate on the pre-tax loss for the first quarter of 2008 was 35.6%, compared to 50.7% in the first quarter of 2007. In arriving at this rate,
we considered a



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variety of factors, including year-to-date pre-tax results, the U.S. federal rate of 35%, estimated year-to-date nondeductible expenses and estimated state
income taxes. The effective rate for the first quarter of 2007 was positively impacted by a $1.7 million credit that resulted from the favorable impact of a state income tax matter. Excluding this benefit, our effective benefit rate would have been
approximately 28% for the first quarter of 2007.

We evaluate our tax rate each quarter and make adjustments when necessary. Our final effective tax rate
for the full year is highly dependent on the level of pre-tax income or loss and the magnitude of any nondeductible expenses in relation to that pre-tax amount.

Critical Accounting Estimates

For information on our critical accounting estimates, see Item 7 of our Annual Report on Form 10-K for
the year ended December 31, 2007. For information about the impact of recently released accounting standards, see Note 1 to the condensed financial statements.



|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------

Evaluation of Disclosure Controls and
Procedures

As of March 31, 2008, an evaluation was performed under the supervision and with the participation of our management, including our
chief executive officer and chief financial officer (collectively, our certifying officers), of the effectiveness of the design and operation of our disclosure controls and procedures. These disclosure controls and procedures are defined
as controls and procedures designed to ensure that the information required to be disclosed by us in our periodic reports filed with or submitted to 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 includes, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to our management, including our certifying
officers, as appropriate to allow timely decisions regarding required disclosure. Our certifying officers concluded, based on their evaluation, that disclosure controls and procedures were effective as of March 31, 2008.

Changes in Internal Control over Financial Reporting

We made no
changes in our internal control over financial reporting during the fiscal quarter ended March 31, 2008, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION



|ITEM 1. | LEGAL PROCEEDINGS
|------- | -----------------

In June 2005, the International Association of
Machinists (IAM) filed a grievance under its Collective Bargaining Agreement (CBA) with Alaska alleging that Alaska violated the CBA by, among other things, subcontracting the Ramp service operation in Seattle. The dispute was referred to an
arbitrator and hearings on the grievance commenced in January 2007, with a final hearing date in August 2007. We expect, but have not yet received, a decision from the arbitrator in the first half of 2008.

We are a party to routine litigation matters incidental to our business and with respect to which no material liability is expected. Management believes the ultimate
disposition of these matters is not likely to materially affect our financial position or results of operations. This forward-looking statement is based on managements current understanding of the relevant law and facts; and 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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|ITEM 1A. | RISK FACTORS
|-------- | ------------

In addition to the other information set forth in
this report, you should carefully consider the factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2007, which could materially affect our business, financial
condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially
adversely affect our business, financial condition and/or operating results.



|ITEM 5. | OTHER INFORMATION
|------- | -----------------

None.



|ITEM 6. | EXHIBITS
|------- | --------

See Exhibit Index on page 27.

Signatures

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



|                     
|---------------------
|                     
|ALASKA AIRLINES, INC.
|Registrant           

Date: May 7, 2008



|                                                                                                        |  |                        
|------------------------------------------------------------------------------------------------------- |  | -----------------------
|                                                                                                        | 
|By:                                                                                                     |  | /s/ Brandon S. Pedersen
|Brandon S. Pedersen                                                                                    
|Vice President/Finance and Controller (Principal Accounting Officer)                                   
|                                                                                                        | 
|By:                                                                                                     |  | /s/ Bradley D. Tilden  
|Bradley D. Tilden                                                                                      
|Executive Vice President/Finance and Planning and Chief Financial Officer (Principal Financial Officer)



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EXHIBIT INDEX

Pursuant to Item 601(a)(2) of Regulation S-K, this Exhibit Index immediately precedes the exhibits.

The following exhibits are numbered in accordance with Item 601 of Regulation S-K.



|            |  |                                                                                                                
|----------- |  | ---------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                    
|            | 
|31.1 *      |  | Section 302 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350                        
|            | 
|31.2 *      |  | Section 302 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350                        
|            | 
|32.1 *      |  | Section 906 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 (furnished, not filed.)
|            | 
|32.2 *      |  | Section 906 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 (furnished, not filed.)

Exhibits 32.1 and 32.2 are being furnished pursuant to 18 U.S.C. Section 1350 and shall not deemed to be
filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (Exchange Act,) or otherwise subject to the liability of that section. Such exhibits shall not be deemed to be incorporated by reference
into any filing of the Company under the Securities Act of 1933, as amended, or the Exchange Act, whether made before or after the date hereof, regardless of any general incorporation language in such filing.



|* | Filed herewith.
|- | ---------------



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