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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 June 30, 2002.

OR

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

For the transition period from . . . . . . to . . . . . .

Commission file number 1-8957

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

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

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

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuers classes
of common stock, as of the latest practicable date.

The registrant has 500 common shares, par value $1.00, outstanding at July
31, 2002.

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Due to the
restatement discussed in Note 2 and the additional work involved
with this restatement, the Companys independent public
accountants have not completed their review of the financial
statements included in this filing in accordance with professional
standards for conducting such reviews.

Upon completion of
the review by the Companys independent accountants, if a change
is required to the accompanying unaudited financial statements, the
Company will amend this Quarterly Report on Form 10-Q to present the
reviewed unaudited financial statements and a discussion of any
material changes made.

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TABLE OF CONTENTS



|                             |                                                                                               |                                           |  |  |  |  |  | 
|---------------------------- | --------------------------------------------------------------------------------------------- | ----------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL STATEMENTS
|                             | ITEM 1. Financial Statements                                                                 
|                             |                                                                                               | BALANCE SHEETS (unaudited)               
|                             |                                                                                               | NOTES TO FINANCIAL STATEMENTS (unaudited)
|                             | ITEM 2. Managements Discussion and Analysis of Results of Operations and Financial Condition
|                             | ITEM 3. Quantitative and Qualitative Disclosure About Market Risk                            
|PART II. OTHER INFORMATION  
|                             | ITEM 1. Legal Proceedings                                                                    
|                             | ITEM 5. Other Information                                                                    
|                             | ITEM 6. Exhibits and Reports on Form 8-K                                                     
|Signatures                  
|EXHIBIT 3.1                 
|EXHIBIT 99.1                
|EXHIBIT 99.2                



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PART I. FINANCIAL STATEMENTS




ITEM 1. Financial Statements




BALANCE SHEETS (unaudited)
Alaska Airlines, Inc.

ASSETS

|                                               |  |              |         |          |  |   |         | 
|---------------------------------------------- |  | ------------ | ------- | -------- |  | - | ------- | 
|                                               |  | Restated     |         |          |  |  
|                                               |  | December 31, |         | June 30,
|(In Millions)                                  |  | 2001         |         | 2002    
|                                               |  |              |         |         
|Current Assets                                 |  |              |         |          |  |   |         | 
|Cash and cash equivalents                      |  | $            | 490.2   |          |  | $ | 269.8   | 
|Marketable securities                          |  |              | 170.4   |          |  |   | 437.0   | 
|Receivables from related companies             |  |              | 71.2    |          |  |   | 82.1    | 
|Receivables  net                              |  |              | 67.0    |          |  |   | 94.4    | 
|Inventories and supplies  net                 |  |              | 37.8    |          |  |   | 38.3    | 
|Prepaid expenses and other assets              |  |              | 93.1    |          |  |   | 92.2    | 
|                                               |  |              |         |          |  |   |         | 
|Total Current Assets                           |  |              | 929.7   |          |  |   | 1,013.8 | 
|                                               |  |              |         |          |  |   |         | 
|Property and Equipment                         |  |              |         |          |  |   |         | 
|Flight equipment                               |  |              | 1,888.0 |          |  |   | 1,887.9 | 
|Other property and equipment                   |  |              | 326.7   |          |  |   | 349.9   | 
|Deposits for future flight equipment           |  |              | 71.6    |          |  |   | 61.9    | 
|                                               |  |              |         |          |  |   |         | 
|                                               |  |              | 2,286.3 |          |  |   | 2,299.7 | 
|Less accumulated depreciation and amortization |  |              | 609.1   |          |  |   | 662.3   | 
|                                               |  |              |         |          |  |   |         | 
|Total Property and Equipment  Net             |  |              | 1,677.2 |          |  |   | 1,637.4 | 
|                                               |  |              |         |          |  |   |         | 
|Intangible Assets                              |  |              | 12.5    |          |  |   | 12.5    | 
|                                               |  |              |         |          |  |   |         | 
|Other Assets                                   |  |              | 131.7   |          |  |   | 143.6   | 
|                                               |  |              |         |          |  |   |         | 
|Total Assets                                   |  | $            | 2,751.1 |          |  | $ | 2,807.3 | 
|                                               |  |              |         |          |  |   |         | 

See accompanying notes to financial statements.

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BALANCE SHEETS (unaudited)
Alaska Airlines, Inc.

LIABILITIES AND SHAREHOLDERS EQUITY

|                                                                                       |                                |      |              |       |          |   |         |       | 
|-------------------------------------------------------------------------------------- | ------------------------------ | ---- | ------------ | ----- | -------- | - | ------- | ----- | 
|                                                                                       |                                |      | Restated     |       |          |   |        
|                                                                                       |                                |      | December 31, |       | June 30,
|(In Millions Except Share Amounts)                                                     |                                | 2001 |              | 2002 
|                                                                                       |                                |      |              |      
|Current Liabilities                                                                    |                                |      |              |       |          |   |         |      
|Accounts payable                                                                       |                                | $    | 96.1         |       |          | $ | 107.3   |      
|Payables to related companies                                                          |                                |      | 4.4          |       |          |   | 4.1     |      
|Accrued aircraft rent                                                                  |                                |      | 81.7         |       |          |   | 70.7    |      
|Accrued wages, vacation and payroll taxes                                              |                                |      | 70.1         |       |          |   | 73.4    |      
|Other accrued liabilities                                                              |                                |      | 191.3        |       |          |   | 176.6   |      
|Air traffic liability                                                                  |                                |      | 219.5        |       |          |   | 285.8   |      
|Current portion of long-term debt and
capital lease obligations                        |                                |      | 43.2         |       |          |   | 45.7    |      
|                                                                                       |                                |      |              |       |          |   |         |      
|Total Current Liabilities                                                              |                                |      | 706.3        |       |          |   | 763.6   |      
|                                                                                       |                                |      |              |       |          |   |         |      
|Long-Term Debt and Capital Lease Obligations                                           |                                |      | 847.9        |       |          |   | 852.1   |      
|                                                                                       |                                |      |              |       |          |   |         |      
|Other Liabilities and Credits                                                          |                                |      |              |       |          |   |         |      
|Deferred income taxes                                                                  |                                |      | 188.9        |       |          |   | 176.9   |      
|Deferred revenue                                                                       |                                |      | 165.8        |       |          |   | 167.2   |      
|Other liabilities                                                                      |                                |      | 124.4        |       |          |   | 151.8   |      
|                                                                                       |                                |      |              |       |          |   |         |      
|                                                                                       |                                |      | 479.1        |       |          |   | 495.9   |      
|                                                                                       |                                |      |              |       |          |   |         |      
|Shareholders Equity                                                                   |                                |      |              |       |          |   |         |      
|Common stock, $1 par value
Authorized: 1,000 shares
Issued: 2001 and 2002 - 500 shares |                                |      |             |       |          |   | --      |      
|                                                                                       | Capital in excess of par value |      |              | 324.8 |          |   |         | 324.8 | 
|Accumulated other comprehensive income (loss)                                          |                                |      | (3.1         | )     |          |   | 4.6     |      
|Retained earnings                                                                      |                                |      | 396.1        |       |          |   | 366.3   |      
|                                                                                       |                                |      |              |       |          |   |         |      
|                                                                                       |                                |      | 717.8        |       |          |   | 695.7   |      
|                                                                                       |                                |      |              |       |          |   |         |      
|Total Liabilities and Shareholders Equity                                             |                                | $    | 2,751.1      |       |          | $ | 2,807.3 |      
|                                                                                       |                                |      |              |       |          |   |         |      

See accompanying notes to financial statements.

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STATEMENTS OF INCOME (unaudited)
Alaska Airlines, Inc.

|                                |  |          |       |      |  |   |       |  
|------------------------------- |  | -------- | ----- | ---- |  | - | ----- | -
|Three Months Ended June 30      |  | Restated |       |      |  |  
|(In Millions)                   |  | 2001     |       | 2002
|                                |  |          |       |     
|Operating Revenues              |  |          |       |      |  |   |       |  
|Passenger                       |  | $        | 434.7 |      |  | $ | 433.6 |  
|Freight and mail                |  |          | 21.4  |      |  |   | 20.0  |  
|Other  net                     |  |          | 15.2  |      |  |   | 23.3  |  
|                                |  |          |       |      |  |   |       |  
|Total Operating Revenues        |  |          | 471.3 |      |  |   | 476.9 |  
|                                |  |          |       |      |  |   |       |  
|Operating Expenses              |  |          |       |      |  |   |       |  
|Wages and benefits              |  |          | 156.4 |      |  |   | 175.2 |  
|Contracted services             |  |          | 18.0  |      |  |   | 19.2  |  
|Aircraft fuel                   |  |          | 74.1  |      |  |   | 64.2  |  
|Aircraft maintenance            |  |          | 32.2  |      |  |   | 36.1  |  
|Aircraft rent                   |  |          | 35.0  |      |  |   | 31.8  |  
|Food and beverage service       |  |          | 14.7  |      |  |   | 16.2  |  
|Commissions                     |  |          | 18.2  |      |  |   | 14.2  |  
|Other selling expenses          |  |          | 26.6  |      |  |   | 27.8  |  
|Depreciation and amortization   |  |          | 25.3  |      |  |   | 28.8  |  
|Loss on sale of assets          |  |          | 0.3   |      |  |   | 0.1   |  
|Landing fees and other rentals  |  |          | 23.3  |      |  |   | 28.4  |  
|Other                           |  |          | 35.7  |      |  |   | 37.1  |  
|                                |  |          |       |      |  |   |       |  
|Total Operating Expenses        |  |          | 459.8 |      |  |   | 479.1 |  
|                                |  |          |       |      |  |   |       |  
|Operating Income (Loss)         |  |          | 11.5  |      |  |   | (2.2  | )
|                                |  |          |       |      |  |   |       |  
|Nonoperating Income (Expense)   |  |          |       |      |  |   |       |  
|Interest income                 |  |          | 6.8   |      |  |   | 6.1   |  
|Interest expense                |  |          | (10.6 | )    |  |   | (11.6 | )
|Interest capitalized            |  |          | 1.2   |      |  |   | 0.4   |  
|Other  net                     |  |          | (0.2  | )    |  |   | 4.6   |  
|                                |  |          |       |      |  |   |       |  
|                                |  |          | (2.8  | )    |  |   | (0.5  | )
|                                |  |          |       |      |  |   |       |  
|Income (loss) before income tax |  |          | 8.7   |      |  |   | (2.7  | )
|Income tax expense (benefit)    |  |          | 3.6   |      |  |   | (0.2  | )
|                                |  |          |       |      |  |   |       |  
|Net Income (Loss)               |  | $        | 5.1   |      |  | $ | (2.5  | )
|                                |  |          |       |      |  |   |       |  

See accompanying notes to financial statements.

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STATEMENTS OF INCOME (unaudited)
Alaska Airlines, Inc.

|                               |  |          |       |      |  |   |       |  
|------------------------------ |  | -------- | ----- | ---- |  | - | ----- | -
|Six Months Ended June 30       |  | Restated |       |      |  |  
|(In Millions)                  |  | 2001     |       | 2002
|                               |  |          |       |      | 
|Operating Revenues             |  |          |       |      |  |   |       |  
|Passenger                      |  | $        | 819.8 |      |  | $ | 807.8 |  
|Freight and mail               |  |          | 39.7  |      |  |   | 35.9  |  
|Other  net                    |  |          | 29.9  |      |  |   | 42.1  |  
|                               |  |          |       |      |  |   |       |  
|Total Operating Revenues       |  |          | 889.4 |      |  |   | 885.8 |  
|                               |  |          |       |      |  |   |       |  
|Operating Expenses             |  |          |       |      |  |   |       |  
|Wages and benefits             |  |          | 310.5 |      |  |   | 341.3 |  
|Contracted services            |  |          | 35.7  |      |  |   | 39.0  |  
|Aircraft fuel                  |  |          | 148.1 |      |  |   | 119.4 |  
|Aircraft maintenance           |  |          | 67.5  |      |  |   | 71.7  |  
|Aircraft rent                  |  |          | 70.3  |      |  |   | 63.6  |  
|Food and beverage service      |  |          | 27.9  |      |  |   | 30.1  |  
|Commissions                    |  |          | 34.1  |      |  |   | 28.5  |  
|Other selling expenses         |  |          | 52.6  |      |  |   | 52.7  |  
|Depreciation and amortization  |  |          | 49.0  |      |  |   | 57.3  |  
|Loss on sale of assets         |  |          | 1.2   |      |  |   | 0.2   |  
|Landing fees and other rentals |  |          | 44.8  |      |  |   | 52.1  |  
|Other                          |  |          | 72.1  |      |  |   | 72.5  |  
|                               |  |          |       |      |  |   |       |  
|Total Operating Expenses       |  |          | 913.8 |      |  |   | 928.4 |  
|                               |  |          |       |      |  |   |       |  
|Operating Loss                 |  |          | (24.4 | )    |  |   | (42.6 | )
|                               |  |          |       |      |  |   |       |  
|Nonoperating Income (Expense)  |  |          |       |      |  |   |       |  
|Interest income                |  |          | 16.3  |      |  |   | 11.1  |  
|Interest expense               |  |          | (22.7 | )    |  |   | (23.5 | )
|Interest capitalized           |  |          | 3.8   |      |  |   | 0.5   |  
|Other  net                    |  |          | (1.4  | )    |  |   | 9.3   |  
|                               |  |          |       |      |  |   |       |  
|                               |  |          | (4.0  | )    |  |   | (2.6  | )
|                               |  |          |       |      |  |   |       |  
|Loss before income tax         |  |          | (28.4 | )    |  |   | (45.2 | )
|Income tax benefit             |  |          | (9.7  | )    |  |   | (15.4 | )
|                               |  |          |       |      |  |   |       |  
|Net Loss                       |  | $        | (18.7 | )    |  | $ | (29.8 | )
|                               |  |          |       |      |  |   |       |  

See accompanying notes to financial statements.

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

|                                                |                              |       |        |           |           |               |               |          |          |       |             |      |   |   |       |   |  |   |       |   | 
|----------------------------------------------- | ---------------------------- | ----- | ------ | --------- | --------- | ------------- | ------------- | -------- | -------- | ----- | ----------- | ---- | - | - | ----- | - |  | - | ----- | - | 
|                                                |                              |       |        |           |           |               |               |          |          |       | Accumulated |      |   |   |       |   |  |   |      
|                                                |                              |       |        |           |           |               | Capital in    |          | Other    |       |             |      |   |   |       |   | 
|                                                |                              |       | Common |           | Excess of |               | Comprehensive |          | Retained |       |             |      |  
|(In Millions)                                   |                              | Stock |        | Par Value |           | Income (Loss) |               | Earnings |          | Total
|                                                |                              |       |        |           |           |               |               |          |          |      
|Balances at December 31, 2001:                  |                              |       |        |           |           |               |               |          |          |       |             |      |   |   |       |   |  |   |       |  
|As previously reported                          |                              | $     |       |           |           | $             | 324.8         |          |          | $     | (3.1        | )    |   | $ | 368.7 |   |  | $ | 690.4 |  
|Prior period adjustment (see Note 2)            |                              |       |        |           |           |               |               |          |          |       |             |      |   |   | 27.4  |   |  |   | 27.4  |  
|                                                |                              |       |        |           |           |               |               |          |          |       |             |      |   |   |       |   |  |   |       |  
|As restated                                     |                              |       |       |           |           |               | 324.8         |          |          |       | (3.1        | )    |   |   | 396.1 |   |  |   | 717.8 |  
|                                                |                              |       |        |           |           |               |               |          |          |       |             |      |   |   |       |   |  |   |       |  
|Net loss for the six months
ended June 30, 2002 |                              |       |        |           |           |               |               |          |          |       |             |      |   |   | (29.8 | ) |  |   | (29.8 | )
|Other comprehensive income (loss):              |                              |       |        |           |           |               |               |          |          |       |             |      |   |   |       |   |  |   |       |  
|Related to fuel hedges:                         |                              |       |        |           |           |               |               |          |          |       |             |      |   |   |       |   |  |   |       |  
|                                                | Change in fair value         |       |        |           |           |               |               |          |          |       |             | 17.9 |   |   |       |   |  |   |       |   | 
|                                                | Reclassification to earnings |       |        |           |           |               |               |          |          |       |             | (6.8 | ) |   |       |   |  |   |       |   | 
|                                                | Income tax effect            |       |        |           |           |               |               |          |          |       |             | (4.4 | ) |   |       |   |  |   |       |   | 
|                                                |                              |       |        |           |           |               |               |          |          |       |             |     
|                                                |                              |       |        |           |           |               |               |          |          |       | 6.7         |      |   |   |       |   |  |   | 6.7   |  
|                                                |                              |       |        |           |           |               |               |          |          |       |             |     
|Related to marketable securities:               |                              |       |        |           |           |               |               |          |          |       |             |      |   |   |       |   |  |   |       |  
|                                                | Change in fair value         |       |        |           |           |               |               |          |          |       |             | 0.5  |   |   |       |   |  |   |       |   | 
|                                                | Reclassification to earnings |       |        |           |           |               |               |          |          |       |             | 0.6  |   |   |       |   |  |   |       |   | 
|                                                | Income tax effect            |       |        |           |           |               |               |          |          |       |             | (0.1 | ) |   |       |   |  |   |       |   | 
|                                                |                              |       |        |           |           |               |               |          |          |       |             |     
|                                                |                              |       |        |           |           |               |               |          |          |       | 1.0         |      |   |   |       |   |  |   | 1.0   |  
|                                                |                              |       |        |           |           |               |               |          |          |       |             |      |   |   |       |   |  |   |       |  
|Total comprehensive income (loss)               |                              |       |        |           |           |               |               |          |          |       |             |      |   |   |       |   |  |   | (22.1 | )
|                                                |                              |       |        |           |           |               |               |          |          |       |             |      |   |   |       |   |  |   |       |  
|Balances at June 30, 2002                       |                              | $     |       |           |           | $             | 324.8         |          |          | $     | 4.6         |      |   | $ | 366.3 |   |  | $ | 695.7 |  
|                                                |                              |       |        |           |           |               |               |          |          |       |             |      |   |   |       |   |  |   |       |  

See accompanying notes to financial statements.

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

|                                                                                |                                              |                                                  |        |          |       |   |        |       |       |  
|------------------------------------------------------------------------------- | -------------------------------------------- | ------------------------------------------------ | ------ | -------- | ----- | - | ------ | ----- | ----- | -
|                                                                                |                                              |                                                  |        | Restated |       |   |        |      
|Six Months Ended June 30 (In Millions)                                          |                                              | 2001                                             |        | 2002    
|                                                                                |                                              |                                                  |        |         
|Cash flows from operating activities:                                           |                                              |                                                  |        |          |       |   |        |      
|Net loss                                                                        |                                              | $                                                | (18.7  | )        |       | $ | (29.8  | )    
|Adjustments to reconcile net loss to
net cash provided by operating activities: |                                              |                                                  |        |          |       |   |        |      
|                                                                                |                                              | Depreciation and amortization                    |        |          | 49.0  |   |        |       | 57.3  |  
|                                                                                |                                              | Amortization of airframe and engine overhauls    |        |          | 33.2  |   |        |       | 29.7  |  
|                                                                                |                                              | Changes
in derivative fair values                |        |          | 2.0   |   |        |       | (6.8  | )
|                                                                                |                                              | Loss on disposition of assets                    |        |          | 1.2   |   |        |       | 0.2   |  
|                                                                                |                                              | Decrease in deferred income taxes                |        |          | (5.9  | ) |        |       | (16.6 | )
|                                                                                |                                              | Increase in accounts receivable  net            |        |          | (50.1 | ) |        |       | (38.3 | )
|                                                                                |                                              | Decrease in other current assets                 |        |          | 19.1  |   |        |       | 9.3   |  
|                                                                                |                                              | Increase in air traffic liability                |        |          | 83.1  |   |        |       | 66.3  |  
|                                                                                |                                              | Increase (decrease) in other current liabilities |        |          | 1.3   |   |        |       | (6.3  | )
|                                                                                |                                              | Increase in deferred revenue and other-net       |        |          | 1.8   |   |        |       | 22.5  |  
|                                                                                |                                              |                                                  |        |          |       |   |        |      
|Net cash provided by operating activities                                       |                                              |                                                  | 116.0  |          |       |   | 87.5   |      
|                                                                                |                                              |                                                  |        |          |       |   |        |      
|Cash flows from investing activities:                                           |                                              |                                                  |        |          |       |   |        |      
|Proceeds from disposition of assets                                             |                                              |                                                  | 0.1    |          |       |   | 0.9    |      
|Purchases of marketable securities                                              |                                              |                                                  | (239.4 | )        |       |   | (358.5 | )    
|Sales and maturities of marketable securities                                   |                                              |                                                  | 265.0  |          |       |   | 93.0   |      
|Property and equipment additions:                                               |                                              |                                                  |        |          |       |   |        |      
|                                                                                | Flight equipment, including advance deposits |                                                  |        | (219.1   | )     |   |        | 8.8   |      
|                                                                                | Capitalized overhauls                        |                                                  |        | (29.1    | )     |   |        | (29.7 | )    
|                                                                                | Other flight equipment                       |                                                  |        | (25.8    | )     |   |        | (4.2  | )    
|                                                                                | Other property                               |                                                  |        | (21.3    | )     |   |        | (18.2 | )    
|Restricted deposits and other                                                   |                                              |                                                  | (0.8   | )        |       |   | (6.7   | )    
|                                                                                |                                              |                                                  |        |          |       |   |        |      
|Net cash used in investing activities                                           |                                              |                                                  | (270.4 | )        |       |   | (314.6 | )    
|                                                                                |                                              |                                                  |        |          |       |   |        |      
|Cash flows from financing activities:                                           |                                              |                                                  |        |          |       |   |        |      
|Proceeds from issuance of long-term debt                                        |                                              |                                                  | 136.5  |          |       |   | 25.5   |      
|Long-term debt and capital lease payments                                       |                                              |                                                  | (47.7  | )        |       |   | (18.8  | )    
|                                                                                |                                              |                                                  |        |          |       |   |        |      
|Net cash provided by financing activities                                       |                                              |                                                  | 88.8   |          |       |   | 6.7    |      
|                                                                                |                                              |                                                  |        |          |       |   |        |      
|Net change in cash and cash equivalents                                         |                                              |                                                  | (65.6  | )        |       |   | (220.4 | )    
|Cash and cash equivalents at beginning of period                                |                                              |                                                  | 101.0  |          |       |   | 490.2  |      
|                                                                                |                                              |                                                  |        |          |       |   |        |      
|Cash and cash equivalents at end of period                                      |                                              | $                                                | 35.4   |          |       | $ | 269.8  |      
|                                                                                |                                              |                                                  |        |          |       |   |        |      
|Supplemental disclosure of cash paid (refunded) during the period for:          |                                              |                                                  |        |          |       |   |        |      
|                                                                                | Interest (net of amount capitalized)         |                                                  | $      | 27.5     |       |   | $      | 23.6  |      
|                                                                                | Income taxes                                 |                                                  |        | (0.1     | )     |   |        | (15.8 | )    
|Noncash investing and financing activities:                                     |                                              | None                                             |        | None    

See accompanying notes to financial statements.

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

Note 1. Basis of Presentation and Significant Accounting policies

The accompanying unaudited financial statements of Alaska Airlines, Inc. (the
Company or Alaska), should be read in conjunction with the financial statements
in the Companys annual report on Form 10-K for the year ended December 31,
2001. They include all adjustments that are, in the opinion of management,
necessary for a fair presentation of the results for the interim periods.
Except for the restatement of the prior years financial statements as
described below, the adjustments made were of a normal recurring nature. The
Company is a wholly owned subsidiary of Alaska Air Group, Inc. (Air Group)
whose principal subsidiaries are Alaska Airlines, Inc. and Horizon Air
Industries, Inc. (Horizon). Certain reclassifications have been made in the
prior years financial statements to conform to the 2002 presentation.

As further discussed in Note 2, the Company
is restating its financial statements for the year ended December 31,
2001 and its unaudited financial statements for the quarterly period
ended March 31, 2002 and for all quarterly periods during the year
ended December 31, 2001. The Company expects to amend its Annual
Report on Form 10-K for the year ended December 31, 2001.

Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets.
Under this Statement the Companys goodwill will no longer be amortized, but
instead will be tested for impairment on a minimum of an annual basis. The
impact of discontinuing amortization of existing goodwill has resulted in an
increase of net income of $0.3 million for the six months ended June 30, 2002.
During the second quarter of 2002, the Company completed the first step of its
impairment test related to its $12.5 million of goodwill. Results of the test
indicate that there may be an impairment as it was determined that the
Companys net book value exceeded its fair value. As a result, the Company is
in the process of completing the second step of the impairment test to
determine the amount of impairment, if any. The Company is unable to estimate
the amount of the possible impairment, but is expected to complete the second
step of the impairment test during the fourth quarter of 2002. If an
impairment charge is made, it would not be reflected in the results of
operations, but would be reflected as a cumulative effect of an accounting
change in the Statements of Income.

In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
143, Accounting for Asset Retirement Obligations (effective for the Company
on January 1, 2003). This Statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The Company expects that
adoption of SFAS No. 143 will not have a material impact on the Companys
financial statements.

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

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. This Statement requires that only certain debt extinguishment
transactions be classified as an extraordinary item. Additionally, under this
Statement, capital leases that are modified so that the resulting agreement is
an operating lease, shall be accounted for under the sale-leaseback provisions
of SFAS No. 98. The Statement also includes minor modifications to existing
U.S. Generally Accepted Accounting Principles (GAAP) literature. Provisions of
the Statement are effective for the Company commencing in May 2002 through
January 2003.

8



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##### Table of Contents



In June 2002 the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. This Statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies EITF Issue No. 94-3 Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). The Statement requires that a liability
for a cost associated with an exit or disposal activity be recognized when the
liability is incurred. The Statement is effective for the Company on January
1, 2003.

We do not expect a significant impact on our financial position or results of
operations from adoption of SFAS No. 145 or 146.

Note 2. Restatement of Quarterly Financial Statements

In June 2002, the Company changed its accounting policies relating to the
accrual for certain lease return costs and the capitalization of software
development costs, and restated its previously issued financial
statements for the year ended December 31, 2001, including interim
periods within that year and the quarter ended March 31, 2002 to
reflect these changes. The effect of these changes is as shown below, but in
summary, they result in an increase in shareholders equity of
$27.4 million as of December 31,
2001. Additionally, the Company changed its accounting for aircraft purchase
commitments assumed by a third party, and made a reclassification of
deferred income taxes, neither of which impact equity or earnings. These changes are
more fully described below. Because the former methods are not considered to
be in compliance with generally accepted accounting principles in the United
States of America, the financial statements have been restated to
give retroactive effect to these
changes.

Leased Aircraft Return Costs

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

Internally Developed Software

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

Aircraft Purchase Commitments

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

9



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##### Table of Contents



The effect of the restatement for the three months ended March 31, 2002 is as
follows:

|                         |  |                    |       |          |  |   |       |  
|------------------------ |  | ------------------ | ----- | -------- |  | - | ----- | -
|                         |  | Three Months Ended
|                         |  | March 31, 2002    
|                         |  |                   
|                         |  | Reported           |       | Restated
|                         |  |                    |       |         
|                         |  | (in millions)     
|Total Operating Expenses |  | $                  | 450.7 |          |  | $ | 449.3 |  
|Net Loss                 |  | $                  | (28.2 | )        |  | $ | (27.3 | )
|                         |  |                    |       |          |  |   |       |  

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

|                         |  |                    |       |                  |  |          |       |          |  |   |       |   |  |   |       |  
|------------------------ |  | ------------------ | ----- | ---------------- |  | -------- | ----- | -------- |  | - | ----- | - |  | - | ----- | -
|                         |  | Three Months Ended |       | Six Months Ended
|                         |  | June 30, 2001      |       | June 30, 2001   
|                         |  |                    |       |                 
|                         |  | Reported           |       | Restated         |  | Reported |       | Restated
|                         |  |                    |       |                  |  |          |       |         
|                         |  | (in millions)     
|Total Operating Expenses |  | $                  | 460.2 |                  |  | $        | 459.8 |          |  | $ | 910.8 |   |  | $ | 913.8 |  
|Net Income (Loss)        |  | $                  | 4.8   |                  |  | $        | 5.1   |          |  | $ | (16.8 | ) |  | $ | (18.7 | )
|                         |  |                    |       |                  |  |          |       |          |  |   |       |   |  |   |       |  

The effect of the restatement on selected balance sheet items is as follows:

|                           |  |                   |         |                |  |          |         |          |  |   |         |  |  |   |         | 
|-------------------------- |  | ----------------- | ------- | -------------- |  | -------- | ------- | -------- |  | - | ------- |  |  | - | ------- | 
|                           |  | December 31, 2001 |         | March 31, 2002
|                           |  |                   |         |               
|                           |  | Reported          |         | Restated       |  | Reported |         | Restated
|                           |  |                   |         |                |  |          |         |         
|                           |  | (in millions)    
|Current Assets             |  | $                 | 904.7   |                |  | $        | 929.7   |          |  | $ | 917.1   |  |  | $ | 942.1   | 
|Property and Equipment-Net |  | $                 | 1,692.8 |                |  | $        | 1,677.2 |          |  | $ | 1,675.1 |  |  | $ | 1,650.7 | 
|Current Liabilities        |  | $                 | 700.2   |                |  | $        | 706.3   |          |  | $ | 706.5   |  |  | $ | 712.6   | 
|Long-Term Debt             |  | $                 | 863.3   |                |  | $        | 847.9   |          |  | $ | 862.5   |  |  | $ | 839.8   | 
|Shareholders Equity       |  | $                 | 690.4   |                |  | $        | 717.8   |          |  | $ | 670.9   |  |  | $ | 699.3   | 

Note 3. Other Assets

At December 31, 2001 and June 30, 2002, other assets included prepaid pension
cost of $98.4 million and $101.4 million, respectively.

Note 4. Frequent Flyer Program

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

|                               |  |                   |       |               |  |   |       | 
|------------------------------ |  | ----------------- | ----- | ------------- |  | - | ----- | 
|                               |  | December 31, 2001 |       | June 30, 2002
|                               |  |                   |       |              
|                               |  | (In millions)    
|Current Liabilities:           |  |                   |       |               |  |   |       | 
|Other accrued liabilities      |  | $                 | 67.3  |               |  | $ | 69.9  | 
|Other Liabilities and Credits: |  |                   |       |               |  |   |       | 
|Deferred revenue               |  |                   | 123.0 |               |  |   | 126.0 | 
|Other liabilities              |  |                   | 58.0  |               |  |   | 80.0  | 
|                               |  |                   |       |               |  |   |       | 
|Total                          |  | $                 | 248.3 |               |  | $ | 275.9 | 
|                               |  |                   |       |               |  |   |       | 

10

Note 5. U.S. Government Compensation

In September 2001, the U.S. Government passed
the Air Transportation Safety and System Stabilization Act (the Act)
to compensate the airlines for direct and incremental losses as a
result of the September 11 terrorist attacks. Alaska estimates
that it is eligible for up to $85 million, and it has recognized
as income the $71.6 million received through June 30, 2002.
In the second quarter of 2000, Alaska submitted its final application
to the Department of Transportation (DOT), and is in the process of
preparing responses to inquiries from the DOT regarding the final
application. The Company expects final resolution of the application
during the third quarter of 2002. The ultimate amount of compensation
to be received may be higher or lower than the amount of cash that
has been received to date.



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##### Table of Contents



Alaska Airlines Financial and Statistical Data

|                                   |  |                            |        |                          |  |        |        |      |  |          |       |        |       |   |        |   |       |   |        |          |      |  |       |  
|---------------------------------- |  | -------------------------- | ------ | ------------------------ |  | ------ | ------ | ---- |  | -------- | ----- | ------ | ----- | - | ------ | - | ----- | - | ------ | -------- | ---- |  | ----- | -
|                                   |  | Three Months Ended June 30 |        | Six Months Ended June 30
|                                   |  |                            |        |                         
|                                   |  | Restated                   |        |                          |  |        |        | %    |  | Restated |       |        |       |   |        | %
|Financial Data (in millions):      |  | 2001                       |        | 2002                     |  | Change |        | 2001 |  | 2002     |       | Change
|                                   |  |                            |        |                          |  |        |        |      |  |          |       |       
|Operating Revenues:                |  |                            |        |                          |  |        |        |      |  |          |       |        |       |   |        |   |       |   |        |          |      |  |       |  
|Passenger                          |  | $                          | 434.7  |                          |  | $      | 433.6  |      |  |          | (0.3  | )      |       | $ | 819.8  |   |       | $ | 807.8  |          |      |  | (1.5  | )
|Freight and mail                   |  |                            | 21.4   |                          |  |        | 20.0   |      |  |          | (6.5  | )      |       |   | 39.7   |   |       |   | 35.9   |          |      |  | (9.6  | )
|Other  net                        |  |                            | 15.2   |                          |  |        | 23.3   |      |  |          | 53.3  |        |       |   | 29.9   |   |       |   | 42.1   |          |      |  | 40.8  |  
|                                   |  |                            |        |                          |  |        |        |      |  |          |       |        |       |   |        |   |       |   |        |          |      |  |       |  
|Total Operating Revenues           |  |                            | 471.3  |                          |  |        | 476.9  |      |  |          | 1.2   |        |       |   | 889.4  |   |       |   | 885.8  |          |      |  | (0.4  | )
|                                   |  |                            |        |                          |  |        |        |      |  |          |       |        |       |   |        |   |       |   |        |          |      |  |       |  
|Operating Expenses:                |  |                            |        |                          |  |        |        |      |  |          |       |        |       |   |        |   |       |   |        |          |      |  |       |  
|Wages and benefits                 |  |                            | 156.4  |                          |  |        | 175.2  |      |  |          | 12.0  |        |       |   | 310.5  |   |       |   | 341.3  |          |      |  | 9.9   |  
|Contracted services                |  |                            | 18.0   |                          |  |        | 19.2   |      |  |          | 6.7   |        |       |   | 35.7   |   |       |   | 39.0   |          |      |  | 9.2   |  
|Aircraft fuel                      |  |                            | 74.1   |                          |  |        | 64.2   |      |  |          | (13.4 | )      |       |   | 148.1  |   |       |   | 119.4  |          |      |  | (19.4 | )
|Aircraft maintenance               |  |                            | 32.2   |                          |  |        | 36.1   |      |  |          | 12.1  |        |       |   | 67.5   |   |       |   | 71.7   |          |      |  | 6.2   |  
|Aircraft rent                      |  |                            | 35.0   |                          |  |        | 31.8   |      |  |          | (9.1  | )      |       |   | 70.3   |   |       |   | 63.6   |          |      |  | (9.5  | )
|Food and beverage service          |  |                            | 14.7   |                          |  |        | 16.2   |      |  |          | 10.2  |        |       |   | 27.9   |   |       |   | 30.1   |          |      |  | 7.9   |  
|Commissions                        |  |                            | 18.2   |                          |  |        | 14.2   |      |  |          | (22.0 | )      |       |   | 34.1   |   |       |   | 28.5   |          |      |  | (16.4 | )
|Other selling expenses             |  |                            | 26.6   |                          |  |        | 27.8   |      |  |          | 4.5   |        |       |   | 52.6   |   |       |   | 52.7   |          |      |  | 0.2   |  
|Depreciation and amortization      |  |                            | 25.3   |                          |  |        | 28.8   |      |  |          | 13.8  |        |       |   | 49.0   |   |       |   | 57.3   |          |      |  | 16.9  |  
|Loss on sale of assets             |  |                            | 0.3    |                          |  |        | 0.1    |      |  | NM       |       |        | 1.2   |   |        |   | 0.2   |   |        | NM      
|Landing fees and other rentals     |  |                            | 23.3   |                          |  |        | 28.4   |      |  |          | 21.9  |        |       |   | 44.8   |   |       |   | 52.1   |          |      |  | 16.3  |  
|Other                              |  |                            | 35.7   |                          |  |        | 37.1   |      |  |          | 3.9   |        |       |   | 72.1   |   |       |   | 72.5   |          |      |  | 0.6   |  
|                                   |  |                            |        |                          |  |        |        |      |  |          |       |        |       |   |        |   |       |   |        |          |      |  |       |  
|Total Operating Expenses           |  |                            | 459.8  |                          |  |        | 479.1  |      |  |          | 4.2   |        |       |   | 913.8  |   |       |   | 928.4  |          |      |  | 1.6   |  
|                                   |  |                            |        |                          |  |        |        |      |  |          |       |        |       |   |        |   |       |   |        |          |      |  |       |  
|Operating Income (Loss)            |  |                            | 11.5   |                          |  |        | (2.2   | )    |  | NM       |       |        | (24.4 | ) |        |   | (42.6 | ) |        |          | 74.6 | 
|                                   |  |                            |        |                          |  |        |        |      |  |          |       |        |       |   |        |   |       |   |        |          |      |  |       |  
|Interest income                    |  |                            | 6.8    |                          |  |        | 6.1    |      |  |          |       |        |       |   | 16.3   |   |       |   | 11.1   |          |      |  |       |  
|Interest expense                   |  |                            | (10.6  | )                        |  |        | (11.6  | )    |  |          |       |        |       |   | (22.7  | ) |       |   | (23.5  | )        |      |  |       |  
|Interest capitalized               |  |                            | 1.2    |                          |  |        | 0.4    |      |  |          |       |        |       |   | 3.8    |   |       |   | 0.5    |          |      |  |       |  
|Other  net                        |  |                            | (0.2   | )                        |  |        | 4.6    |      |  |          |       |        |       |   | (1.4   | ) |       |   | 9.3    |          |      |  |       |  
|                                   |  |                            |        |                          |  |        |        |      |  |          |       |        |       |   |        |   |       |   |        |          |      |  |       |  
|                                   |  |                            | (2.8   | )                        |  |        | (0.5   | )    |  |          |       |        |       |   | (4.0   | ) |       |   | (2.6   | )        |      |  |       |  
|                                   |  |                            |        |                          |  |        |        |      |  |          |       |        |       |   |        |   |       |   |        |          |      |  |       |  
|Income (Loss) Before Income Tax    |  | $                          | 8.7    |                          |  | $      | (2.7   | )    |  | NM       |       | $      | (28.4 | ) |        | $ | (45.2 | ) |        |          | 59.2 | 
|                                   |  |                            |        |                          |  |        |        |      |  |          |       |        |       |   |        |   |       |   |        |          |      |  |       |  
|Operating Statistics:              |  |                            |        |                          |  |        |        |      |  |          |       |        |       |   |        |   |       |   |        |          |      |  |       |  
|Revenue passengers (000)           |  |                            | 3,698  |                          |  |        | 3,616  |      |  |          | (2.2  | )      |       |   | 6,896  |   |       |   | 6,809  |          |      |  | (1.3  | )
|RPMs (000,000)                     |  |                            | 3,290  |                          |  |        | 3,372  |      |  |          | 2.5   |        |       |   | 6,185  |   |       |   | 6,349  |          |      |  | 2.7   |  
|ASMs (000,000)                     |  |                            | 4,683  |                          |  |        | 4,929  |      |  |          | 5.2   |        |       |   | 9,111  |   |       |   | 9,396  |          |      |  | 3.1   |  
|Passenger load factor              |  |                            | 70.3   | %                        |  |        | 68.4   | %    |  | (1.9)pts |       |        | 67.9  | % |        |   | 67.6  | % |        | (0.3)pts
|Breakeven load factor              |  |                            | 69.9   | %                        |  |        | 70.0   | %    |  | 0.1 pts  |       |        | 71.9  | % |        |   | 72.9  | % |        | 1.0 pts 
|Yield per passenger mile           |  |                            | 13.21¢ |                          |  |        | 12.86¢ |      |  |          | (2.7  | )      |       |   | 13.25¢ |   |       |   | 12.72¢ |          |      |  | (4.0  | )
|Operating revenue per ASM          |  |                            | 10.06¢ |                          |  |        | 9.68¢  |      |  |          | (3.8  | )      |       |   | 9.76¢  |   |       |   | 9.43¢  |          |      |  | (3.4  | )
|Operating expenses per ASM         |  |                            | 9.82¢  |                          |  |        | 9.72¢  |      |  |          | (1.0  | )      |       |   | 10.03¢ |   |       |   | 9.88¢  |          |      |  | (1.5  | )
|Expense per ASM excluding fuel     |  |                            | 8.23¢  |                          |  |        | 8.42¢  |      |  |          | 2.2   |        |       |   | 8.40¢  |   |       |   | 8.61¢  |          |      |  | 2.5   |  
|Fuel cost per gallon               |  |                            | 92.3¢  |                          |  |        | 78.0¢  |      |  |          | (15.5 | )      |       |   | 94.6¢  |   |       |   | 75.9¢  |          |      |  | (19.8 | )
|Fuel gallons (000,000)             |  |                            | 80.3   |                          |  |        | 82.3   |      |  |          | 2.5   |        |       |   | 156.5  |   |       |   | 157.3  |          |      |  | 0.5   |  
|Average number of employees        |  |                            | 10,201 |                          |  |        | 10,222 |      |  |          | 0.2   |        |       |   | 10,202 |   |       |   | 10,019 |          |      |  | (1.8  | )
|Aircraft utilization (blk hrs/day) |  |                            | 11.1   |                          |  |        | 10.8   |      |  |          | (2.5  | )      |       |   | 11.0   |   |       |   | 10.4   |          |      |  | (5.4  | )
|Operating fleet at period-end      |  |                            | 100    |                          |  |        | 102    |      |  |          | 2.0   |        |       |   | 100    |   |       |   | 102    |          |      |  | 2.0   |  

NM = Not Meaningful

11



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

Forward-Looking Information

This report may contain forward-looking statements that are based on the best
information currently available to management. These forward-looking
statements are intended to be subject to the safe harbor protection provided by
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Forward-looking statements are indicated by phrases such
as will, should, the Company believes, we expect or any other language
indicating a prediction of future events. There can be no assurance that
actual developments will be those anticipated by the Company. Actual results
could differ materially from those projected as a result of a number of
factors, some of which the Company cannot predict or control. For a discussion
of these factors, please see Item 1 of the Companys Annual Report on Form 10-K
for the year ended December 31, 2001.

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

Results of Operations

Second Quarter 2002 Compared with Second Quarter 2001

Our net loss for the second quarter of 2002 was $2.5 million compared with net
income of $5.1 million in 2001. Our operating loss for the second quarter of
2002 was $2.2 million compared with operating income of $11.5 million for 2001.
Financial and statistical data is shown on page 11. A discussion of this data
follows.

Revenues

Our capacity increased 5.2% due to our service to new markets (Seattle to
Washington D.C., Boston and Denver; Los Angeles to Cancun and Calgary),
partially offset by reduced service in existing markets, especially the Pacific
Northwest to Southern California and the Pacific Northwest to Northern
California. Traffic grew by 2.5%, and our passenger load factor decreased 1.9
percentage points. The new Washington D.C., Boston and Denver markets
experienced load factors exceeding the system average. Virtually all other
markets experienced reductions in load factor. Passenger yields were down 2.7%
due to a combination of fewer business passengers, a drop off in demand due to
the September 11, 2001 terrorist attacks and the slowing economy, and fare
sales offered to stimulate demand. Yields were down in all major markets
except the Pacific Northwest to Southern California market. The lower yield
combined with the lower load factor resulted in a 3.8% decrease in revenue per
available seat mile (ASM). The higher traffic combined with the lower yield
resulted in a 0.3% decrease in passenger revenue.

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Freight and mail revenues decreased 6.5% primarily due to lower freight volumes
attributable to increased security restrictions. Other-net revenues increased
53.3%, due to increased revenue related
to the sale of miles in Alaskas frequent flyer program, new security fee
reimbursement revenue and higher essential air service subsidy rates.

Expenses

Total operating expenses increased 4.2% compared to 2001, while our cost per
ASM decreased by 1.0%. Our cost per ASM excluding fuel increased by 2.2%.
Explanations of significant year-over-year changes in the components of
operating expenses are as follows:



| |  |  | Wages and benefits increased 12.0% due to an 11.8% increase in
average wages and benefits per employee combined with a 0.2% increase
in the number of employees. Average wages and benefits per employee
increased due to pilot pay increases (11% effective in June 2001 plus
5% effective in May 2002), scale and step increases for union
employees, annual merit raises for management employees, and higher
pension and health insurance costs for all employees.                                                                                                                                                                                                                                                                                                              
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Fuel expense decreased 13.4% due to a 15.5% decrease in the cost
per gallon of fuel combined with a 2.5% increase in gallons consumed.
The lower fuel prices saved $11.8 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  |  | Maintenance expense increased 12.1%, largely due to increased
airframe overhaul expenses. A total of 10 C checks (annual airframe
inspections) were performed at outside contractors in 2002 compared to
three in 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  |  | Aircraft rent decreased 9.1%, due to lower lease rates on several
aircraft and reduced spare parts rental costs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  |  | Commission expense decreased 22.0%, much more than the 0.3%
decrease in passenger revenue, due to a commission cap we instituted
in November 2001 and the continuing shift to direct sales channels.
In 2002, 57.8% of the Companys ticket sales were made through travel
agents, versus 61.4% in 2001. In 2002, 20.4% of total ticket sales
were made through Alaskas Internet web site versus 15.9% in 2001. In
June 2002, the Company changed its travel agent commissions program to
eliminate base commissions and move to a 100% incentive-based program.
This change had no material impact on commissions expense in the
second quarter of 2002, but is expected to reduce commission expense
by approximately $17 million for the remainder of 2002, as compared to
2001.
|
| |  |  | Depreciation and amortization increased 13.8%, primarily because
we owned an average of four more aircraft in 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  |  | Landing fees and other rentals increased 21.9%, primarily due to
higher rates. The higher rates are attributable to airport
construction projects and the effects of increased security and other
costs resulting from the events of September 11.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

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| |  |  | Other expense increased 3.9% due to higher insurance costs,
offset by lower costs for legal, personnel, professional services and
supplies.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------

Nonoperating Income (Expense)

Net nonoperating items were $0.5 million expense in 2002 compared to $2.8
million expense in 2001. The $2.3 million change was primarily due to a $4.3
million gain due to the increase in value of fuel hedging contracts in 2002
(compared with a $0.6 million loss on such contracts in 2001), offset by higher
interest expense (net of capitalized interest) resulting from new debt incurred
in the past year and much lower levels of capitalization.

Six Months 2002 Compared with Six Months 2001

The net loss for the six months ended June 30, 2002 was $29.8 million compared
with a net loss of $18.7 million in 2001. The operating loss widened by $18.2
million to $42.6 million in 2002. Capacity increased 3.1% for the first six
months of 2002 compared to 2001. This increase is attributable to service to
new markets which commenced in late 2001 (Seattle to Washington D.C. and Los
Angeles to Cancun), the first quarter of 2002 (Los Angeles to Calgary), and in
April 2002 (Seattle to Denver and Boston). The increase was partially offset
by reduced service in existing markets, primarily the Pacific Northwest to
Southern and Northern California markets. Traffic increased by 2.7% compared
to 2001, and our passenger load factor decreased 0.3 percentage points. The
new Washington D.C., Boston and Denver markets have experienced load factors
which exceed the system average for the year. Passenger yields decreased 4.0%
compared to 2001, due to a combination of fewer business passengers, a drop off
in demand due to the September 11, 2001 terrorist attacks, the slowing economy
and fare sales offered to stimulate demand. The lower yield combined with the
lower load factor resulted in a 3.4% decrease in revenue per ASM. The higher
traffic combined with the lower yield resulted in a 1.5% decrease in passenger
revenue. Freight and mail revenue decreased 9.6% due to lower freight volumes
attributable to increased security restrictions as a result of the September
11, 2001 terrorist attacks. Other net revenues increased by 40.8% due
primarily to increased revenue related to the sale of miles in
Alaskas frequent flyer program.

Explanations of significant year-over-year changes in the components of
operating expenses are as follows:



| |  |  | Wages and benefits increased 9.9% due to an 11.9% increase in
average wages and benefits per employee combined with a 1.8% decrease
in the number of employees. Average wages and benefits per employee
increased due to pilot pay increases (11% effective in June 2001 plus
5% effective in May 2002), scale and step increases for union
employees, annual merit raises for management employees, and higher
pension and health insurance costs for all employees.                                                                               
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Fuel expense decreased 19.4% due to a 19.8% decrease in the cost
per gallon of fuel combined with a 0.5% increase in gallons consumed.
The lower fuel prices saved $29.5 million.                                                                                                                                                                                                                                                                                                                                                                   
|
| |  |  | Commission expense decreased 16.4%, much more than the 1.5%
decrease in passenger revenue, due to a commission cap we instituted
in November 2001 and the continuing shift to direct sales channels.
In 2002, 58.2% of Air Group ticket sales were made through travel
agents, versus 61.5% in 2001. In 2002, 19.6% of total ticket sales
were made through Alaskas Internet web site versus 15.4% in 2001. In
June 2002, the Company changed its travel agent commissions program to
eliminate base commissions and move to a 100% incentive-based

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| |   |  | program. This change had no material impact on commissions expense in the
second quarter of 2002, but is expected to reduce commission expense
by approximately $17 million for the remainder of 2002, as compared to
2001.                       
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Depreciation and amortization increased 16.9%, primarily because
we owned an average of five more aircraft in 2002.                                                                                                                               
|
| |  |  | Landing fees and other rentals increased 16.3%, primarily due to
higher rates. The higher rates are attributable to airport
construction projects and the effects of increased security and other
costs resulting from the events of September 11.

Nonoperating Income (Expense)

Net nonoperating items were $2.6 million expense in the first six months of
2002 compared to $4.0 million expense in the same period of 2001. The $1.4
million net change was primarily as a result of a $6.8 million gain due to the
increase in value of fuel hedging contracts in 2002 (compared with a $2.0
million loss on such contracts in 2001), offset by lower interest income and
higher interest expense (net of capitalized interest) resulting from new debt
incurred in the past year and much lower levels of capitalization.

Income Tax Benefit

Accounting standards require us to provide for income taxes
each quarter based on our estimate of the effective tax rate for the full year.
The volatility of air fares and fuel prices and the seasonality of our
business make it difficult to accurately forecast full-year pretax results. In
addition, a relatively small change in pretax results can cause a significant
change in the effective tax rate due to the magnitude of nondeductible
expenses, such as employee per diem costs. In estimating the 34.1% tax rate
for the first half of 2002, we considered a variety of factors, including the
U.S. federal rate of 35%, estimates of nondeductible expenses and state income
taxes, and our forecast of pretax income for the full year. We evaluate this
rate each quarter and make adjustments if necessary.

Critical Accounting Policies

During the second quarter of 2002, the Company
revised its accounting practices with respect to lease return costs.
This change is more fully described in Note 2 to the financial
statements.

Liquidity and Capital Resources

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

|                                                                                                  |  |                            |        |               |  |        |        |   |  |    |       |  
|------------------------------------------------------------------------------------------------- |  | -------------------------- | ------ | ------------- |  | ------ | ------ | - |  | -- | ----- | -
|                                                                                                  |  | December 31, 2001 Restated |        | June 30, 2002 |  | Change
|                                                                                                  |  |                            |        |               |  |       
|(In millions, except debt-to-capital)                                                            
|Cash and marketable securities                                                                    |  | $                          | 660.6  |               |  | $      | 706.8  |   |  | $  | 46.2  |  
|Working capital                                                                                   |  |                            | 223.4  |               |  |        | 250.2  |   |  |    | 26.8  |  
|Long-term debt and
capital lease obligations                                                      |  |                            | 847.9  |               |  |        | 852.1  |   |  |    | 4.2   |  
|Shareholders equity                                                                              |  |                            | 717.8  |               |  |        | 695.7  |   |  |    | (22.1 | )
|Debt-to-capital                                                                                   |  |                            | 54%:46 | %             |  |        | 55%:45 | % |  | NA
|Debt-to-capital assuming aircraft
operating leases are capitalized
at seven times annualized rent |  |                            | 71%:29 | %             |  |        | 71%:29 | % |  | NA
|                                                                                                  |  |                            |        |               |  |        |        |   |  |    |       |  

The Companys cash and marketable securities portfolio increased $46.2 million
during the first six months of 2002. Operating activities provided $87.5
million of cash during this period. Additional

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cash was provided by the
issuance of $25.5 million of new debt. Cash was used for $43.3 million of
capital expenditures, including flight equipment deposits, the purchase of
spare parts, airframe and engine overhauls, and for $18.8 million of debt
repayment.

Shareholders equity decreased $22.1 million primarily due to the net loss of
$29.8 million.

CommitmentsAs of June 30, 2002, the Company had firm orders for 10 aircraft
requiring aggregate payments of approximately $301 million, as set forth below.
In addition, Alaska has options to acquire 24 more B737s. Alaska expects to
finance the new planes with either leases, long-term debt or internally
generated cash.

|                    |  |                               |    |      |  |      |     |       |  |   |    |  |  |   |     | 
|------------------- |  | ----------------------------- | -- | ---- |  | ---- | --- | ----- |  | - | -- |  |  | - | --- | 
|                    |  | Delivery Period - Firm Orders
|                    |  |                              
|Aircraft            |  | 2002                          |    | 2003 |  | 2004 |     | Total
|                    |  |                               |    |      |  |      |     |      
|Boeing B737-700     |  |                               |   |      |  |      | 3   |       |  |   |   |  |  |   | 3   | 
|Boeing B737-900     |  |                               | 1  |      |  |      | 3   |       |  |   | 3  |  |  |   | 7   | 
|                    |  |                               |    |      |  |      |     |       |  |   |    |  |  |   |     | 
|Total               |  |                               | 1  |      |  |      | 6   |       |  |   | 3  |  |  |   | 10  | 
|                    |  |                               |    |      |  |      |     |       |  |   |    |  |  |   |     | 
|Payments (Millions) |  | $                             | 69 |      |  | $    | 164 |       |  | $ | 68 |  |  | $ | 301 | 
|                    |  |                               |    |      |  |      |     |       |  |   |    |  |  |   |     | 

New Accounting Standards- In June 2001, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 143,
Accounting for Asset Retirement Obligations (effective for the Company on
January 1, 2003). This Statement addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets
and the associated asset retirement costs. The Company expects that adoption
of SFAS No. 143 will not have a material impact on the Companys financial
statements.

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

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. This Statement requires that only certain debt extinguishment
transactions be classified as an extraordinary item. Additionally, under this
Statement, capital leases that are modified so that the resulting agreement is
an operating lease, shall be accounted for under the sale-leaseback provisions
of SFAS No. 98. The Statement also includes minor modifications to existing
GAAP literature. Provisions of the Statement are effective for the Company
commencing in May 2002 through January 2003.

In June 2002 the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. This Statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies EITF Issue No. 94-3 Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). The Statement requires that a liability
for a cost associated with an exit or

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disposal activity be recognized when the
liability is incurred. The Statement is effective for the Company on January
1, 2003.

We do not expect a significant impact on our financial position or results of
operations from adoption of SFAS No. 145 or 146.




ITEM 3. Quantitative and Qualitative Disclosure About Market Risk

At June 30, 2002, the Company had swap agreements for crude oil contracts in
place to hedge approximately 40% of its 2002 and 35% of its 2003 expected jet
fuel requirements. At June 30, 2002, these contracts had unrealized pretax
gains of $6.1 million.




PART II. OTHER INFORMATION




ITEM 1. Legal Proceedings

Flight 261 Litigation

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

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

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




ITEM 5. Other Information

Employees

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

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ITEM 6. Exhibits and Reports on Form 8-K

Exhibit 3.1 Articles of Incorporation of Alaska
Airlines, Inc., as amended, filed herein.

Exhibit 3.2 Bylaws of Alaska Airlines, Inc.
(Incorporated by reference to Exhibit 3.2 to Form 10-K for
the year ended December 31, 2000.)

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

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

On May 28, 2002, a report on Form 8-K was filed disclosing a change in the
registrants certifying accountant.




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: August 14, 2002 | 
|--------------------- | 



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



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

18