UNITED STATES SECURITIES AND EXCHANGE
COMMISSIONWASHINGTON, DC  20549FORM 10-Q (Mark One) xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended September 30, 2001. OR oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934For the transition period from  . . . . . .  to  .
 . . . . . Commission file number  1-8957 ALASKA AIRLINES, INC.(Exact name of registrant as specified in its charter) Alaska
    92-0009235(State or other
      jurisdiction of
    (I.R.S.
      Employerincorporation or
      organization)
    Identification
      No.)
 19300 Pacific Highway South, Seattle, Washington
98188(Address of principal executive
offices) (206) 431-7079(Registrants telephone number, including area code) 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. YesxNoo 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,
 2001.  
 PART I. FINANCIAL STATEMENTSITEM 1.
Financial StatementsBALANCE SHEETS (unaudited)Alaska Airlines, Inc. ASSETSDecember 31, 2000
    September 30, 2001(In
      Millions)Current AssetsCash and
      cash equivalents
    $101.0
    $30.4Marketable securities
    360.6
    636.6Receivables from related companies
    53.0
    58.1Receivables - net
    76.5
    75.0Inventories and supplies - net
    34.5
    39.3Prepaid expenses and other assets
    190.8
    163.4Total
      Current Assets
    816.4
    1,002.8Property and EquipmentFlight equipment
    1,527.2
    1,841.1Other
      property and equipment
    299.3
    326.9Deposits for future flight equipment
    192.0
    84.02,018.5
    2,252.0Less accumulated depreciation and amortization
    488.0
    545.51,530.5
    1,706.5Capital leases:Flight
      and other equipment
    44.4
    44.4Less accumulated amortization
    33.8
    35.510.6
    8.9Total Property and Equipment - Net
    1,541.1
    1,715.4Intangible Assets - Subsidiaries
    13.0
    12.6Other Assets
    35.9
    34.8Total Assets
    $2,406.4
    $2,765.6 See accompanying notes to financial
statements. 2  BALANCE SHEETS (unaudited)Alaska Airlines, Inc. LIABILITIES AND SHAREHOLDERS EQUITYDecember 31, 2000
    September 30, 2001(In
      Millions Except Share Amounts)Current LiabilitiesAccounts
      payable
    $117.1
    $104.0Payables to related companies
    0.5
    4.1Accrued
      aircraft rent
    74.2
    74.6Accrued wages, vacation and payroll taxes
    59.1
    66.1Other
      accrued liabilities
    127.1
    170.6Air traffic liability
    212.3
    238.4Current
      portion of long-term debt and capital lease obligations
    66.7
    37.8Total Current Liabilities
    657.0
    695.6Long-Term Debt and Capital Lease
    Obligations
    609.2
    869.4Other
      Liabilities and CreditsDeferred income taxes
    156.4
    171.6Deferred
      revenue
    133.0
    154.0Other liabilities
    147.2
    167.0436.6
    492.6Shareholders EquityCommon
      stock, $1 par valueAuthorized:  1,000 sharesIssued:  2000 and 2001 - 500 shares
    -
    -Capital in excess of par value
    324.8
    324.8Retained
      earnings
    378.8
    383.2703.6
    708.0Total Liabilities and Shareholders
Equity
    $2,406.4
    $2,765.6 See accompanying notes to financial
statements. 3  STATEMENTS OF
INCOME (unaudited)Alaska Airlines, Inc. Three Months
      Ended September 30(In
      Millions)
    2000
    2001Operating RevenuesPassenger
    $451.5
    $441.8Freight and mail
    19.8
    20.8Other -
net
    13.0
    17.4Total Operating Revenues
    484.3
    480.0Operating
      ExpensesWages and benefits
    150.3
    166.6Contracted
      services
    16.3
    16.8Aircraft fuel
    82.1
    71.7Aircraft
      maintenance
    32.3
    32.2Aircraft rent
    35.4
    33.7Food and beverage
      service
    13.5
    14.5Commissions
    17.1
    16.3Other selling
      expenses
    27.0
    26.3Depreciation and amortization
    22.2
    26.7Loss on sale of
      assets
    0.4
    0.6Landing fees and other rentals
    19.9
    25.9Other
    34.5
    32.8Total Operating Expenses
    451.0
    464.1Operating
      Income
    33.3
    15.9Nonoperating Income (Expense)Interest
      income
    6.9
    7.9Interest expense
    (9.3)
    (11.9)Interest
      capitalized
    3.2
    1.0U.S. government
      compensation
    -
    18.7Other - net
    0.9
    (0.3)1.7
    15.4Income
      before income tax
    35.0
    31.3Income tax
      expense
    17.6
    10.1Net Income
    $17.4
    $21.2 See accompanying notes to financial
statements. 4  STATEMENTS OF
INCOME (unaudited)Alaska Airlines, Inc. Nine Months
      Ended September 30(In
      Millions)
    2000
    2001Operating RevenuesPassenger
    $1,221.6
    $1,261.6Freight and mail
    57.7
    60.5Other -
net
    40.7
    47.3Total Operating Revenues
    1,320.0
    1,369.4Operating
      ExpensesWages and benefits
    431.2
    479.4Contracted
      services
    46.4
    52.9Aircraft fuel
    223.6
    219.8Aircraft
      maintenance
    90.8
    95.4Aircraft rent
    107.3
    104.0Food and beverage
      service
    38.0
    42.4Commissions
    49.4
    50.4Other selling
      expenses
    70.8
    78.9Depreciation and amortization
    60.2
    74.4Loss on sale of
      assets
    0.8
    1.8Landing fees and other rentals
    54.4
    70.7Other
    96.6
    104.8Special charge - Mileage Plan
    24.0
    -Total Operating Expenses
    1,293.5
    1,374.9Operating Income
      (Loss)
    26.5
    (5.5)Nonoperating Income (Expense)Interest
      income
    19.3
    24.2Interest expense
    (25.1)
    (34.6)Interest
      capitalized
    8.8
    4.8U.S. government
      compensation
    -
    18.7Other - net
    1.7
    (1.7)4.7
    11.4Income before income
      tax and accounting change
    31.2
    5.9Income tax
      expense
    16.0
    1.5Income
      before accounting change
    15.2
    4.4Cumulative effect of
      accounting change, net of income taxes of $35.6 million
    (56.9)
    -Net Income (Loss)
    $(41.7)
    $(4.4) See accompanying notes to financial
statements. 5   STATEMENTS OF SHAREHOLDERS EQUITY
(unaudited)Alaska Airlines,
Inc. Capital inCommon
    Excess of
    Retained(In Millions)
    Stock
    Par Value
    Earnings
    TotalBalances
      at December 31, 2000
    $-
    $324.8
    $378.8
    $703.6Net income
      for the nine months ended September 30, 2001
    
    
    4.4
    4.4Balances at September 30, 2001
    $-
    $324.8
    $383.2
    $708.0 See accompanying notes to financial
statements. 6   STATEMENTS OF CASH FLOWS
(unaudited)Alaska Airlines,
Inc. Nine Months
      Ended September 30  (In Millions)
    2000
    2001Cash flows from operating activities:Net income (loss)
    $(41.7)
    $4.4Adjustments to reconcile net income (loss) to cash:Cumulative effect of accounting change
    56.9
    -Special charge - Mileage Plan
    24.0
    -Depreciation and amortization
    60.2
    74.4Amortization of airframe and engine overhauls
    36.7
    33.8Loss on sale of assets
    0.8
    1.8Increase (decrease) in deferred income taxes
    (32.5)
    15.2Increase in accounts receivable - net
    (59.4)
    (3.6)Decrease in other current assets
    6.4
    22.6Increase in air traffic liability
    53.1
    26.1Increase in other current liabilities
    79.9
    41.4Increase in deferred revenue and other-net
    11.2
    45.6Net cash provided by
      operating activities
    195.6
    261.7Cash flows from investing activities:Proceeds from
      disposition of assets
    37.1
    0.2Purchases of
      marketable securities
    (229.6)
    (670.5)Sales and maturities of marketable securities
    180.2
    394.5Flight equipment
      deposits returned
    -
    33.4Additions to flight
      equipment deposits
    (95.0)
    (53.0)Additions to
      property and equipment
    (181.8)
    (267.1)Restricted deposits and other
    (0.2)
    (1.1)Net cash used in
      investing activities
    (289.3)
    (563.6)Cash flows from financing activities:Proceeds from
      issuance of long-term debt
    118.7
    359.5Long-term debt and capital lease payments
    (19.9)
    (128.2)Net cash provided by (used in)
      financing activities
    98.8
    231.3Net
      change in cash and cash equivalents
    5.1
    (70.6)Cash and cash
      equivalents at beginning of period
    132.3
    101.0Cash and cash equivalents at end of period
    $137.4
    $30.4Supplemental
      disclosure of cash paid (refunded) during the period for:Interest (net of amount capitalized)
    $10.2
    $34.8Income
      taxes
    13.7
    (16.7)Noncash investing and financing activities: 2000 - A flight simulator was transferred to
      Alaska Air Group Leasing in exchange for a $2.4 million note receivable
      and a $0.6 million reduction in its payable to Alaska Air Group. See accompanying notes to financial
statements. 7  NOTES TO FINANCIAL STATEMENTS THAT HAVE CHANGED
SIGNIFICANTLY DURING THE NINE MONTHS ENDED SEPTEMBER 30, 2001Alaska Airlines, Inc. Note 1.Basis of PresentationThe accompanying unaudited
financial statements of Alaska Airlines, Inc. (the Company or Alaska), should be
read in conjunction with the financial statements in the Companys annual report
on Form 10-K for the year ended December 31, 2000. They include all adjustments
that are, in the opinion of management, necessary for a fair presentation of the
results for the interim periods. Except for the recording of U.S. Government
compensation described below, the adjustments made were of a normal recurring
nature. The Company is a wholly owned subsidiary of Alaska Air Group, Inc. (Air
Group) whose principal subsidiaries are Alaska Airlines, Inc. and Horizon Air
Industries, Inc. Effective January 1, 2001, the Company adopted
Statement of Financial Accounting Standards No. 133 (SFAS 133), Accounting for
Derivative Instruments and Hedging Activities, as amended. SFAS 133 requires
companies to record derivatives on the balance sheet as assets or liabilities,
measured at fair value. The Companys operating results can be significantly
impacted by changes in the price of aircraft fuel. To manage the risks
associated with changes in aircraft fuel prices, the Company uses purchase
options for crude oil contracts. These contracts, referred to as fuel hedge
contracts, have a high correlation to changes in aircraft fuel prices, and
therefore qualify as cash flow hedges under SFAS 133. Upon adoption of SFAS 133,
the Company recorded the fair market value of its fuel hedging contracts on the
Balance Sheet. Each period, the contracts are adjusted to fair market value. To
the extent the change in the value of the fuel contract does not perfectly
offset the change in the value of the aircraft fuel purchase being hedged, that
portion of the hedge is recognized in earnings. For the nine months ended
September 30, 2001, the Company recognized $2.5 million of nonoperating expense
related to fair market value changes in fuel hedge contracts. Note 2.Prepaid Expenses and Other Current AssetsAt December 31, 2000 and
September 30, 2001, other current assets included a deferred tax asset of $49.4
million. Note
3.              
Long-term Debt and Capital Lease Obligations (See Note 5 to Financial Statements
at December 31, 2000)During 2001, Alaska issued
$209.5 million of debt secured by flight equipment, including $64.5 million with
fixed interest rates of approximately 6.8% and a term of 12 years. Interest
rates on the other $145.0 million varies with LIBOR and has payment terms of 12
to 16 years. In September 2001, Alaska borrowed $150 million under its credit
facility at an interest rate that varies with LIBOR and is payable on or before
December 31, 2004. 8  Note
4.              
Frequent Flyer Program (See Note 10 to Financial Statements at December 31,
2000)Balance Sheet Classification of Frequent
Flyer LiabilityAlaskas Mileage Plan liabilities are
included under the following balance sheet captions. December 31,
      2000
    September 30,
      2001(In
      millions)Current
      Liabilities:Other accrued
      liabilities
    $59.5
    $70.0Other Liabilities
      and Credits:Deferred revenue
    94.0
    110.0Other
      liabilities
    45.0
    58.0Total
    $198.5
    $238.0  Note
5.              
U.S. Government CompensationOn September 11, 2001,
the United States was attacked by terrorists using hijacked jets of two other
U.S. airlines. Due to the negative impact these attacks had on the airline
industry, on September 22, 2001, the U.S. Government passed the Air
transportation Safety and System Stabilization Act to provide $5 billion of cash
compensation and $10 billion of guaranteed loans to U.S. airlines. The purpose
of the Act was to compensate the airlines for direct and incremental losses for
the period September 11 through December 31, 2001 as a result of the attacks.
Alaska expects to receive $89.3 million of the $5 billion cash compensation. As a result of decreased demand for its services, increased
security costs and other direct and incremental costs arising from the attacks,
Alaska estimates that its terrorist-attack related losses from September 11
thorough December 31 will exceed $89.3 million, therefore, the amount is
expected to be fully collected. As of September 30, 2001, the Company has
received $45.4 million. In accordance with EITF Issue No. 01-10, the
compensation received is being recognized as the losses are incurred. For the
period September 11 through September 30, Alaska estimated its terrorist-related
losses to be $18.7 million. Hence, $18.7 million of the U.S. government
compensation was recognized as nonoperating income in the third quarter of 2001.
The remainder of the cash received, $26.7 million, was considered deferred U.S.
government compensation and was shown as part of other accrued liabilities at
September 30, 2001. The $26.7 million is expected to be recognized as
nonoperating income during the fourth quarter of 2001. 9  Alaska  Airlines Financial and Statistical
Data Quarter Ended Sep 30
      Nine Months Ended Sep 30%
    
    
    
    %Financial Data
      (in millions):
    2000
    2001
    Change
      2000
    2001
    ChangeOperating Revenues:Passenger
    $451.5
    $441.8
    (2.1)
    
    $1,221.6
    $1,261.6
    3.3Freight and mail
    19.8
    20.8
    5.1
    
    57.7
    60.5
    4.9Other -
net
    13.0
    17.4
    33.8
    
    40.7
    47.3
    16.2Total Operating Revenues
    484.3
    480.0
    (0.9)
    
    1,320.0
    1,369.4
    3.7Operating Expenses:Wages and
      benefits
    150.3
    166.6
    10.8
    
    431.2
    479.4
    11.2Contracted services
    16.3
    16.8
    3.1
    
    46.4
    52.9
    14.0Aircraft
    fuel
    82.1
    71.7
    (12.7)
    
    223.6
    219.8
    (1.7)Aircraft maintenance
    32.3
    32.2
    (0.3)
    
    90.8
    95.4
    5.1Aircraft
    rent
    35.4
    33.7
    (4.8)
    
    107.3
    104.0
    (3.1)Food
      and beverage service
    13.5
    14.5
    7.4
    
    38.0
    42.4
    11.6Commissions
    17.1
    16.3
    (4.7)
    
    49.4
    50.4
    2.0Other selling expenses
    27.0
    26.3
    (2.6)
    
    70.8
    78.9
    11.4Depreciation and
      amortization
    22.2
    26.7
    20.3
    
    60.2
    74.4
    23.6Loss
      on sale of assets
    0.4
    0.6
    NM
    
    0.8
    1.8
    NMLanding fees and
      other rentals
    19.9
    25.9
    30.2
    
    54.4
    70.7
    30.0Other
    34.5
    32.8
    (4.9)
    
    96.6
    104.8
    8.5Special charge - Mileage Plan
    0.0
    0.0
    0.0
    
    24.0
    0.0
    NMTotal Operating
      Expenses
    451.0
    464.1
    2.9
    
    1,293.5
    1,374.9
    6.3Operating
    Income (Loss)
    33.3
    15.9
    (52.3)
    
    26.5
    (5.5)
    NMInterest
      income
    6.9
    7.9
    
    
    19.3
    24.2Interest expense
    (9.3)
    (11.9)
    
    
    (25.1)
    (34.6)Interest
      capitalized
    3.2
    1.0
    
    
    8.8
    4.8U.S. government
      compensation
    0.0
    18.7
    
    
    0.0
    18.7Other - net
    0.9
    (0.3)
    
    
    1.7
    (1.7)1.7
    15.4
    
    
    4.7
    11.4Income
      Before Income Tax and Accounting Change
    $35.0
    $31.3
    (10.6)
    
    $31.2
    $5.9
    (81.1)Operating Statistics:Revenue passengers
      (000)
    3,655
    3,747
    2.5
    
    10,255
    10,643
    3.8RPMs
      (000,000)
    3,226
    3,328
    3.2
    
    9,088
    9,514
    4.7ASMs
    (000,000)
    4,494
    4,687
    4.3
    
    12,936
    13,798
    6.7Passenger load factor
    71.8%
    71.0%
    (0.8)pts
    
    70.3%
    69.0%
    (1.3)ptsBreakeven load
      factor
    66.8%
    70.1%
    3.3
      pts
    
    67.9%
    71.1%
    3.2
      ptsYield per passenger mile
    13.99¢
    13.27¢
    (5.2)
    
    13.44¢
    13.26¢
    (1.4)Operating revenue
      per ASM
    10.78¢
    10.24¢
    (5.0)
    
    10.20¢
    9.92¢
    (2.7)Operating expenses per ASM*
    10.04¢
    9.90¢
    (1.3)
    
    9.81¢
    9.96¢
    1.5Expense per ASM
      excluding fuel*
    8.21¢
    8.37¢
    2.0
    
    8.09¢
    8.37¢
    3.5Fuel
      cost per gallon
    104.6¢
    90.1¢
    (13.9)
    
    98.5¢
    93.1¢
    (5.4)Fuel gallons
      (000,000)
    78.5
    79.6
    1.4
    
    227.1
    236.1
    4.0Average number of employees
    9,763
    10,222
    4.7
    
    9,494
    10,209
    7.5Aircraft utilization
      (blk hrs/day)
    10.8
    10.3
    (4.6)
    
    10.7
    10.8
    0.9Operating fleet at period-end
    93
    102
    9.7
    
    93
    102
    9.7* Nine months-to-date
    amount excludes the impact of a special charge in June 2000.NM = Not
      Meaningful 10  ITEM 2. Managements Discussion and Analysis of Results of Operations and Financial Condition
Forward-Looking Information

This report may contain forward-looking statements that are based on the best
information currently available to management. These forward-looking statements
are intended to be subject to the safe harbor protection provided by Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. Forward-looking statements are indicated by phrases such as
will, should, the Company believes, we
expect or any other language indicating a prediction of future events.
There can be no assurance that actual developments will be those anticipated by
the Company. Actual results could differ materially from those projected as a
result of a number of factors, some of which the Company cannot predict or
control. For a discussion of these factors, please see Item 1 of the
Companys Annual Report on Form 10-K for the year ended December 31, 2000. Industry Conditions
On September 11, 2001, the United States was attacked by terrorists using
hijacked jets of two other U.S. airlines. The Federal Aviation Administration
(FAA) shut down all commercial airline flight operations for September 11 and
12. Airlines resumed flight operations at reduced levels on September 13. For
the month of September 2001 as compared to September 2000, the nine major U.S.
airlines have reported passenger traffic decreases ranging from 19% to 34%. Due
to anticipated decreased demand for travel, many of these airlines have reported
capacity reductions of about 20%, work force reductions and other cost-saving
measures. As a result of the terrorist attacks, credit rating agencies have downgraded
the long-term credit ratings of most U.S. airlines and their related entities,
including Alaska Airlines, Inc. Due to the negative impact these attacks had on
the airline industry, on September 22, 2001, the U.S. Government passed the Air
Transportation Safety and System Stabilization Act (Act) to provide
$5 billion of cash compensation and $10 billion of guaranteed loans to U.S.
airlines. Alaska expects to receive $89.3 million of the $5 billion cash
compensation. Results of Operations
Third Quarter 2001 Compared with Third Quarter 2000

Net income for the third quarter of 2001 was $21.2 million compared with net
income of $17.4 million in 2000. Operating income for the third quarter of 2001
was $15.9 million compared with operating income of $33.3 million for 2000.
Financial and statistical data is shown on page ten. A discussion of this data
follows. Revenues

Capacity increased by 4.3% primarily due to additional flights in the Arizona
and Alaska-to-U.S. mainland markets. Traffic grew by 3.2%, and passenger load
factor decreased 0.8 percentage points. Capacity, traffic and load factors in
all markets were adversly impacted by the September 11th terrorist attacks. For
the month of September 2001 as compared to September 2000, traffic decreased
18.6% and load factor decreased 2.0 percentage points. For third quarter,
passenger yields were down 5.2%, largely due to a reduction in business
passengers. The combined result of the 3.2% traffic increase and the 5.2% yield
decrease was a 2.1% decrease in passenger revenue. 11  Freight and mail revenues, which were also adversely impacted
by the September 11th terrorist attacks, increased 5.1%, primarily due to higher
mail rates. Other-net revenues increased 33.8%, largely due to increased revenue
from the sale of miles in Alaskas frequent flyer program. Expenses
Operating expenses grew by 2.9% as a result of a 4.3% increase in capacity and a
1.3% decrease in cost per available seat mile (ASM). Cost per ASM excluding fuel
increased 2.0%. Unit costs were adversely impacted by the capacity reductions
that resulted from the September 11th terrorist attacks. Explanations of
significant year-over-year changes in operating expenses are as follows: Wages and benefits increased 10.8% due to a 4.7% increase in the
number of employees combined with a 5.9% increase in average wages and benefits
per employee. Employees were added in most areas due to the net addition of 9
aircraft to the operating fleet (a 9.7% increase). The 2000 results include a
$2.9 million charge for a flight attendant early retirement program. The 2001
results include approximately $6.1 million of added expense for a pilot pay
increase that was retroactive to June 2001. Excluding these unusual items,
average wages and benefits per employee increased 4.0%, due to longevity
increases for union employees and annual merit raises for management employees.Contracted services increased 3.1%, in line with a 3.0% increase in
departures.Fuel expense decreased 12.7%, due to a 13.9% decrease in the cost per gallon
of fuel, offset by a 1.4% increase in gallons consumed. The fuel consumption
rate decreased 2.7% due to the use of more fuel efficient B737-700 and B737-900
aircraft. The lower fuel prices saved $11.5 million.Aircraft maintenance expense fluctuates from quarter to quarter depending
upon the number of airframe checks and engine repairs performed. Ten airframe
checks were done in 2001 compared to 26 in 2000. The lower airframe check
expense was offset by higher expenses for engines and landing gear, resulting in
essentially flat maintenance expense.Commission expense decreased 4.7%, more than the 2.1% decrease in passenger
revenue, due to a smaller proportion of sales being made through travel agents.
In 2001, 57.7% of Air Group ticket sales were made through travel agents, versus
62.9% in 2000. In 2001, 17.5% of the ticket sales were made through Alaskas
Internet web site versus 10.5% in 2000.Other selling expenses decreased 2.6%, in line with the 2.1% decrease in
passenger revenue.Depreciation and amortization increased 20.3%, primarily due to the
addition of eleven owned aircraft during the last 12 months.Landing fees and other rentals increased 30.2%, exceeding the 3.0% increase
in landings, due to higher landing fee and rental rates at airports throughout
the system. The higher rates reflect the airports increased cost of
operations due to living wage ordinances, expansion of their
facilities and increased costs for utilities. The higher rates are expected to
continue during the remainder of 2001. 12  Other expense decreased 4.9%, primarily due to lower legal, passenger
remuneration, recruiting and supplies costs, offset by higher expenditures for
insurance and utilities. Nonoperating Income (Expense)Net nonoperating income was
$15.4 million in 2001 compared to $1.7 million in 2000. The $13.7 million
increase was primarily due to recording $18.7 million of U.S government
compensation under the Act described above under Industry Conditions. Interest
expense, net of capitalized interest, increased $4.8 million due to new debt
incurred during the past twelve months. Effective January 1, 2001, the Company
adopted Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended. SFAS 133 requires
companies to record derivatives on the balance sheet as assets or liabilities,
measured at fair value. Consequently, a $0.5 million charge was recorded in the
third quarter of 2001 to recognize the reduction in fair value of fuel hedging
contracts in accordance with the new standard. Nine Months 2001 Compared with Nine Months 2000

Net income for the nine months ended September 30, 2001 was $4.4 million
compared with an income before accounting change (and excluding a special charge
in 2000) of $30.0 million in 2000. Operating income (excluding a special charge
in 2000) decreased from $50.5 million income in 2000 to a $5.5 million loss in
2001. The main reason for the operating income reduction was that revenues did
not grow as fast as expenses. A 6.7% capacity increase combined with a 2.7%
decrease in revenue per ASM resulted in a 3.7% increase in operating revenues.
The lower revenue per ASM was due to a 1.4% decrease in yield and a 1.3 point
drop in load factor. The 6.7% capacity increase combined with a 1.5% increase in
expense per ASM resulted in an 8.3% increase in operating expenses (excluding a
special charge in 2000). Changes in operating expense items are generally due to
the same reasons stated above in the third quarter comparison. Income Tax  Accounting standards require the
Company to provide for income taxes each quarter based on its estimate of the
effective tax rate for the full year. The volatility of air fares and fuel
prices and the seasonality of the Companys 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 goodwill
amortization and employee per diem costs. In estimating the 25.4% tax rate for
the first nine months of 2001, the Company considered a variety of factors,
including the U.S. federal rate of 35%, estimates of nondeductible expenses and
state income taxes, and its estimate of pretax income for the full year. This
rate is evaluated each quarter and adjustments are made if necessary. 13  Liquidity and Capital Resources
The table below presents the major indicators of financial condition and
liquidity.  December 31,
      2000
    September 30,
      2001
    Change(In
      millions, except debt-to-capital)Cash and
      marketable securities
    $461.6
    $667.0
    $205.4Working capital
    159.4
    307.2
    147.8Unused credit
      facility
    150.0
    0.0
    (150.0)Long-term debt
      and capital lease obligations
    609.2
    869.4
    260.2Shareholders
      equity
    703.6
    708.0
    4.4Debt-to-capital
    46%:54%
    55%:45%
    NADebt-to-capital
      assuming aircraft operating leases are capitalized at
      seven times annualized rent
    70%:30%
    72%:28%
    NA  The Companys cash and marketable securities portfolio
increased by $205.4 million during the first nine months of 2001. Operating
activities provided $261.7 million of cash (including $45.4 million of U.S.
government cash compensation under the Act) during this period. Additional cash
was provided by the issuance of $359.5 million of new debt (including $150.0
million borrowed under Alaskas credit facility) and the return of $33.4
million of flight equipment deposits. Cash was used for $320.1 million of
capital expenditures, including the purchase of eight new and one used Boeing
737 aircraft, flight equipment deposits, spare parts and airframe and engine
overhauls, and for $128.2 million of debt repayment. Commitments   As of September 30, 2001, the Company had
firm orders for 8 aircraft requiring aggregate payments of approximately $224
million, as set forth below. In addition, Alaska has options to acquire 26 more
B737s. Alaska expects to finance the new planes with either leases, long-term
debt or internally generated cash. Delivery Period - Firm OrdersAircraft
    2001
    2002
    2003
    TotalBoeing
      B737-700
    --
    2
    --
    2Boeing B737-900
    --
    2
    4*
    6Total
    --
    4
    4
    8Payments (Millions)
    $8
    $37
    $179
    $224 * With manufacturer approval, some of these firm orders may be
converted to other Next Generation Boeing 737 aircraft. New Accounting Standards  In June 2001, the Financial
Accounting Standards Board issued SFAS No. 141, Business
Combinations (effective July 1, 2001) and SFAS No. 142, Goodwill and
Other Intangible Assets (effective for the Company on January 1, 2002).
SFAS 141 prohibits pooling-of-interests accounting for acquisitions. SFAS 142
specifies that goodwill and some intangible assets will no longer be amortized
but instead will be subject to periodic impairment testing. The Company
estimates that the adoption of SFAS 142 will increase annual net income $0.5
million. In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations (effective for the Company on January 1, 2003).
This Statement addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. In August 2001, the FASB issued SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets
(effective for the Company on January 1, 2002). This Statement supersedes FASB
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of and other related accounting
guidance. The Company is in the process of evaluating the financial statement
impact of SFAS No. 143 and SFAS No. 144. 14  Outlook for Fourth Quarter 2001 and Early 2002

Alaska operated approximately 82% of its previously planned schedule in October,
expects to increase to approximately 88% in November and December and return to
100% in February 2002. Alaskas business is seasonal and pretax losses are
common in the fourth quarter. Losses in the fourth quarter of 2001 are expected
to be larger than normal due to the slowing economy, the impact of the September
11 terrorist attacks and fare sales. Alaska expects to partly offset its losses
with recognition of $70.6 million more U.S. government compensation in the
fourth quarter of 2001. PART II. OTHER INFORMATIONITEM 1. Legal ProceedingsOakland Maintenance Investigation
In December 1998 the U.S. attorney for the Northern District of California
initiated a grand jury investigation concerning certain 1998 maintenance
activities at Alaskas Oakland maintenance base. The investigation has also
included the aircraft involved in the loss of Flight 261 in January 2000. Alaska
is cooperating with this investigation. To the Companys knowledge, no charges
have been filed. The FAA has separately proposed a civil penalty of $44,000 in
connection with this matter. The parties are in settlement discussions over this
penalty. These proceedings are described in more detail in the Alaska Air Group,
Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 2000. Flight 261 Litigation

Alaska is a defendant in a number of lawsuits relating to the loss of Flight 261
on January 31, 2000. Lawsuits on behalf of all 88 passengers and crew on board
have been filed against Alaska, The Boeing Company and others. The suits seek
unspecified compensatory and punitive damages. In May 2001 the judge presiding
over the majority of the cases ruled that punitive damages are not available
against Alaska. Consistent with industry standards, the Company maintains
insurance against aircraft accidents. This litigation is described in more
detail in the Alaska Air Group, Inc. Annual Report on Form 10-K for the fiscal
year ended December 31, 2000. The Company cannot predict the outcome of any of the pending civil or potential
criminal proceedings described above. However, management believes their
ultimate disposition is not likely to materially affect the Companys financial
position or results of operations. This forward-looking statement is based on
managements current understanding of the relevant law and facts; it is subject
to various contingencies, including the potential costs and risks associated
with litigation and the actions of judges and juries. The Company is also
subject to other ordinary routine litigation incidental to its business and with
respect to which no material liability is expected. 15  ITEM 5. Other InformationEmployees
During the third quarter, Alaska and the Air Line Pilots Association agreed to a
two-year contract extension to April 30, 2005. The agreement calls for a pay
increase of 11.05% retroactive to June 1, 2001, followed by a 5% increase
effective June 1, 2002 and 4% increases effective on June 1, 2003 and 2004. ITEM 6. Exhibits and Reports on Form 8-K
No exhibits are attached and no reports on Form 8-K were filed
this quarter. 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:  November 8,
  2001/s/ Bradley D. Tilden
      Bradley D. TildenVice President / Finance and Chief Financial Officer/s/ Terri K. Maupin
      Terri K. MaupinStaff Vice President / Finance and Controller 16