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UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549
 FORM 10-Q/A (Amendment No. 1)
 (Mark One) þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2004. OR o
    
    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.  Delaware
    
    92-0009235(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 19300 Pacific Highway South, Seattle, Washington 98188
(Address of principal executive offices) Registrants telephone number, including area code: (206) 392-5040 Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes XNo Indicate
by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes
 No X APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date. The registrant has 500 common shares, par value $1.00, outstanding at September 30, 2004.




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Revision to Previously Filed Financial Statements and SEC Filings In December, we discovered a clerical error in our calculation of deferred Mileage Plan revenue
that existed as of September 30, 2004. As a result, we have revised our third quarter and year to
date reported condensed financial statements to adjust for this item. The revision increases other
accrued liabilities by $8.4 million and the total Mileage Plan liability and deferred revenue
balance (both the current and long-term portion) from $379.2 million to $387.6 million, and
results in an $8.4 million (pretax) decrease to other revenues for the third quarter and nine
months ended September 30, 2004. See Note 12 to the Condensed Financial Statements. The revised 2004 third quarter net income is $61.0 million and the revised net income for the nine
months ended September 30, 2004 is $23.9 million. We originally reported third quarter net income
of $66.2 million and net income for the nine month period of $29.1 million. The revisions have no impact on previously reported operating expenses as determined in accordance
with GAAP or on previously reported operating cost per Available Seat Mile excluding fuel, a
non-GAAP measure we believe is important to some users of our financial statements. See the
accompanying Financial and Statistical Data, Managements Discussion and Analysis of Financial
Condition and Results of Operations, and the Condensed Financial Statements including the Notes to
Condensed Financial Statements, for the impact of the reclassifications. This Amendment No. 1 to
the Companys Quarterly Report on Form 10-Q/A for the three and nine months ended September 30,
2004 amends and reclassifies those items of the previously filed Form 10-Q which have been affected
by the revisions. For additional information regarding the revisions, see Note 12 in the Notes to
Condensed Financial Statements included in Part I, Item 1. This Form 10-Q/A has not been updated except as required to reflect the effects of the foregoing
restatement. In order to preserve the nature and character of the disclosures set forth in such
items as originally filed, no attempt has been made in this amendment to modify or update the
disclosures in the original Quarterly Report on Form 10-Q except for the foregoing restatement. As
a result, this Quarterly Report on Form 10-Q/A contains forward-looking information which has not
been updated for events subsequent to the date of the original filing, and the Company directs you
to its SEC filings made subsequent to that original filing date for additional information. 2




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TABLE OF CONTENTS PART I. FINANCIAL INFORMATIONItem 1.
    
    Condensed Financial StatementsItem 2.
    
    Management's Discussion and Analysis of Financial Condition and Results of OperationsItem 3.
    
    Quantitative and Qualitative Disclosures About Market RiskItem 4.
    
    Controls and ProceduresPART II. OTHER INFORMATIONItem 1.
    
    Legal ProceedingsSignaturesExhibitsEXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  Cautionary Note regarding Forward-Looking Statements In addition to historical
information, this Quarterly Report on Form 10-Q/A contains
forward-looking statements that relate to future events of our future financial performance and
involve a number of risks and uncertainties. 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. In some cases, you can identify
forward-looking statements by terminology such as forecast, may, will, could, should,
expect, plan, believe, potential or other similar words indicating future events or
contingencies. Some of the things that could cause our actual results to differ from our
expectations are: changes in our operating costs including fuel; the competitive environment and
other trends in our industry; economic conditions; our reliance on automated systems; actual or
threatened terrorist attacks, global instability and potential U.S. military involvement; our
ability to meet our cost reduction goals; the outcome of contract talks with the Air Line Pilots
Association, whether as a result of negotiations or binding arbitration; labor disputes; changes in
laws and regulations; liability and other claims asserted against us; failure to expand our
business; interest rates and the availability of financing; our ability to attract and retain
qualified personnel; changes in our business plans; our significant indebtedness; downgrades of our
credit ratings; and inflation. For a discussion of these and other risk factors, review the
information under the caption Business  Business Risks in Item 1 of the Companys Annual Report
on Form 10-K/A for the year ended December 31, 2003. All of the forward-looking statements are
qualified in their entirety by reference to the risk factors discussed therein. Our
forward-looking statements are based on the information currently available to us and speak only as
of the date of this report. You should not place undue reliance on our forward-looking statements
because the matters they describe are subject to known and unknown risks, uncertainties and other
unpredictable factors, many of which are beyond our control. We undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result of new information,
future events or otherwise, after the date of this report to conform them to actual results. Over
time, our actual results, performance or achievements will likely differ from the anticipated
results, performance or achievements that are expressed or implied by our forward-looking
statements, and such differences might be significant and materially adverse. 3




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PART I. FINANCIAL INFORMATION 
 ITEM 1. Condensed Financial Statements CONDENSED BALANCE SHEETS (unaudited)
Alaska Airlines, Inc. ASSETSDecember 31,
    
    September 30,(In Millions)
    
    2003
    
    2004Revised (See Note 12)Current AssetsCash and cash equivalents
    
    $
    192.5
    
    
    $
    222.7Marketable securities
    
    
    619.4
    
    
    
    655.6Receivables from related companies
    
    
    120.5
    
    
    
    82.8Receivables  net
    
    
    83.0
    
    
    
    113.4Inventories and supplies  net
    
    
    20.7
    
    
    
    21.9Deferred income taxes
    
    
    80.9
    
    
    
    72.2Prepaid expenses and other current assets
    
    
    36.3
    
    
    
    107.2Total Current Assets
    
    
    1,153.3
    
    
    
    1,275.8Property and EquipmentFlight equipment
    
    
    2,188.2
    
    
    
    2,089.5Other property and equipment
    
    
    391.2
    
    
    
    392.4Deposits for future flight equipment
    
    
    32.8
    
    
    
    36.22,612.2
    
    
    
    2,518.1Less accumulated depreciation and amortization
    
    
    816.3
    
    
    
    783.2Total Property and Equipment  Net
    
    
    1,795.9
    
    
    
    1,734.9Intangible Assets
    
    
    45.6
    
    
    
    44.6Other Assets
    
    
    71.6
    
    
    
    105.8Total Assets
    
    $
    3,066.4
    
    
    $
    3,161.1
 See accompanying notes to condensed financial statements. 4




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CONDENSED BALANCE SHEETS (unaudited)
Alaska Airlines, Inc. LIABILITIES AND SHAREHOLDERS' EQUITYDecember 31,
    
    September 30,(In Millions)
    
    2003
    
    2004Revised (See Note 12)Current LiabilitiesAccounts payable
    
    $
    108.8
    
    
    $
    122.7Payables to related companies
    
    
    2.7
    
    
    
    3.5Accrued aircraft rent
    
    
    67.8
    
    
    
    69.1Accrued wages, vacation and payroll taxes
    
    
    81.4
    
    
    
    108.1Other accrued liabilities
    
    
    269.1
    
    
    
    286.1Air traffic liability
    
    
    237.1
    
    
    
    279.1Current portion of long-term debt and
capital lease obligations
    
    
    206.7
    
    
    
    50.1Total Current Liabilities
    
    
    973.6
    
    
    
    918.7Long-Term Debt and Capital Lease Obligations
    
    
    756.8
    
    
    
    815.0Other Liabilities and CreditsDeferred income taxes
    
    
    181.4
    
    
    
    193.1Deferred revenue
    
    
    246.0
    
    
    
    285.5Other liabilities
    
    
    210.5
    
    
    
    224.6637.9
    
    
    
    703.2Commitments and ContingenciesShareholders EquityCommon stock, $1 par valueAuthorized: 1,000 sharesIssued: 2003 and 2004 - 500 shares
    
    
    
    
    
    
    Capital in excess of par value
    
    
    448.4
    
    
    
    448.4Accumulated other comprehensive income (loss)
    
    
    (80.2
    )
    
    
    (78.0
    )Retained earnings
    
    
    329.9
    
    
    
    353.8698.1
    
    
    
    724.2Total Liabilities and Shareholders Equity
    
    $
    3,066.4
    
    
    $
    3,161.1
 See accompanying notes to condensed financial statements. 5




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CONDENSED STATEMENTS OF OPERATIONS (unaudited)
Alaska Airlines, Inc. Three Months Ended September 30(In Millions Except Per Share Amounts)
    
    2003
    
    2004Revised (See Note 12)
    
    Revised (See Note 12)Operating RevenuesPassenger
    
    $
    532.5
    
    
    $
    576.6Freight and mail
    
    
    21.4
    
    
    
    24.5Other  net
    
    
    31.4
    
    
    
    31.7Total Operating Revenues
    
    
    585.3
    
    
    
    632.8Operating ExpensesWages and benefits
    
    
    198.7
    
    
    
    207.3Contracted services
    
    
    20.5
    
    
    
    17.8Aircraft fuel
    
    
    83.3
    
    
    
    130.2Aircraft maintenance
    
    
    35.2
    
    
    
    27.1Aircraft rent
    
    
    31.1
    
    
    
    28.1Food and beverage service
    
    
    17.0
    
    
    
    13.7Other selling expenses and commissions
    
    
    43.4
    
    
    
    35.9Depreciation and amortization
    
    
    29.7
    
    
    
    32.0Loss (gain) on sale of assets
    
    
    0.8
    
    
    
    (2.5
    )Landing fees and other rentals
    
    
    33.6
    
    
    
    37.6Other
    
    
    34.5
    
    
    
    37.1Restructuring charges
    
    
    
    
    
    
    27.5Total Operating Expenses
    
    
    527.8
    
    
    
    591.8Operating Income
    
    
    57.5
    
    
    
    41.0Nonoperating Income (Expense)Interest income
    
    
    4.6
    
    
    
    8.4Interest expense
    
    
    (11.2
    )
    
    
    (11.6
    )Interest capitalized
    
    
    0.2
    
    
    
    0.4Other  net
    
    
    (1.0
    )
    
    
    59.7(7.4
    )
    
    
    56.9Income before income tax
    
    
    50.1
    
    
    
    97.9Income tax expense
    
    
    20.5
    
    
    
    36.9Net Income
    
    $
    29.6
    
    
    $
    61.0
 See accompanying notes to condensed financial statements. 6




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CONDENSED STATEMENTS OF OPERATIONS (unaudited)
Alaska Airlines, Inc. Nine Months Ended September 30(In Millions Except Per Share Amounts)
    
    2003
    
    2004Revised (See Note 12)
    
    Revised (See Note 12)Operating RevenuesPassenger
    
    $
    1,380.1
    
    
    $
    1,545.8Freight and mail
    
    
    59.8
    
    
    
    65.3Other  net
    
    
    83.0
    
    
    
    90.6Total Operating Revenues
    
    
    1,522.9
    
    
    
    1,701.7Operating ExpensesWages and benefits
    
    
    578.7
    
    
    
    611.8Contracted services
    
    
    60.9
    
    
    
    70.3Aircraft fuel
    
    
    232.2
    
    
    
    336.4Aircraft maintenance
    
    
    117.7
    
    
    
    111.3Aircraft rent
    
    
    92.8
    
    
    
    85.5Food and beverage service
    
    
    44.8
    
    
    
    37.9Other selling expenses and commissions
    
    
    109.0
    
    
    
    101.1Depreciation and amortization
    
    
    87.8
    
    
    
    95.2Loss on sale of assets
    
    
    1.3
    
    
    
    (0.6
    )Landing fees and other rentals
    
    
    93.5
    
    
    
    106.1Other
    
    
    102.9
    
    
    
    111.0Restructuring charges
    
    
    
    
    
    
    27.5Impairment of aircraft
    
    
    
    
    
    
    36.8Total Operating Expenses
    
    
    1,521.6
    
    
    
    1,730.3Operating Income (Loss)
    
    
    1.3
    
    
    
    (28.6
    )Nonoperating Income (Expense)Interest income
    
    
    10.3
    
    
    
    20.0Interest expense
    
    
    (33.9
    )
    
    
    (33.1
    )Interest capitalized
    
    
    1.3
    
    
    
    0.7U.S. government compensation
    
    
    52.8
    
    
    
    -Other  net
    
    
    7.3
    
    
    
    82.937.8
    
    
    
    70.5Income before income tax
    
    
    39.1
    
    
    
    41.9Income tax expense
    
    
    17.8
    
    
    
    18.0Net Income
    
    $
    21.3
    
    
    $
    23.9
 See accompanying notes to condensed financial statements. 7




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CONDENSED STATEMENT OF SHAREHOLDERS EQUITY (unaudited)
Alaska Airlines, Inc. AccumulatedCapital in
    
    OtherCommon
    
    Excess of
    
    Comprehensive
    
    Retained(In Millions)
    
    Stock
    
    Par Value
    
    Income (Loss)
    
    Earnings
    
    TotalBalances at December 31, 2003:
    
    $
    0.0
    
    
    $
    448.4
    
    
    $
    (80.2
    )
    
    $
    329.9
    
    
    $
    698.1Net income for the nine months
ended September 30, 2004 - Revised (See Note 12)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23.9
    
    
    
    23.9Other comprehensive income (loss):Officers supplemental retirement plan
net of $0.4 tax benefit
    
    
    
    
    
    
    
    
    
    
    0.7
    
    
    
    
    
    
    
    0.7Related to marketable securities:Change in fair value
    
    
    
    
    
    
    
    
    
    
    (3.5
    )Reclassification to earnings
    
    
    
    
    
    
    
    
    
    
    0.5Income tax effect
    
    
    
    
    
    
    
    
    
    
    1.1(1.9
    )
    
    
    
    
    
    
    (1.9
    )Related to fuel hedges:Change in fair value
    
    
    
    
    
    
    
    
    
    
    16.3Reclassification to earnings
    
    
    
    
    
    
    
    
    
    
    (10.9
    )Income tax effect
    
    
    
    
    
    
    
    
    
    
    (2.0
    )3.4
    
    
    
    
    
    
    
    3.4Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26.1Balances at September 30, 2004 - Revised (See Note 12)
    
    $
    0.0
    
    
    $
    448.4
    
    
    $
    (78.0
    )
    
    $
    353.8
    
    
    $
    724.2
 See accompanying notes to condensed financial statements. 8




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CONDENSED STATEMENTS OF CASH FLOWS (unaudited)
Alaska Airlines, Inc. Nine Months Ended September 30 (In Millions)
    
    2003
    
    2004Revised (See Note 12)Cash flows from operating activities:Net income
    
    $
    21.3
    
    
    $
    23.9Adjustments to reconcile net income to
net cash provided by (used in) operating activities:Impairment of aircraft and spare engines
    
    
    
    
    
    
    36.8Depreciation and amortization
    
    
    87.8
    
    
    
    95.2Amortization of airframe and engine overhauls
    
    
    44.0
    
    
    
    43.2Changes in fair values of fuel hedges
    
    
    1.4
    
    
    
    (69.3
    )Loss (gain) on sale of assets
    
    
    1.3
    
    
    
    (0.6
    )Increase in deferred income taxes
    
    
    17.9
    
    
    
    20.4(Increase) decrease in receivables  net
    
    
    (43.1
    )
    
    
    7.3(Increase) decrease in prepaid expenses and other current assets
    
    
    5.1
    
    
    
    (2.7
    )Increase in air traffic liability
    
    
    54.2
    
    
    
    42.0Increase in other current liabilities
    
    
    23.3
    
    
    
    59.7Increase in deferred revenue and other-net
    
    
    22.9
    
    
    
    31.4Net cash provided by operating activities
    
    
    236.1
    
    
    
    287.3Cash flows from investing activities:Proceeds from disposition of assets
    
    
    0.5
    
    
    
    10.1Purchases of marketable securities
    
    
    (695.3
    )
    
    
    (637.9
    )Sales and maturities of marketable securities
    
    
    535.3
    
    
    
    598.7Property and equipment additions:Aircraft purchase deposits
    
    
    (7.5
    )
    
    
    (10.2
    )Capitalized overhauls
    
    
    (45.4
    )
    
    
    (38.8
    )Aircraft
    
    
    (194.4
    )
    
    
    (37.0
    )Other flight equipment
    
    
    (8.9
    )
    
    
    (10.7
    )Other property
    
    
    (21.6
    )
    
    
    (24.2
    )Aircraft deposits returned
    
    
    1.2
    
    
    
    -Restricted deposits and other
    
    
    (12.6
    )
    
    
    (8.6
    )Net cash used in investing activities
    
    
    (448.7
    )
    
    
    (158.6
    )Cash flows from financing activities:Proceeds from issuance of long-term debt
    
    
    160.6
    
    
    
    94.6Long-term debt and capital lease payments
    
    
    (55.6
    )
    
    
    (193.1
    )Capital contribution from Air Group
    
    
    60.0
    
    
    
    -Net cash provided by (used in) financing activities
    
    
    165.0
    
    
    
    (98.5
    )Net change in cash and cash equivalents
    
    
    (47.6
    )
    
    
    30.2Cash and cash equivalents at beginning of period
    
    
    268.9
    
    
    
    192.5Cash and cash equivalents at end of period
    
    $
    221.3
    
    
    $
    222.7Supplemental disclosure of cash paid during the period for:Interest (net of amount capitalized)
    
    $
    30.2
    
    
    $
    30.1Income taxes
    
    
    
    
    
    $
    3.3
 See accompanying notes to condensed financial statements. 9




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NOTES TO CONDENSED FINANCIAL STATEMENTS (unaudited)  Note 1. Basis of Presentation and Significant Accounting Policies Organization and Basis of Presentation The accompanying unaudited condensed financial statements of Alaska Airlines, Inc. (Alaska or the
Company) should be read in conjunction with the financial statements in the Companys Annual Report
on Form 10-K/A for the year ended December 31, 2003. In the opinion of management, all adjustments
have been made which are necessary to present fairly the Companys financial position as of
September 30, 2004, as well as the results of operations for the three and nine months ended
September 30, 2003 and 2004. The adjustments made were of a normal recurring nature. The Company
is a wholly owned subsidiary of Alaska Air Group, Inc. (Air Group) whose principle subsidiaries are
Alaska and Horizon Air Industries, Inc. (Horizon). The Companys financial statements have been prepared in conformity with accounting principles
generally accepted in the United States of America (GAAP). In preparing these condensed financial
statements, the Company is required to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent liabilities, as well as the reported
amounts of revenues and expenses. Significant estimates made include assumptions used to record
liabilities, expenses and revenues associated with the Companys Mileage Plan, lease return
provisions, the fair market value of surplus or impaired aircraft, engines and parts, assumptions
used in the calculation of pension expense in the Companys defined benefit plans and the amounts
of certain accrued liabilities. Actual results may differ from the Companys estimates. Stock Options The Company has awards outstanding under five long-term incentive equity plans, one of which
continues to provide for the grant of stock options to purchase Air Group common stock at market
prices on the date of the grant to officers and employees of Air Group and its subsidiaries. The
Company applies the intrinsic value method in accordance with the provisions of Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations, in accounting for stock options. Accordingly, no compensation cost has been
recognized for these plans as the exercise price of options equals the fair market value on the
date of grant. The following table represents the effect on net income if the Company had applied the fair value
based method and recognition provisions of Statement on Financial Accounting Standards (SFAS) No.
123, Accounting for Stock-Based Compensation, to its stock-based employee compensation (in
millions): 10




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Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2003
    
    2004
    
    2003
    
    2004Net income:As reported
    
    $
    29.6
    
    
    $
    61.0
    
    
    $
    21.3
    
    
    $
    23.9Deduct: Total stock-based employee
compensation expense determined
under fair value based methods for
all awards, net of related tax effects
    
    
    (1.1
    )
    
    
    (0.9
    )
    
    
    (3.7
    )
    
    
    (3.0
    )Pro forma net income
    
    $
    28.5
    
    
    $
    60.1
    
    
    $
    17.6
    
    
    $
    20.9
 Note 2. Restructuring Charges During the third quarter of 2004, the Company announced a management reorganization and the closure
of its Oakland maintenance base, contracting out of the Companys Fleet Service, Ground Equipment
and Facility maintenance functions and other initiatives. In total, these restructuring activities
are expected to result in a reduction of approximately 900 employees when fully implemented in
2005. Severance and related costs associated with this restructuring are estimated at $50-$55
million, of which $27.5 million was recorded during the third quarter of 2004 and $23 to $27
million will be recorded in the fourth quarter. The Company is also currently evaluating any
possible asset impairment that may result from the announced initiatives. Any impairment charge
would be in addition to the severance estimates above. The following table displays the activity and balances of the restructuring charges for the three
and nine months ended September 30, 2004. There were no restructuring charges during the same
period of 2003 ($ in millions): Severance and Related CostsBalance at December 31, 2003
    
    $
    Restructuring charges
    
    
    27.5Cash payments*
    
    
    (1.2
    )Balance at September 30, 2004
    
    $
    26.3
 * The Company expects the majority of cash payments will be made during the first and second
quarters of 2005. Note 3. Impairment of Aircraft and Related Spare Engines Impairment of 737-200C Aircraft In June 2004, the Companys Board approved a plan to accelerate the retirement of its Boeing
737-200C fleet and remove those aircraft from service (by the end of 2007) earlier than initially
planned. In July 2004, the Company announced its plan to replace these aircraft by modifying five
existing 737-400 aircraft and using other existing 737-400 aircraft for the remaining passenger
capacity. Four of the five modified airplanes will be converted into combination passenger/cargo
aircraft and one will be converted to an all cargo aircraft. The Company expects to backfill the
737-400s with Boeing 737-800s in 2005 and 2006. 11




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As a result of this decision, the Company evaluated impairment as required by SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets and concluded that the carrying
value of the 737-200C fleet was no longer recoverable when compared to the estimated remaining
future cash flows. Accordingly, during the second quarter of 2004, the Company recorded an
impairment charge totaling $36.8 million (pretax) to write down the fleet to its estimated fair
market value. The estimated fair value of the Companys aircraft was derived using third-party appraisals and
market data compiled by an independent pricing authority, and adjusted for other factors that
management deemed appropriate. In conjunction with the fair value determination, the Company has
reassessed the useful lives and residual values of the fleet and related spare equipment and will
depreciate the remaining carrying values through 2007 when the last aircraft will be retired. Note 4. Derivative Financial Instruments The Companys operations are inherently dependent upon the price and availability of aircraft fuel,
which accounted for 15% and 20% of year-to-date 2003 and 2004 operating expenses (excluding
impairment and restructuring charges), respectively. To manage economic risks associated with
fluctuations in aircraft fuel prices, the Company enters into swap agreements and call options for
crude oil. Prior to the second quarter of 2004, these hedging contracts were highly correlated
to changes in aircraft fuel prices, and therefore qualified as cash flow hedges under SFAS No.
133 whereby the majority of the changes in fair value were deferred in Accumulated Other
Comprehensive Income on the Companys Balance Sheet until these hedge positions were settled at
which point they were recognized in earnings. The Companys current fuel hedge program includes the same underlying commodities used
historically. However, because of variations in the spread between the prices of crude oil and jet
fuel since April 1, 2004, the Companys hedge contracts are no longer highly correlated to
changes in prices of aircraft fuel, as defined in SFAS No. 133. The impacts on the Companys
reported results are as follows:  
    
    All changes in the fair value of fuel hedge contracts that existed as of March 31,
2004 (the end of the first quarter of 2004) or hedge positions entered into subsequent to
March 31, 2004 (the end of the first quarter of 2004) are reported in other non-operating
income (expense).
    
    Because the Company will be recording fair value changes in its statement of
operations as they occur (in non-operating income (expense)), actual gains or losses
realized upon settlement of the hedge contracts entered into subsequent to March 31, 2004
will not be reflected in fuel expense.
    
    Reported fuel expense will include the effective portion of gains associated with
hedge positions that settled during the current period on contracts that existed at March
31, 2004 to the extent that mark-to-market gains were already included in Accumulated
Other Comprehensive Income at March 31, 2004. 12




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##### Table of Contents



The following table summarizes realized fuel hedging gains and changes in fair value of hedging
contracts outstanding as of September 30, 2004 and 2003 (in millions): Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2003
    
    2004
    
    2003
    
    2004Settled hedging gains included in
aircraft fuel
    
    $
    4.3
    
    
    $
    3.5
    
    
    $
    14.0
    
    
    $
    11.0Settled hedging gains (losses) included
In non-operating income (expense)***
    
    $
    (0.7
    )
    
    $
    8.5
    
    
    $
    3.8
    
    
    $
    11.7Mark-to-market hedging gains
included in non-operating
income (expense)**
    
    $
    
    
    
    $
    50.3
    
    
    $
    
    
    
    $
    70.4Hedging gains included in
non-operating income (expense)*
    
    $
    (0.7
    )
    
    $
    58.8
    
    
    $
    3.8
    
    
    $
    82.1
 * Includes the ineffective portion recorded currently in earnings using hedge accounting through
the first quarter of 2004. ** Includes changes in fair value since March 31, 2004 resulting from the loss of hedge
accounting. *** 2003 includes the ineffective portion of fair market value changes under hedge accounting. Fuel hedge positions entered into by Alaska are currently as follows: Approximate %
    
    Gallons Hedged
    
    Approximate Crudeof Expected Fuel
    
    (in millions)
    
    Oil Price perRequirements
    
    
    
    BarrelFourth Quarter 2004
    
    
    50
    %
    
    
    43.1
    
    
    $
    30.39First Quarter 2005
    
    
    50
    %
    
    
    43.4
    
    
    $
    29.86Second Quarter 2005
    
    
    50
    %
    
    
    45.7
    
    
    $
    28.97Third Quarter 2005
    
    
    50
    %
    
    
    49.0
    
    
    $
    28.81Fourth Quarter 2005
    
    
    50
    %
    
    
    44.4
    
    
    $
    31.85First Quarter 2006
    
    
    40
    %
    
    
    35.8
    
    
    $
    33.22Second Quarter 2006
    
    
    30
    %
    
    
    28.2
    
    
    $
    34.41Third Quarter 2006
    
    
    20
    %
    
    
    20.2
    
    
    $
    36.05Fourth Quarter 2006
    
    
    10
    %
    
    
    9.2
    
    
    $
    37.28First Quarter 2007
    
    
    5
    %
    
    
    4.6
    
    
    $
    35.75Second Quarter 2007
    
    
    5
    %
    
    
    4.8
    
    
    $
    35.48Third Quarter 2007
    
    
    5
    %
    
    
    5.2
    
    
    $
    35.23
 13




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##### Table of Contents



As of December 31, 2003 and September 30, 2004, the fair values of the Companys fuel hedge
positions were $15.7 million and $103.0 million, respectively, and are presented in the balance
sheets as follows (in millions): December 31, 2003
    
    September 30, 2004Prepaid expenses and other current assets
    
    $
    10.3
    
    
    $
    71.8Other assets
    
    
    5.4
    
    
    
    31.2$
    15.7
    
    
    $
    103.0
 Note 5. Other Assets At December 31, 2003 and September 30, 2004, other assets consisted of the following (in millions): December 31, 2003
    
    September 30, 2004Restricted deposits (primarily restricted investments)
    
    $
    53.2
    
    
    $
    62.9Derivative financial instruments (fuel hedges)
    
    
    5.4
    
    
    
    31.1Deferred costs and other
    
    
    13.0
    
    
    
    11.8$
    71.6
    
    
    $
    105.8
 Note 6. Frequent Flyer Program Alaskas Mileage Plan liabilities are included under the following balance sheet captions (in
millions): December 31, 2003
    
    September 30, 2004Current Liabilities:Other accrued liabilities
    
    $
    112.9
    
    
    $
    129.5Other Liabilities and Credits (non-current):Deferred revenue
    
    
    204.5
    
    
    
    238.4Other liabilities
    
    
    18.6
    
    
    
    19.7Total
    
    $
    336.0
    
    
    $
    387.6
 Note 7. Related Company Transactions The Company periodically loans Horizon funds at varying interest rates. All amounts are payable on
demand. Interest income recognized related to the Horizon loans totaled $0.6 million and $0.4
million for the quarters ended September 30, 2003 and 2004, respectively, and $1.9 million and $1.7
million for the nine months ended September 30, 2003 and 2004, respectively. At September 30,
2004, receivables from related companies include $64.4 million from Horizon, $9.4 million from AAGL
and $9.0 million from Air Group. Alaska has an agreement with Horizon to provide revenue sharing on certain markets. Under the
arrangement, Alaska makes a monthly payment to Horizon for markets that provide connecting traffic
to Alaska but create losses for Horizon (the incentive markets). The payment is based on fully
allocated cost for Horizon to provide the transportation service, plus a 5% mark-up. Incentive
markets are analyzed quarterly and the monthly reimbursement amount is adjusted to reflect the
prior quarters actual performance. Alaska made incentive payments to Horizon of 14




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##### Table of Contents



$13.8 million and $5.1 million during the quarters ended September 30, 2003 and 2004, respectively,
and $28.7 million and $9.5 million during the nine months ended September 30, 2003 and 2004,
respectively. These amounts are reflected as other selling expenses and commissions in the
condensed statements of operations. Alaska also provides certain services to Horizon for which Alaska receives payment from Horizon
based on the cost of the services, including personnel expenses related to development and
maintenance of alaskaair.com, the maintenance of telecommunications lines and related software,
personnel and systems expenses to process Horizons revenue transactions, and printing and graphics
services. Alaska also pays certain leasing and other facilities costs on Horizons behalf that are
reimbursed monthly by Horizon. Total amounts received by Alaska from Horizon were $2.4 million and
$2.8 million for the quarters ended September 30, 2003 and 2004, respectively. For the nine months
ended September 30, 2003 and 2004, total amounts received by Alaska from Horizon were $6.0 million
and $7.6 million, respectively. In the normal course of business, Alaska and Horizon provide certain ground handling services to
the other company. For the quarters ended September 30, 2003 and 2004, charges for ground services
provided by Alaska to Horizon totaled $0.6 million and $0.4 million, respectively. For the nine
months ending September 30, 2003 and 2004, charges for ground services provided by Alaska to
Horizon totaled $1.7 million and $1.5 million, respectively. For the quarters ended September 30,
2003 and 2004, charges for ground services provided by Horizon to Alaska totaled $1.2 million and
$1.2 million, respectively. For the nine months ended September 30, 2003 and 2004, charges for
ground services provided by Horizon to Alaska totaled $3.0 million and $4.0 million, respectively. 15




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##### Table of Contents



Note 8. Employee Benefit Plans Pension Plans-Defined Benefit Net pension expense for the three and nine months ended September 30 included the following
components (in millions): Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2003
    
    2004
    
    2003
    
    2004Service cost
    
    $
    11.1
    
    
    $
    13.5
    
    
    $
    33.3
    
    
    $
    40.9Interest cost
    
    
    10.8
    
    
    
    11.8
    
    
    
    32.4
    
    
    
    35.8Expected return on assets
    
    
    (8.5
    )
    
    
    (10.9
    )
    
    
    (25.5
    )
    
    
    (32.3
    )Amortization of prior service cost
    
    
    1.3
    
    
    
    1.1
    
    
    
    3.9
    
    
    
    3.7Actuarial loss
    
    
    3.7
    
    
    
    3.6
    
    
    
    11.1
    
    
    
    11.0SFAS No. 88 curtailment charge*
    
    
    
    
    
    
    1.0
    
    
    
    
    
    
    
    1.0Net pension expense
    
    $
    18.4
    
    
    $
    20.1
    
    
    $
    55.2
    
    
    $
    60.1
 * In connection with the restructuring charge and reduction in force as discussed in Note 2,
the Company recorded a curtailment charge pursuant to SFAS No. 88. This charge is estimated at $1.0
million and is included in restructuring charges in the condensed financial statements. The Company made $37.8 million in contributions to its defined benefit pension plans during
the three and nine months ended September 30, 2003. The Company made $16.5 million and $49.4
million in contributions during the three and nine months ended September 30, 2004, respectively,
and does not expect to make any additional contributions to these plans during the remainder of
2004. Pension Plans-Noncontributory Net pension expense for the unfunded, noncontributory defined benefit plans for certain elected
officers of the Company for the three and nine months ended September 30 included the following
components (in millions): Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2003
    
    2004
    
    2003
    
    2004Service cost
    
    $
    0.2
    
    
    $
    0.2
    
    
    $
    0.6
    
    
    $
    0.8Interest cost
    
    
    0.5
    
    
    
    0.4
    
    
    
    1.5
    
    
    
    1.4Actuarial loss
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.3
    
    
    
    0.5Net pension expense
    
    $
    0.8
    
    
    $
    0.7
    
    
    $
    2.4
    
    
    $
    2.7
 16




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##### Table of Contents



Other Postretirement Benefits Net periodic benefit cost for the postretirement medical plans for the three and nine months ended
September 30 included the following components (in millions): Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2003
    
    2004
    
    2003
    
    2004Service cost
    
    $
    0.9
    
    
    $
    0.6
    
    
    $
    2.7
    
    
    $
    3.0Interest cost
    
    
    1.1
    
    
    
    0.7
    
    
    
    3.3
    
    
    
    3.3Amortization of prior service cost
    
    
    
    
    
    
    (0.1
    )
    
    
    
    
    
    
    (0.3
    )Actuarial loss
    
    
    0.4
    
    
    
    0.4
    
    
    
    1.2
    
    
    
    1.8Net periodic benefit cost
    
    $
    2.4
    
    
    $
    1.6
    
    
    $
    7.2
    
    
    $
    7.8
 Note 9. Long-Term Debt and Capital Lease Obligations At December 31, 2003, and September 30, 2004, long-term debt and capital lease obligations were as
follows (in millions): December 31, 2003
    
    September 30, 2004Fixed rate notes payable due through 2015
    
    $
    382.6
    
    
    $
    368.6Variable rate notes payable due through 2018
    
    
    572.5
    
    
    
    496.1Long-term debt
    
    
    955.1
    
    
    
    864.7Capital lease obligations
    
    
    8.4
    
    
    
    0.4Less current portion
    
    
    (206.7
    )
    
    
    (50.1
    )$
    756.8
    
    
    $
    815.0
 During the first nine months of 2004, Alaska issued $94.6 million of debt secured by flight
equipment, having interest rates that vary with LIBOR and payment terms ranging from 12 to 16
years. Debt issuances during the period were offset by normal long-term debt payments of $43.1
million and full repayment of the Companys credit facility of $150.0 million. Note 10. Contingencies The Company is a party to routine litigation incidental to its business and with respect to which
no material liability is expected. Management believes the ultimate disposition of these matters is
not likely to materially affect the Companys financial position or results of operations.
However, this belief 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. Note 11. U.S. Government Compensation On April 16, 2003, the Emergency Wartime Supplemental Appropriations Act (the Act) was signed into
legislation. The Act included $2.3 billion of one-time cash payments to air carriers, allocated
based on each carriers share of security fees remitted and carrier fees paid to the Transportation
Security Administration (TSA) since its inception in February 2002. In May 2003, the Company
received its share of the one-time cash grant in the amount of $52.8 million. 17




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##### Table of Contents



Note 12. Revision of Previously Issued Financial Statements In December, we discovered a clerical error in our calculation of deferred Mileage Plan revenue
that existed as of September 30, 2004. As a result, we have revised our third quarter and year to
date reported condensed financial statements to adjust for this item. The revision increases other
accrued liabilities by $8.4 million and the total Mileage Plan liability and deferred revenue
balance (both the current and long-term portion) from $379.2 million to $387.6 million, and
results in an $8.4 million (pretax) decrease to other revenues for the third quarter and nine
months ended September 30, 2004. The revised 2004 third quarter net income is $61.0 million and the revised net income for the nine
months ended September 30, 2004 is $23.9 million. We originally reported third quarter net income
of $66.2 million and net income for the nine month period of $29.1 million. The effect of the revisions on the condensed statement of operations for 2004 is as follows (in
millions): Three Months Ended
    
    Nine Months EndedSeptember 30, 2004
    
    September 30, 2004Total Operating Revenues:As Previously Reported
    
    $
    641.2
    
    
    $
    1,710.1Revised
    
    $
    632.8
    
    
    $
    1,701.7Operating Income (Loss):As Previously Reported
    
    $
    49.4
    
    
    $
    (20.2
    )Revised
    
    $
    41.0
    
    
    $
    (28.6
    )Income Before Income TaxesAs Previously Reported
    
    $
    106.3
    
    
    $
    50.3Revised
    
    $
    97.9
    
    
    $
    41.9Net IncomeAs Previously Reported
    
    $
    66.2
    
    
    $
    29.1Revised
    
    $
    61.0
    
    
    $
    23.9
 18




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##### Table of Contents



The effect of the revision on selected balance sheet items is as follows as of September 30, 2004
(in millions): Deferred Income Taxes (Current Assets):As Previously Reported
    
    $
    69.8Revised
    
    $
    72.2Total Current Assets:As Previously Reported
    
    $
    1,273.4Revised
    
    $
    1,275.8Total Assets:As Previously Reported
    
    $
    3,158.7Revised
    
    $
    3,161.1Other Accrued Liabilities (Current Liabilities):As Previously Reported
    
    $
    277.7Revised
    
    $
    286.1Total Current Liabilities:As Previously Reported
    
    $
    910.3Revised
    
    $
    918.7Deferred Income Taxes:As Previously Reported
    
    $
    193.9Revised
    
    $
    193.1Shareholders EquityShareholders Equity
As Previously Reported
    
    $
    729.4Revised
    
    $
    724.2
 19




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##### Table of Contents



In its previously reported 2003 Form 10-Qs, the Company recorded unrealized gains and losses
related to the ineffective portion of changes in fair value of the Companys fuel hedge positions
as nonoperating income (expense) and then reclassified those gains and losses to fuel expense as
those hedges were settled. This practice was not consistent with its stated policy, which is to
record the ineffective portion in nonoperating income (expense). The Company has revised its 2003
reported condensed financial statements to adjust its historical presentation of such items. Such
revisions have resulted in reclassification between operating income and nonoperating income
(expense) in the statements of operations. The revisions have no impact on previously reported
pretax income (loss), net income (loss), the balance sheets, the statements of shareholders equity
or the statements of cash flows for any periods. The effect of the revisions for 2003 is as follows (in millions): Three Months Ended
    
    Nine Months EndedSeptember 30, 2003
    
    September 30, 2003Total Aircraft Fuel:As Previously Reported
    
    $
    81.6
    
    
    $
    227.6As Revised
    
    $
    83.3
    
    
    $
    232.2Total Operating Expenses:As Previously Reported
    
    $
    526.1
    
    
    $
    1,517.0As Revised
    
    $
    527.8
    
    
    $
    1,521.6Total Operating Income:As Previously Reported
    
    $
    59.2
    
    
    $
    5.9As Revised
    
    $
    57.5
    
    
    $
    1.3Nonoperating income (expense):As Previously Reported
    
    $
    (9.1
    )
    
    $
    33.2As Revised
    
    $
    (7.4
    )
    
    $
    37.8
 20




---



##### Table of Contents



Alaska Airlines Financial and Statistical Data Three Months Ended September 30
    
    Nine Months Ended September 30Financial Data (in millions):
    
    
    
    
    
    
    
    
    
    %
    
    
    
    
    
    
    
    
    
    %2003*
    
    2004*
    
    Change
    
    2003*
    
    2004*
    
    ChangeOperating Revenues:Passenger
    
    $
    532.5
    
    
    $
    576.6
    
    
    
    8.3
    %
    
    $
    1,380.1
    
    
    $
    1,545.8
    
    
    
    12.0
    %Freight and mail
    
    
    21.4
    
    
    
    24.5
    
    
    
    14.5
    %
    
    
    59.8
    
    
    
    65.3
    
    
    
    9.2
    %Other  net
    
    
    31.4
    
    
    
    31.7
    
    
    
    1.0
    %
    
    
    83.0
    
    
    
    90.6
    
    
    
    9.2
    %Total Operating Revenues
    
    
    585.3
    
    
    
    632.8
    
    
    
    8.1
    %
    
    
    1,522.9
    
    
    
    1,701.7
    
    
    
    11.7
    %Operating Expenses:Wages and benefits
    
    
    198.7
    
    
    
    207.3
    
    
    
    4.3
    %
    
    
    578.7
    
    
    
    611.8
    
    
    
    5.7
    %Contracted services
    
    
    20.5
    
    
    
    17.8
    
    
    
    -13.2
    %
    
    
    60.9
    
    
    
    70.3
    
    
    
    15.4
    %Aircraft fuel
    
    
    83.3
    
    
    
    130.2
    
    
    
    56.3
    %
    
    
    232.2
    
    
    
    336.4
    
    
    
    44.9
    %Aircraft maintenance
    
    
    35.2
    
    
    
    27.1
    
    
    
    -23.0
    %
    
    
    117.7
    
    
    
    111.3
    
    
    
    -5.4
    %Aircraft rent
    
    
    31.1
    
    
    
    28.1
    
    
    
    -9.6
    %
    
    
    92.8
    
    
    
    85.5
    
    
    
    -7.9
    %Food and beverage service
    
    
    17.0
    
    
    
    13.7
    
    
    
    -19.4
    %
    
    
    44.8
    
    
    
    37.9
    
    
    
    -15.4
    %Other selling expenses and commissions
    
    
    43.4
    
    
    
    35.9
    
    
    
    -17.3
    %
    
    
    109.0
    
    
    
    101.1
    
    
    
    -7.2
    %Depreciation and amortization
    
    
    29.7
    
    
    
    32.0
    
    
    
    7.7
    %
    
    
    87.8
    
    
    
    95.2
    
    
    
    8.4
    %Loss on sale of assets
    
    
    0.8
    
    
    
    (2.5
    )
    
    NM
    
    
    1.3
    
    
    
    (0.6
    )
    
    NMLanding fees and other rentals
    
    
    33.6
    
    
    
    37.6
    
    
    
    11.9
    %
    
    
    93.5
    
    
    
    106.1
    
    
    
    13.5
    %Other
    
    
    34.5
    
    
    
    37.1
    
    
    
    7.5
    %
    
    
    102.9
    
    
    
    111.0
    
    
    
    7.9
    %Restructuring charges
    
    
    
    
    
    
    27.5
    
    
    
    100.0
    %
    
    
    
    
    
    
    27.5
    
    
    NMImpairment of aircraft
    
    
    
    
    
    
    
    
    
    
    0.0
    %
    
    
    
    
    
    
    36.8
    
    
    NMTotal Operating Expenses
    
    
    527.8
    
    
    
    591.8
    
    
    
    12.1
    %
    
    
    1,521.6
    
    
    
    1,730.3
    
    
    
    13.7
    %Operating Income (Loss)
    
    
    57.5
    
    
    
    41.0
    
    
    
    -28.7
    %
    
    
    1.3
    
    
    
    (28.6
    )
    
    NMInterest income
    
    
    4.6
    
    
    
    8.4
    
    
    
    
    
    
    
    10.3
    
    
    
    20.0Interest expense
    
    
    (11.2
    )
    
    
    (11.6
    )
    
    
    
    
    
    
    (33.9
    )
    
    
    (33.1
    )Interest capitalized
    
    
    0.2
    
    
    
    0.4
    
    
    
    
    
    
    
    1.3
    
    
    
    0.7U.S. government compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    52.8
    
    
    
    -Other  net
    
    
    (1.0
    )
    
    
    59.7
    
    
    
    
    
    
    
    7.3
    
    
    
    82.9(7.4
    )
    
    
    56.9
    
    
    
    
    
    
    
    37.8
    
    
    
    70.5Income Before Income Tax
    
    $
    50.1
    
    
    $
    97.9
    
    
    
    95.4
    %
    
    $
    39.1
    
    
    $
    41.9
    
    
    
    7.2
    %Operating Statistics:Revenue passengers (000)
    
    
    4,280
    
    
    
    4,589
    
    
    
    7.2
    %
    
    
    11,335
    
    
    
    12,296
    
    
    
    8.5
    %RPMs (000,000)
    
    
    4,126
    
    
    
    4,571
    
    
    
    10.8
    %
    
    
    10,946
    
    
    
    12,255
    
    
    
    12.0
    %ASMs (000,000)
    
    
    5,693
    
    
    
    6,012
    
    
    
    5.6
    %
    
    
    15,611
    
    
    
    16,825
    
    
    
    7.8
    %Passenger load factor
    
    
    72.5
    %
    
    
    76.0
    %
    
    3.5 pts
    
    
    70.1
    %
    
    
    72.8
    %
    
    2.7 ptsYield per passenger mile
    
    
    12.91¢
    
    
    
    12.62¢
    
    
    
    -2.2
    %
    
    
    12.61¢
    
    
    
    12.61¢
    
    
    
    0.0
    %Operating revenue per ASM
    
    
    10.28¢
    
    
    
    10.53¢
    
    
    
    2.4
    %
    
    
    9.76¢
    
    
    
    10.11¢
    
    
    
    3.6
    %Operating expenses per ASM (a)
    
    
    9.27¢
    
    
    
    9.84¢
    
    
    
    6.1
    %
    
    
    9.75¢
    
    
    
    10.28¢
    
    
    
    5.4
    %Operating expenses per ASM excluding fuel, navigation fee settlement,
restructuring and impairment charges (a)
    
    
    7.81¢
    
    
    
    7.35¢
    
    
    
    -6.0
    %
    
    
    8.26¢
    
    
    
    7.95¢
    
    
    
    -3.9
    %Raw fuel cost per gallon (a)
    
    
    95.2¢
    
    
    
    139.6¢
    
    
    
    46.6
    %
    
    
    97.0¢
    
    
    
    129.8¢
    
    
    
    33.8
    %GAAP fuel cost per gallon (a)
    
    
    90.5¢
    
    
    
    135.9¢
    
    
    
    50.2
    %
    
    
    91.5¢
    
    
    
    125.7¢
    
    
    
    37.4
    %Economic fuel cost per gallon (a)
    
    
    88.7¢
    
    
    
    127.0¢
    
    
    
    43.2
    %
    
    
    89.6¢
    
    
    
    121.3¢
    
    
    
    35.4
    %Fuel gallons (000,000)
    
    
    92.0
    
    
    
    95.8
    
    
    
    4.1
    %
    
    
    253.9
    
    
    
    267.6
    
    
    
    5.4
    %Average number of employees
    
    
    10,114
    
    
    
    10,201
    
    
    
    0.9
    %
    
    
    10,079
    
    
    
    10,147
    
    
    
    0.7
    %Aircraft utilization (blk hrs/day)
    
    
    11.1
    
    
    
    11.8
    
    
    
    6.3
    %
    
    
    10.6
    
    
    
    11.1
    
    
    
    4.7
    %Operating fleet at period-end
    
    
    109
    
    
    
    107
    
    
    
    -1.8
    %
    
    
    109
    
    
    
    107
    
    
    
    -1.8
    %
 NM = Not Meaningful (a) See Note A on Page 22 * As revised. See Note 12 to our condensed financial statements. 21




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##### Table of Contents



Note A: Pursuant to Item 10 of Regulation S-K, we are providing disclosure of the reconciliation of reported non-GAAP financial measures to their most
directly comparable financial measures reported on a GAAP basis. The non-GAAP financial measures provide management the ability to measure and
monitor performance both with and without the cost of aircraft fuel (including the gains and losses associated with our fuel hedging program where
appropriate), restructuring charges, aircraft impairment charges, government compensation in 2003 and a large recovery in 2004 of disputed
navigation fees paid in prior years (of which $7.7 million was recorded in operating expenses and $3.3 million was recorded in non-operating
income). Because the cost and availability of aircraft fuel are subject to many economic and political factors beyond our control and we record
changes in the fair value of our hedge portfolio in our income statement, it is our view that the measurement and monitoring of performance without
fuel is important. In addition, we believe the disclosure of financial performance without impairment and restructuring charges, government
compensation and the navigation fee recovery in 2004 is useful to investors.
Finally, these non-GAAP financial measures are also more comparable to financial measures reported to the Department of Transportation by other major
network airlines. The following tables reconcile our non-GAAP financial measures to the most directly comparable GAAP financial measures for Alaska Airlines, Inc.:
(Certain amounts included below have been revised as explained further in Note 12 to our condensed financial statements) Alaska Airlines, Inc.:($ in millions)Three Months Ended September 30,
    
    Three Months Ended September 30,Unit cost reconciliations:
    
    2003
    
    2004
    
    2003
    
    2004Operating expenses
    
    $
    527.8
    
    
    $
    591.8
    
    
    $
    1,521.6
    
    
    $
    1,730.3ASMs (000,000)
    
    
    5,693
    
    
    
    6,012
    
    
    
    15,611
    
    
    
    16,825Operating expenses per ASM
    
    
    9.27¢
    
    
    
    9.84¢
    
    
    
    9.75¢
    
    
    
    10.28¢Operating expenses
    
    $
    527.8
    
    
    $
    591.8
    
    
    $
    1,521.6
    
    
    $
    1,730.3Less: aircraft fuel
    
    
    (83.3
    )
    
    
    (130.2
    )
    
    
    (232.2
    )
    
    
    (336.4
    )Less: impairment of aircraft
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (36.8
    )Less: restructuring charges
    
    
    
    
    
    
    (27.5
    )
    
    
    
    
    
    
    (27.5
    )Add: navigation fee settlement
    
    
    
    
    
    
    7.7
    
    
    
    
    
    
    
    7.7Operating expense excluding fuel, navigation fee
settlement, impairment and restructuring charges
    
    $
    444.5
    
    
    $
    441.8
    
    
    $
    1,289.4
    
    
    $
    1,337.3ASMs (000,000)
    
    
    5,693
    
    
    
    6,012
    
    
    
    15,611
    
    
    
    16,825Operating expense per ASM excluding fuel, navigation
fee settlement, impairment and restructuring charges
    
    
    7.81¢
    
    
    
    7.35¢
    
    
    
    8.26¢
    
    
    
    7.95¢Aircraft fuel reconciliations:Fuel expense before hedge activities (raw fuel)
    
    $
    87.6
    
    
    $
    133.7
    
    
    $
    246.2
    
    
    $
    347.4Fuel gallons (000,000)
    
    
    92.0
    
    
    
    95.8
    
    
    
    253.9
    
    
    
    267.6Raw fuel cost per gallon
    
    
    95.2¢
    
    
    
    139.6¢
    
    
    
    97.0¢
    
    
    
    129.8¢Fuel expense before hedge activities (raw fuel)
    
    $
    87.6
    
    
    $
    133.7
    
    
    $
    246.2
    
    
    $
    347.4Less: gains on settled hedges included in fuel expense
    
    
    (4.3
    )
    
    
    (3.5
    )
    
    
    (14.0
    )
    
    
    (11.0
    )GAAP fuel expense
    
    $
    83.3
    
    
    $
    130.2
    
    
    $
    232.2
    
    
    $
    336.4Fuel gallons (000,000)
    
    
    92.0
    
    
    
    95.8
    
    
    
    253.9
    
    
    
    267.6GAAP fuel cost per gallon
    
    
    90.5¢
    
    
    
    135.9¢
    
    
    
    91.5¢
    
    
    
    125.7¢GAAP fuel expense
    
    $
    83.3
    
    
    $
    130.2
    
    
    $
    232.2
    
    
    $
    336.4Less: gains on settled hedges included in nonoperating
income (expense)
    
    
    (1.7
    )
    
    
    (8.5
    )
    
    
    (4.6
    )
    
    
    (11.7
    )Adjusted fuel
    
    
    81.6
    
    
    
    121.7
    
    
    
    227.6
    
    
    
    324.7Fuel gallons (000,000)
    
    
    92.0
    
    
    
    95.8
    
    
    
    253.9
    
    
    
    267.6Economic fuel cost per gallon
    
    
    88.7¢
    
    
    
    127.0¢
    
    
    
    89.6¢
    
    
    
    121.3¢Mark-to-market gains included in non-operating income
related to hedges that settle in future periods
    
    
    
    
    
    $
    50.3
    
    
    
    
    
    
    $
    70.4Reconciliation to GAAP pretax income (loss):Pretax income (loss) excluding impairment and
restructuring charges, navigation fee settlement,
government compensation and mark-to-market hedging
gains
    
    $
    50.1
    
    
    $
    64.1
    
    
    
    ($13.7
    )
    
    $
    24.8Less: impairment of aircraft
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (36.8
    )Less: restructuring charges
    
    
    
    
    
    
    (27.5
    )
    
    
    
    
    
    
    (27.5
    )Add: government compensation
    
    
    
    
    
    
    
    
    
    
    52.8
    
    
    
    Add: mark-to-market hedging gains included
in nonoperating income (expense)
    
    
    
    
    
    
    50.3
    
    
    
    
    
    
    
    70.4Add: navigation fee settlement
    
    
    
    
    
    
    11.0
    
    
    
    
    
    
    
    11.0Pretax income (loss) reported GAAP amounts
    
    $
    50.1
    
    
    $
    97.9
    
    
    $
    39.1
    
    
    $
    41.9
 22




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##### Table of Contents



Alaska Airlines, Inc. Net Income Reconciliation: The following table summarizes Alaska Airlines, Inc.s net income during 2003
and 2004 excluding restructuring and impairment charges, navigation fee
recovery, the second and third quarter of 2004 hedging mark-to-market gains,
government compensation and as reported in accordance with GAAP (in millions
except per share amounts). These tables have been revised as further explained
in Note 12 to the condensed financial statements. Three Months Ended September 30,2003
    
    2004Dollars
    
    DollarsNet income excluding mark-to-market hedging gains,
navigation fee settlement and restructuring charges
    
    $
    29.6
    
    
    $
    41.4Mark-to-market hedging gains, net of tax
    
    
    
    
    
    
    29.1Navigation fee settlement
    
    
    
    
    
    
    6.4Restructuring charge, net of tax
    
    
    
    
    
    
    (15.9
    )Reported GAAP amounts
    
    $
    29.6
    
    
    $
    61.0
 Nine Months Ended September 30,2003
    
    2004Dollars
    
    DollarsNet income
(loss) excluding mark-to-market hedging gains,
navigation fee settlement, restructuring charges, government
compensation and impairment charge
    
    
    ($11.3
    )
    
    $
    13.9Government compensation, net of tax
    
    
    32.6
    
    
    
    -Navigation fee settlement
    
    
    
    
    
    
    6.4Mark-to-market hedging gains, net of tax
    
    
    
    
    
    
    40.8Impairment charge, net of tax
    
    
    
    
    
    
    (21.3
    )Restructuring charge, net of tax
    
    
    
    
    
    
    (15.9
    )Reported GAAP amounts
    
    $
    21.3
    
    
    $
    23.9
 23




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##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations In December, we discovered a clerical error in our calculation of deferred Mileage Plan revenue
that existed as of September 30, 2004. As a result, we have revised our third quarter and year to
date reported condensed financial statements to adjust for this item. The revision increases other
accrued liabilities by $8.4 million and the total Mileage Plan liability and deferred revenue
balance (both the current and long-term portion) from $379.2 million to $387.6 million, and
results in an $8.4 million (pretax) decrease to other revenues for the third quarter and nine
months ended September 30, 2004. See Note 12 to the Condensed Financial Statements. The revised 2004 third quarter net income is $61.0 million and the revised net income for the nine
months ended September 30, 2004 is $23.9 million. We originally reported third quarter net income
of $66.2 million and net income for the nine month period of $29.1 million. The revisions have no impact on previously reported operating expenses as determined in accordance
with GAAP or on previously reported operating cost per Available Seat Mile excluding fuel, a
non-GAAP measure we believe is important to some users of our financial statements. See the
accompanying Financial and Statistical Data, Managements Discussion and Analysis of Financial
Condition and Results of Operations, and the Condensed Financial Statements including the Notes to
Condensed Financial Statements, for the impact of the reclassifications. This Amendment No. 1 to
the Companys Quarterly Report on Form 10-Q/A for the three and nine months ended September 30,
2004 amends and reclassifies those items of the previously filed Form 10-Q which have been affected
by the revisions. For additional information regarding the revisions, see Note 12 in the Notes to
Condensed Financial Statements included in Part I, Item 1. The following discussion should be read in conjunction with our condensed financial statements and
the related notes contained elsewhere in this quarterly report on Form 10-Q/A. All statements in
the following discussion that are not reports of historical information or descriptions of current
accounting policy are forward-looking statements. Please consider our forward-looking statements
in light of the risks referred to in this reports introductory cautionary note. Alaskas filings with the Securities and Exchange Commission, including its annual report on Form
10-K/A, quarterly reports on Form 10-Q and 10-Q/A, current reports on Form 8-K and amendments to
those reports are accessible free of charge at www.alaskaair.com. The information contained on our
website is not a part of this quarterly report on Form 10-Q/A. As used in this Form 10-Q/A, the
terms Alaska, our, we and the Company refer to Alaska Airlines, Inc., unless the context
indicates otherwise. Third Quarter in Review and Current Events We recorded a third quarter 2004 net income of $61.0 million, compared to $29.6 million in the
third quarter of 2003. Third quarter results include a restructuring charge of $27.5 million
($15.9 million net of tax) related to the restructuring initiatives announced in late August and
early September. Third quarter results also include mark-to-market fuel hedging gains, reflecting
the increase in the fair value of our hedge portfolio during the quarter, of $50.3 million ($29.1
million net of tax). These amounts are net of the gains realized on contracts which settled during
the quarter. Finally, third quarter results include the recovery of certain disputed Mexico
navigation fees which were originally 24




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##### Table of Contents



paid in 2002 and 2003, that amounted to $11.0 million ($6.4 million net of tax). Approximately $7.7
million of this refund was recorded in operating expenses for fees previously remitted and the
remaining $3.3 million was recorded in non-operating income for interest accrued on the fees.
Without these items in 2004, net income would have been $41.4 million during 2004. Financial and
statistical data comparisons are shown on page 21. A discussion of the three-month data follows.
On pages 22 and 23, we have included a reconciliation of reported non-GAAP financial measures to
the most directly comparable GAAP financial measures. Restructuring Charges During the third quarter of 2004, the Company announced a management reorganization and the closure
of its Oakland maintenance base, contracting out of the Companys Fleet Service, Ground Equipment
and Facility maintenance functions and other initiatives. In total, these restructuring activities
are expected to result in a reduction of approximately 900 employees when fully implemented in
2005. Severance and related costs associated with this restructuring are estimated at $50-$55
million, of which $27.5 million was recorded during the third quarter of 2004 and $23-$27 million
will be recorded in the fourth quarter. The Company is also currently evaluating any possible
asset impairment that may result from the announced initiatives. Any impairment charge would be in
addition to the severance estimates above. We expect savings from these job related initiatives to
be approximately $35 million per year when fully implemented. Labor Costs and Negotiations Alaska Airlines continues to pursue the restructuring of its labor agreements so that they are in
line with the market. Our objectives as we restructure these agreements are to achieve market
labor costs, productivity and employee benefit costs. Based on these three objectives, in 2003
Alaska targeted $112 million per year of labor savings. As a result of increases in our wage rates
since that time combined with labor cost decreases achieved by our competitors, we believe that our
wages and benefits are now above market by more than $112 million. Alaska believes that its pilot
labor costs represent the majority of this amount. Alaska is currently in negotiations with the
Air Line Pilots Association (ALPA) on the pilot collective bargaining agreement. If we do not
reach an agreement, the parties will submit the contract to binding arbitration, the decision of
which will be effective in May 2005. The arbitration will cover wages plus five issues submitted
by each of the Company and ALPA. The pilot labor contract contains market related standards for
wages and benefits. Nevertheless, we cannot predict the outcome of this proceeding, particularly
whether the arbitrators award will reflect cost savings in wage rates, productivity and benefits
equal to what the we consider to be the current excess over market. Mark-to-Market Fuel Hedging Gains Beginning in the second quarter of 2004, we lost the ability to defer, as a component of
comprehensive income, recognition of any unrealized gain or loss on our fuel hedge contracts until
the hedged fuel is consumed. We lost this ability because the correlation between crude oil, the
commodity we use to hedge, and West Coast jet fuel fell below required thresholds. For more
discussion, see Note 4 to our condensed financial statements. The implications of this change in the current period and on a go-forward basis are twofold:
First, we will have more volatile earnings as we mark our entire hedge portfolio to market each
quarter-end and report the gain or loss in other non-operating income or expense. Second, to an
increasing extent, 25




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##### Table of Contents



the impact of our fuel hedge program will not be reflected in fuel expense. We had unrealized
gains on our balance sheet of $23.3 million at March 31, 2004 when we last qualified for hedge
accounting. These unrealized gains will be recognized in fuel expense as the hedged fuel is
consumed, which will occur through the second quarter of 2006. Subsequent gains or losses
resulting from changes in the fair value of our current hedge positions will be recorded in other
non-operating income or expense until correlation returns and the positions are redesignated. We have provided information on mark-to-market gains or losses, as well as calculations of our
economic fuel cost per gallon on page 22. We continue to believe that our fuel hedge program is an important part of our strategy to reduce
our exposure to volatile fuel prices. Impairment of 737-200C Aircraft In June 2004, the Companys Board approved a plan to accelerate the retirement of its Boeing
737-200C fleet and remove those aircraft from service (by the end of 2007) earlier than initially
planned. In July 2004, the Company announced its plan to replace these aircraft by modifying five
existing 737-400 aircraft and using other existing 737-400 aircraft for the remaining passenger
capacity. Four of the five modified airplanes will be converted into combination passenger/cargo
aircraft and one will be converted to an all cargo aircraft. The Company expects to backfill the
737-400s with Boeing 737-800 aircraft in 2005 and 2006. As a result of this decision, the Company evaluated impairment as required by SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets and concluded that the carrying
value of the 737-200C fleet was no longer recoverable when compared to the estimated remaining
future cash flows. Accordingly, during the second quarter of 2004, the Company recorded an
impairment charge totaling $36.8 million (pretax) to write down the fleet to its estimated fair
market value. In addition, we revised our estimates of the useful lives and residual values of
the fleet and related spare equipment and will depreciate the remaining carrying values through
2007, when the last aircraft will be retired. Other Events In October 2004, Alaska entered into a 10 year outsourcing power-by-the-hour engine maintenance
agreement with a third party. Under terms of this arragement, the third party will provide routine
and major overhaul maintenance services on certain engines in our 737-400 fleet at an agreed upon
rate per hour flown. For 2004, we expect a capacity increase of approximately 7%. The expected capacity increase is due
largely to the annualization of the additional aircraft added in 2003 combined with increases in
utilization. Alaska is currently in the process of be adding a row of seats to the 737-400 fleet. When complete,
this will result in an increase of approximately 2.3% in available seat miles on an annualized
basis. We expect this change will represent a significant portion of our capacity growth in 2005. 26




---



##### Table of Contents



Results of Operations Comparison of Three Months Ended September 30, 2004 to Three Months Ended September 30, 2003 During the third quarter of 2004, we recorded operating and pre-tax income of $41.0 million and
$97.9 million, respectively, versus $57.5 million and $50.1 million, respectively, in the third
quarter of 2003. Alaska Airlines Revenues Operating revenues increased $47.5 million, or 8.1%, during 2004 as compared to 2003. For the
quarter, available seat miles (ASMs or capacity) increased 5.6% and revenue passenger miles (RPMs
or traffic) increased 10.8%. The majority of our 2004 ASM growth came from expansion in our
Trans-Continental markets. We also experienced slight increases in capacity in Nevada, Mexico and
Anchorage/Fairbanks-Lower 48, partially offset by decreases in service to Northern Alaska, Canada,
Arizona, the Bay Area and the Pacific Northwest. Traffic increases primarily reflect increases in
traffic in the Trans Continental, Denver, Southern California, Mexico, Arizona, Nevada and
Anchorage/Fairbanks-Lower 48 markets, partially offset by decreases in traffic in Northern Alaska,
the Bay Area and Canada. Passenger revenues increased by 8.3% as a result of a 10.8% increase in traffic partially offset by
a 2.2% decrease in yield per passenger mile. Load factors were up year over year in all of our
regions. Freight and mail revenues increased by $3.1 million, or 14.5%, compared to the same period in 2003
as a result of a new mail contract we have in the State of Alaska and due to revenues associated
with an agreement with PenAir to provide flight services to Dutch Harbor that began in January of
2004. These increases are partially offset by lower contract maintenance revenue. Other-net revenues was essentially flat during the period. 27




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##### Table of Contents



Alaska Airlines Expenses For the quarter, total operating expenses increased $64.0 million, or 12.1%, as compared to the
same period in 2003. Operating expenses per ASM increased 6.1% in 2004 as compared to 2003.
These increases are due largely to the restructuring charge, significant increases in fuel costs
and higher wages and benefit costs. Operating expense per ASM excluding fuel, the navigation fee
recovery and the restructuring charge decreased 6.0% as compared to the same period in 2003.
Explanations of significant period-over-period changes in the components of operating expenses are
as follows:  
    
    Wages and benefits increased $8.6 million, or 4.3%, during the third quarter.
Approximately $1.5 million of this increase reflects higher benefit costs, resulting from
increases in pension, medical and health insurance costs. The remaining $7.1 million
increase primarily reflects scale and step increases.In May 2004, under terms of our union contract, our pilots received a 4% wage rate
increase, which represented 50.7% of the total increase in wages.
    
    Contracted services decreased $2.7 million, or 13.2%, due largely to the recovery in
2004 of disputed Mexico navigation fees paid in 2002 and 2003, partially offset by
expenses associated with an agreement with PenAir to provide flight services to Dutch
Harbor that began in January of 2004 and costs associated with a temporary charter
contract we had for our new mail contract in Alaska, and higher security costs.
    
    Aircraft fuel increased $46.9 million, or 56.3%, due to a 50.2% increase in the GAAP
fuel cost per gallon and a 4.1% increase in fuel gallons consumed. Our economic cost per
gallon (the raw price paid less all benefits from settled hedges) was $1.27 per gallon, a
43.2% increase over the prior year. Fuel prices remain at very high levels and continue
to be volatile. At September 30, 2004, we have fuel hedge contracts in place to hedge
50% of our anticipated fuel consumption for the remainder of 2004 and 2005 and 25% of our
anticipated fuel consumption in 2006 at prices ranging from $28.81 to $37.28 per crude
oil barrel. 28




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##### Table of Contents



The following table summarizes fuel cost per gallon realized by Alaska (the economic cost
per gallon), the cost per gallon on a GAAP basis (including hedging gains recorded in
aircraft fuel and non-operating income (expense)) and fuel cost per gallon excluding all
hedging activities: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2003
    
    2004
    
    2003
    
    2004Fuel expense before hedge
activities (raw fuel)
    
    $
    87.6
    
    
    $
    133.7
    
    
    $
    246.2
    
    
    $
    347.4Fuel gallons (000,000)
    
    
    92.0
    
    
    
    95.8
    
    
    
    253.9
    
    
    
    267.6Raw fuel cost per gallon
    
    
    95.2¢
    
    
    
    139.6¢
    
    
    
    97.0¢
    
    
    
    129.8¢Fuel expense before hedge
activities (raw fuel)
    
    $
    87.6
    
    
    $
    133.7
    
    
    $
    246.2
    
    
    $
    347.4Less: gains on settled hedges included
in fuel expense
    
    
    (4.3
    )
    
    
    (3.5
    )
    
    
    (14.0
    )
    
    
    (11.0
    )GAAP fuel expense
    
    $
    83.3
    
    
    $
    130.2
    
    
    $
    232.2
    
    
    $
    336.4Fuel gallons (000,000)
    
    
    92.0
    
    
    
    95.8
    
    
    
    253.9
    
    
    
    267.6GAAP fuel cost per gallon
    
    
    90.5¢
    
    
    
    135.9¢
    
    
    
    91.5¢
    
    
    
    125.7¢GAAP fuel expense
    
    $
    83.3
    
    
    $
    130.2
    
    
    $
    232.2
    
    
    $
    336.4Less: gains on settled hedges included
in nonoperating income (expense)
    
    
    (1.7
    )
    
    
    (8.5
    )
    
    
    (4.6
    )
    
    
    (11.7
    )Adjusted fuel
    
    $
    81.6
    
    
    $
    121.7
    
    
    $
    227.6
    
    
    $
    324.7Fuel gallons (000,000)
    
    
    92.0
    
    
    
    95.8
    
    
    
    253.9
    
    
    
    267.6Economic fuel cost per gallon
    
    
    88.7¢
    
    
    
    127.0¢
    
    
    
    89.6¢
    
    
    
    121.3¢Mark-to-market gains included in
nonoperating income related to
hedges that settle in future periods (in millions)
    
    
    
    
    
    $
    50.3
    
    
    
    
    
    
    $
    70.4
  
    
    Aircraft maintenance decreased $8.1 million, or 23.0%, due largely to fewer engine
overhauls and a change in the mix of heavy maintenance versus routine maintenance.For the remainder of the year we anticipate that aircraft maintenance will be somewhat
higher than in 2003 as outsourcing of all base maintenance work takes effect. The
anticipated savings from contracting out will be reflected through lower wages and benefits
in future periods.
    
    Aircraft rent decreased $3.0 million, or 9.6%, due to lower rates on extended leases.
    
    Other selling expenses and commissions decreased $7.5 million, or 17.3%. This
decrease is due largely to a decrease in incentive payments made to Horizon. Incentive
payments to Horizon are eliminated in consolidation at the Air Group level. 29




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##### Table of Contents




    
    Landing fees and other rentals increased $4.0 million, or 11.9%. The higher rates
primarily reflect higher joint-use rental fees at Seattle, Portland and Los Angeles,
combined with modest volume growth. We expect landing fees and other rentals to continue
to increase as a result of airport facility expansions and increased costs for security
due to unfunded government mandates. Nonoperating Income (Expense) Net nonoperating income was $56.9 million in 2004 compared to net nonoperating expense of $7.4
million in 2003. Other-net includes $1.7 million and $8.5 million in gains resulting from settled fuel hedge
contracts in 2003 and 2004, respectively. In addition, other-net includes mark-to-market hedging
gains of $50.3 million in 2004 as previously discussed. Comparison of Nine Months Ended September 30, 2004 to Nine Months Ended September 30, 2003 During the nine months ended September 30, 2004, we recorded net income of $23.9 million, compared
to net income of $21.3 million during the same period of 2003. Our 2003 net income includes $52.8
million received in connection with government assistance received under the the Emergency Wartime
Supplemental Appropriations Act. The 2004 results include four unusual items. First, we recorded
a restructuring charge of $27.5 million ($15.9 million net of tax) related to the restructuring
initiatives announced in late August and early September. Second, like last quarter, this quarters
results include mark-to-market fuel hedging gains, which reflect the increase in the fair value of
our hedge portfolio during the quarter, of $70.4 million ($40.8 million net of tax). These amounts
exclude gains realized on contracts which settled during the quarter. Third, 2004 results also
include impairment charges of $36.8 million ($21.3 million net of tax) associated with a decision
to accelerate the retirement of the Companys Boeing 737-200C fleet. Finally, this quarters
results include the recovery of certain disputed Mexico navigation fees which were originally paid
in 2002 and 2003, that amounted to $11.0 million ($6.4 million net of tax). Without these items in
2004 and excluding the government compensation received in 2003, net income would have been $13.9
million during 2004, compared to a net loss of $11.3 million in 2003. Financial and statistical
data comparisons for Alaska are shown on page 21. A discussion of the nine-month data follows. On
pages 22 and 23, we have included a reconciliation of reported non-GAAP financial measures to the
most directly comparable GAAP financial measures. Alaska Airlines Revenues Operating revenues increased $178.8 million, or 11.7%, during 2004 as compared to 2003. For the
first nine months of 2004, ASMs increased 7.8% and RPMs increased 12.0%. Yield per passenger mile remained flat at 12.61 cents and passenger load factor increased 2.7
points during the first nine months of 2004 as compared to the same period in 2003. Increases in
traffic and yield resulted in a 12.0% increase in passenger revenues in 2004. Freight and mail revenues increased $5.5 million, or 9.2%, compared to the same period in 2003
because of a new mail contract we have in the State of Alaska. 30




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##### Table of Contents



Other-net revenues increased $7.6 million, or 9.2%, due largely to revenues received from an
agreement with PenAir to provide flight services to Dutch Harbor that began in January of 2004. Alaska Airlines Expenses For the nine months ended September 30, 2004, total operating expenses increased $208.7 million, or
13.7%, as compared to the same period in 2003. Operating expenses per ASM increased 5.4% in 2004
as compared to 2003. These increases are due largely to the 7.8% increase in capacity combined
with a significant increase in fuel costs, higher wages and benefits, landing fees and other rental
costs, restructuring charges and an impairment charge related to our Boeing 737-200 fleet.
Operating expense per ASM excluding fuel, navigation fee recovery, restructuring and impairment
charges decreased 3.9% as compared to the same period in 2003. Explanations of significant
period-over-period changes in the components of operating expenses are as follows:  
    
    Wages and benefits increased $33.1 million, or 5.7%, during the first nine months of
2004. Approximately $12.5 million of this increase reflects higher benefit costs,
resulting from increases in pension, medical and health insurance costs. The remaining
$20.6 million increase primarily reflects scale and step increases.In May of 2004, under terms of our union contract, our pilots received a 4% wage rate
increase, which represented approximately 51.0% of the total increase in wages.
    
    Contracted services increased $9.4 million, or 15.4%, due largely to expenses
associated with an agreement with PenAir to provide flight services to Dutch Harbor that
began in January of 2004, costs associated with a temporary charter contract we have for
our new mail contract in Alaska and higher security costs, partially offset by the
recovery in 2004 of disputed Mexico navigation fees paid in 2002 and 2003.
    
    Aircraft fuel increased $104.2 million, or 44.9%, due to a 37.4% increase in the GAAP
fuel cost per gallon and a 5.4% increase in fuel gallons consumed. Air Groups fuel
hedging program resulted in Alaska recognizing a $11.0 million reduction in aircraft fuel
expense for hedging gains realized on hedge positions settled during the first half of
2004.
    
    Aircraft maintenance decreased $6.4 million, or 5.4%, due largely to fewer engine
overhauls during the first nine months and a change in the mix of heavy maintenance
versus routine maintenance.
    
    Aircraft rent decreased $7.3 million, or 7.9%, due to lower rates on extended leases
and MD-80 returns, offset by one new 737-700 aircraft and one new 737-900 aircraft since
the end of the third quarter of 2003.
    
    Depreciation and amortization increased $7.4 million, or 8.4%, reflecting accelerated
depreciation on the planned retirement of three Boeing 737-200Cs and an increase in
depreciation resulting from two aircraft purchased in the last twelve months.
    
    Landing fees and other rentals increased $12.6 million, or 13.5%. The higher rates
primarily reflect higher joint-use rental fees at Seattle, Portland, Los Angeles and
Oakland, combined 31




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##### Table of Contents



with modest volume growth. We expect landing fees and other rentals to continue to
increase as a result of airport facility expansions and increased costs for security due to
unfunded government mandates.  
    
    Other expense increased $8.1 million, or 7.9%, primarily reflecting a $6.4 million
increase in professional services and a $1.1 million increase in property taxes. Nonoperating Income (Expense) Net nonoperating income was $70.5 million in 2004 compared to $37.8 million in 2003. Interest
income increased $9.7 million due to a larger marketable securities portfolio in 2004 combined with
a negative adjustment of premium and discount amortization on our marketable securities portfolio
in 2003. The 2003 results include $52.8 million received in connection with the government reimbursement of
security fees remitted and carrier fees paid under the Emergency Wartime Supplemental
Appropriations Act. Other-net includes $4.6 million and $11.7 million in gains from settled fuel hedging contracts in
2003 and 2004, respectively. In addition, other-net includes mark-to-market gains on unsettled
hedge contracts of $70.4 million in 2004. Income Tax Benefit Accounting standards require us to provide for income taxes each quarter based on either our
estimate of the effective tax rate for the full year or the actual year-to-date effective tax rate
if it is our best estimate of our annual expectation. The volatility of airfares and fuel prices
and the seasonality of our business make it difficult to accurately forecast full-year pretax
results. In addition, a relatively small change in pretax results can cause a significant change
in the effective tax rate due to the magnitude of nondeductible expenses, such as employee per diem
costs relative to pretax profit or loss. In estimating the 43.0% tax rate for 2004, we used our
estimate of the full year effective tax rate and considered a variety of factors, including the
U.S. federal rate of 35%, estimates of nondeductible expenses and state income taxes, and
year-to-date pretax results and our current forecast for the fourth quarter. We evaluate this rate
each quarter and make adjustments when necessary. Critical Accounting Policies For information on our critical accounting policies, see Item 7 of our Annual Report on Form 10-K/A
for the year ended December 31, 2003. 32




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##### Table of Contents



Liquidity and Capital Resources The table below presents the major indicators of financial condition and liquidity. December 31, 2003
    
    September 30, 2004
    
    Change(In millions, except debt-to-capital amounts)Cash and marketable securities
    
    $
    811.9
    
    
    $
    878.3
    
    
    $
    66.4Working capital
    
    
    179.7
    
    
    
    357.1
    
    
    
    177.4Long-term debt and
capital lease obligations
    
    
    756.8
    
    
    
    815.0
    
    
    
    58.2Shareholders equity
    
    
    698.1
    
    
    
    724.2
    
    
    
    26.1Long-term debt-to-capital
    
    
    52%:48
    %
    
    
    53%:47
    %
    
    NALong-term debt-to-capital assuming
aircraft operating leases are capitalized
at seven times annualized rent
    
    
    70%:30
    %
    
    
    69%:31
    %
    
    NA
 During the nine months ended September 30, 2004, our cash and marketable securities increased
$66.4 million to $878.3 million at September 30, 2004. This increase reflects cash provided by
operating activities of $287.3 million, partially offset by cash used in financing activities of
$98.5 million and cash used for the purchase of property and equipment of $110.8 million. Cash Provided by Operating Activities During the first nine months of 2004, net cash provided by operating activities was $287.3 million
(including $42.7 million of cash received from a tax refund during the second quarter of 2004),
versus $236.1 million during the first nine months of 2003. Cash Used in Investing Activities Cash used in investing activities was $158.6 million during the first nine months of 2004, compared
to $448.7 million in 2003. We had net purchases of $39.2 million of marketable securities and
$110.8 million for property and equipment. During the first nine months of 2004, our aircraft
related capital expenditures decreased $158.3 million as compared to 2003, primarily reflecting a
reduction in spending for new aircraft and capitalized overhauls. Cash Provided by (Used in) Financing Activities Net cash used in financing activities was $98.5 million during the first nine months of 2004
compared to net cash provided by financing activities of $165.0 million during the same period in
2003. Debt issuances during the first nine months of 2004 of $94.6 million were secured by flight
equipment. These debt issuances have interest rates that vary with the London Interbank Offered
Rate (LIBOR) and payment terms ranging from 12 to 16 years. Debt issuances during the period were
offset by normal long-term debt payments of $43.1 million and full repayment of our credit facility
of $150 million. We plan to meet our capital and operating commitments through internally generated funds from
operations and cash and marketable securities on hand at September 30, 2004 totaling $878.3
million. 33




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##### Table of Contents



Contractual Obligations, Commitments and Off-Balance Sheet Arrangements At September 30, 2004, we had firm orders for 3 aircraft requiring aggregate payments of
approximately $79.2 million, as set forth below. In addition, we have options to acquire 26
additional B737s. We expect to finance the firm orders and to the extent exercised, the option
aircraft with leases, long-term debt or internally generated cash. During the first quarter of
2004, Alaska converted two 737-900 aircraft it had on firm order with Boeing for two 737-800s. The
planes are due for delivery in February and July of 2005. The following table summarizes aircraft commitments and payments by year: Delivery Period - Firm OrdersOctober 1-December 31,
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    BeyondAircraft
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    2008
    
    TotalBoeing 737-800
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3Total
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3Payments (Millions)
    
    $
    11.1
    
    
    $
    59.6
    
    
    $
    7.3
    
    
    $
    1.2
    
    
    $
    
    
    
    $
    
    
    
    $
    79.2
 The table above does not include our planned acquisition of three Boeing 737-800s in 2006 to
replace the Boeing 737-400s being converted since we do not have firm commitments at this time. The following table provides a summary of our principal payments under current and long-term debt
obligations, capital lease obligations, operating lease commitments and aircraft purchase
commitments as of September 30, 2004. This table excludes other obligations that we may have, such
as pension obligations and routine purchase obligations entered into in the normal course of
business. October 1-December 31,
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Beyond(in millions)
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    2008
    
    TotalCurrent and long-term debt
and capital lease obligations
    
    $
    15.8
    
    
    $
    51.1
    
    
    $
    54.7
    
    
    $
    57.7
    
    
    $
    60.7
    
    
    $
    625.1
    
    
    $
    865.1Operating lease commitments
    
    
    57.1
    
    
    
    179.8
    
    
    
    140.3
    
    
    
    118.7
    
    
    
    114.1
    
    
    
    620.0
    
    
    
    1,230.0Aircraft purchase commitments
    
    
    11.1
    
    
    
    59.6
    
    
    
    7.3
    
    
    
    1.2
    
    
    
    
    
    
    
    
    
    
    
    79.2Total
    
    $
    84.0
    
    
    $
    290.5
    
    
    $
    202.3
    
    
    $
    177.6
    
    
    $
    174.8
    
    
    $
    1,245.1
    
    
    $
    2,174.3
 34




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##### Table of Contents



ITEM 3. Quantitative and Qualitative Disclosure about Market Risk There have been no material changes in market risk from the information provided in Item 7A
Quantitative and Qualitative Disclosure About Market Risk in our 2003 10-K/A except as follows: Fuel Hedging We purchase jet fuel at prevailing market prices, and seek to manage the risk of price fluctuations
through execution of a documented hedging strategy. We utilize derivative financial instruments as
hedges to decrease our exposure to the volatility of jet fuel prices. We believe there is risk in
not hedging against the possibility of fuel price increases. At September 30, 2004, we had fuel
hedge contracts in place to hedge 43.1 million gallons of our expected jet fuel usage during the
remainder of 2004, 182.5 million gallons in 2005, 93.4 million gallons in 2006 and 14.6 million
gallons in 2007. This represents 50% of our anticipated fuel consumption in 2004 and 2005 and 25%
and 4% of our anticipated fuel consumption in 2006 and 2007, respectively. Prices of these
agreements range from $28.81 to $37.28 per crude oil barrel. We estimate that a 10% increase or
decrease in crude oil prices as of September 30, 2004 would impact hedging positions by
approximately $4.4 million. As of December 31, 2003 and September 30, 2004, the fair values of our fuel hedge positions were
$15.7 million and $103.0 million, respectively. Of these amounts, $10.3 million of the 2003 fair
value amounts and $71.8 million of the 2004 fair value amounts were included in prepaid and other
current assets in the balance sheets. The remaining $5.4 million 2003 fair value and $31.2 million
2004 fair value is reflected in other assets in the balance sheets. The following table summarizes Alaskas realized fuel hedging gains and changes in fair value of
hedging contracts outstanding as of September 30, 2004 and 2003 (in millions): Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2003
    
    2004
    
    2003
    
    2004Settled hedging gains included in
aircraft fuel
    
    $
    4.3
    
    
    $
    3.5
    
    
    $
    14.0
    
    
    $
    11.0Settled hedging gains (losses) included
In non-operating income (expense)***
    
    $
    (0.7
    )
    
    $
    8.5
    
    
    $
    3.8
    
    
    $
    11.7Mark-to-market hedging gains
included in non-operating
income (expense)**
    
    $
    
    
    
    $
    50.3
    
    
    $
    
    
    
    $
    70.4Hedging gains included in
non-operating income (expense)*
    
    $
    (0.7
    )
    
    $
    58.8
    
    
    $
    3.8
    
    
    $
    82.1
 * Includes the ineffective portion recorded currently in earnings using hedge accounting through
the first three months of 2004. ** Includes changes in fair value since March 31, 2004 resulting from the loss of hedge
accounting. *** 2003 includes the ineffective portion of fair market value changes under hedge accounting. 35




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##### Table of Contents



Financial Market Risk During the first nine months of 2004, we issued $94.6 million of debt secured by flight equipment,
having interest rates that vary with LIBOR and payment terms ranging from 12 to 16 years. 
 ITEM 4. Controls and Procedures As of September 30, 2004, an evaluation was performed under the supervision and with the
participation of our management, including our chief executive officer and chief financial officer
(collectively, our certifying officers), of the effectiveness of the design and operation of our
disclosure controls and procedures. These disclosure controls and procedures are designed to ensure
that the information required to be disclosed by us in our periodic reports filed with the
Securities and Exchange Commission (the SEC) is recorded, processed, summarized and reported within
the time periods specified by the SECs rules and forms, and that the information is communicated
to our certifying officers on a timely basis. Our certifying officers concluded, based on their evaluation, that disclosure controls and
procedures were effective. In December, we discovered a clerical error in our calculation of deferred Mileage Plan revenue
that existed at September 30, 2004. As a result, we have revised our third quarter and year to
date condensed financial statements to adjust for this item. In response to this finding,
management has taken the following steps to strengthen internal
controls and disclosure over the Mileage Plan
deferred revenue calculation. We have:  
    
    provided additional training to the individuals responsible for preparing and reviewing
the calculation.
    
    implemented additional levels of testing and review to ensure the clerical accuracy of
the calculation.
    
    developed new monitoring reports to identify unusual variations in mileage plan
accounts. Management believes the
actions taken will be sufficient to ensure that our disclosure
controls and procedures and internal controls over financial
reporting are effective. We made no changes in our internal controls over financial reporting during the fiscal quarter
ended September 30, 2004, that our certifying officers concluded materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting. We intend to regularly review and evaluate the design and effectiveness of our disclosure controls
and procedures and internal controls over financial reporting on an ongoing basis and to improve
these controls and procedures over time and to correct any deficiencies that we may discover in the
future. While we believe the present design of our disclosure controls and procedures and
internal controls over financial reporting, as modified by the steps
described above, are effective, future events affecting our business may
cause us to modify these controls and procedures in the future. 36




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##### Table of Contents



PART II. OTHER INFORMATION 
 ITEM 1. Legal Proceedings We are a party to ordinary routine litigation incidental to our business and with respect to which
no material liability is expected. Management believes the ultimate disposition of these matters is
not likely to materially affect our financial position or results of operations. This
forward-looking statement is based on managements current understanding of the relevant law and
facts; it is subject to various contingencies, including the potential costs and risks associated
with litigation and the actions of judges and juries. 37




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##### Table of Contents



Signatures Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned thereunto duly authorized. ALASKA AIRLINES, INC.
RegistrantDate: December 23, 2004By:
    
    /s/ Brandon S. Pedersen

Brandon S. Pedersen
Staff Vice President/Finance and ControllerBy:
    
    /s/ Bradley D. Tilden

Bradley D. Tilden
Executive Vice President/Finance and Chief Financial Officer
 38




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##### Table of Contents



EXHIBIT INDEX Pursuant to Item 601(a)(2) of Regulation S-K, this Exhibit Index immediately precedes the exhibits. The following exhibits are numbered in accordance with Item 601 of Regulation S-K. Exhibit No.
    
    Description31.1
    
    
    (1
    )
    
    Section 302 Certification of Chief Executive Officer
Pursuant to 15 U.S.C. Section 724131.2
    
    
    (1
    )
    
    Section 302 Certification of Chief Financial Officer
Pursuant to 15 U.S.C. Section 724132.1
    
    
    (1
    )
    
    Section 906 Certification of Chief Executive Officer
Pursuant to 18 U.S.C. Section 135032.2
    
    
    (1
    )
    
    Section 906 Certification of Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350
  (1)
    
    Filed herewith. 39