##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2005.
 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
(State or other jurisdiction of
incorporation or organization)
    
    92-0009235
(I.R.S. Employer
Identification No.)
 
  þ o
 o þ




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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 ProceedingsItem 6. ExhibitsSignaturesEXHIBIT 10.1EXHIBIT 10.2EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  Cautionary Note regarding Forward-Looking Statements
  2




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PART I. FINANCIAL INFORMATION
 
 BALANCE SHEETS (unaudited)
 June 30,
    
    
    December 31,(In Millions)
    
    2005
    
    
    2004ASSETSCurrent AssetsCash and cash equivalents
    
    $
    31.0
    
    
    $
    27.8Marketable securities
    
    
    694.9
    
    
    
    845.9Receivables from related companies
    
    
    85.6
    
    
    
    64.9Receivables  net
    
    
    118.8
    
    
    
    91.9Inventories and supplies  net
    
    
    19.4
    
    
    
    17.0Deferred income taxes
    
    
    68.3
    
    
    
    66.6Fuel hedge contracts
    
    
    107.5
    
    
    
    57.9Prepaid expenses and other current assets
    
    
    45.7
    
    
    
    38.9Total Current Assets
    
    
    1,171.2
    
    
    
    1,210.9Property and EquipmentFlight equipment
    
    
    2,035.7
    
    
    
    2,101.7Other property and equipment
    
    
    394.7
    
    
    
    396.6Deposits for future flight equipment
    
    
    183.6
    
    
    
    39.52,614.0
    
    
    
    2,537.8Less accumulated depreciation and amortization
    
    
    860.3
    
    
    
    809.6Total Property and Equipment  Net
    
    
    1,753.7
    
    
    
    1,728.2Intangible Assets
    
    
    38.6
    
    
    
    38.6Fuel Hedge Contracts
    
    
    61.7
    
    
    
    26.6Other Assets
    
    
    80.6
    
    
    
    77.6Total Assets
    
    $
    3,105.8
    
    
    $
    3,081.9
  3




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BALANCE SHEETS (unaudited)
  June 30,
    
    
    December 31,(In Millions Except Share Amounts)
    
    2005
    
    
    2004LIABILITIES AND SHAREHOLDERS EQUITYCurrent LiabilitiesAccounts payable
    
    $
    115.5
    
    
    $
    125.9Payables to related companies
    
    
    7.4
    
    
    
    5.7Accrued aircraft rent
    
    
    56.8
    
    
    
    68.2Accrued wages, vacation and payroll taxes
    
    
    97.1
    
    
    
    119.6Other accrued liabilities
    
    
    334.2
    
    
    
    291.8Air traffic liability
    
    
    374.7
    
    
    
    249.4Current portion of long-term debt and
capital lease obligations
    
    
    52.9
    
    
    
    51.1Total Current Liabilities
    
    
    1,038.6
    
    
    
    911.7Long-Term Debt and Capital Lease Obligations
    
    
    771.0
    
    
    
    798.2Other Liabilities and CreditsDeferred income taxes
    
    
    126.0
    
    
    
    158.9Deferred revenue
    
    
    298.9
    
    
    
    299.2Other liabilities
    
    
    255.0
    
    
    
    237.3679.9
    
    
    
    695.4Commitments and ContingenciesShareholders EquityCommon stock, $1 par valueAuthorized: 1,000 sharesIssued: 2005 and 2004 - 500 shares
    
    
    
    
    
    
    Capital in excess of par value
    
    
    451.4
    
    
    
    451.4Deferred stock-based compensation
    
    
    (2.4
    )
    
    
    (2.9
    )Accumulated other comprehensive loss
    
    
    (85.6
    )
    
    
    (82.7
    )Retained earnings
    
    
    252.9
    
    
    
    310.8616.3
    
    
    
    676.6Total Liabilities and Shareholders Equity
    
    $
    3,105.8
    
    
    $
    3,081.9
  4




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CONDENSED STATEMENTS OF OPERATIONS (unaudited)
  Three Months Ended June 30(In Millions)
    
    2005
    
    
    2004Operating RevenuesPassenger
    
    $
    561.2
    
    
    $
    519.9Freight and mail
    
    
    23.9
    
    
    
    23.1Other  net
    
    
    31.2
    
    
    
    34.6Total Operating Revenues
    
    
    616.3
    
    
    
    577.6Operating ExpensesWages and benefits
    
    
    182.0
    
    
    
    203.7Contracted services
    
    
    31.6
    
    
    
    29.4Aircraft fuel
    
    
    151.5
    
    
    
    112.6Aircraft maintenance
    
    
    50.2
    
    
    
    40.7Aircraft rent
    
    
    29.3
    
    
    
    27.9Food and beverage service
    
    
    11.5
    
    
    
    13.0Other selling expenses and commissions
    
    
    31.2
    
    
    
    31.3Depreciation and amortization
    
    
    30.7
    
    
    
    30.4Landing fees and other rentals
    
    
    40.5
    
    
    
    35.3Other
    
    
    41.5
    
    
    
    38.1Restructuring charges
    
    
    14.7
    
    
    
    Impairment of aircraft and related spare parts
    
    
    
    
    
    
    36.8-Total Operating Expenses
    
    
    614.7
    
    
    
    599.2Operating Income (Loss)
    
    
    1.6
    
    
    
    (21.6
    )Nonoperating Income (Expense)Interest income
    
    
    7.6
    
    
    
    6.3Interest expense
    
    
    (12.4
    )
    
    
    (10.7
    )Interest capitalized
    
    
    1.2
    
    
    
    0.2Fuel hedging gains
    
    
    23.9
    
    
    
    0.0Other  net
    
    
    0.2
    
    
    
    23.020.5
    
    
    
    18.8Income (loss) before income tax and accounting change
    
    
    22.1
    
    
    
    (2.8
    )Income tax expense (benefit)
    
    
    9.2
    
    
    
    (0.1
    )Net Income (Loss)
    
    $
    12.9
    
    
    $
    (2.7
    )Pro Forma Results(assuming change in method ofaccounting was applied retrospectively):Pro forma net income
    
    NA
    
    $
    0.6
  5




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CONDENSED STATEMENTS OF OPERATIONS (unaudited)
  Six Months Ended June 30(In Millions Except Per Share Amounts)
    
    2005
    
    
    2004Operating RevenuesPassenger
    
    $
    1,032.5
    
    
    $
    969.2Freight and mail
    
    
    43.2
    
    
    
    40.8Other  net
    
    
    63.9
    
    
    
    58.9Total Operating Revenues
    
    
    1,139.6
    
    
    
    1,068.9Operating ExpensesWages and benefits
    
    
    381.7
    
    
    
    404.5Contracted services
    
    
    59.4
    
    
    
    52.5Aircraft fuel
    
    
    279.1
    
    
    
    206.2Aircraft maintenance
    
    
    100.3
    
    
    
    84.2Aircraft rent
    
    
    57.7
    
    
    
    57.4Food and beverage service
    
    
    22.4
    
    
    
    24.2Other selling expenses and commissions
    
    
    63.9
    
    
    
    65.2Depreciation and amortization
    
    
    61.0
    
    
    
    63.2Landing fees and other rentals
    
    
    81.1
    
    
    
    68.5Other
    
    
    79.9
    
    
    
    75.8Restructuring charges
    
    
    22.1
    
    
    
    Impairment of aircraft and related spare parts
    
    
    
    
    
    
    36.8-Total Operating Expenses
    
    
    1,208.6
    
    
    
    1,138.5Operating Loss
    
    
    (69.0
    )
    
    
    (69.6
    )Nonoperating Income (Expense)Interest income
    
    
    13.9
    
    
    
    11.6Interest expense
    
    
    (23.9
    )
    
    
    (21.5
    )Interest capitalized
    
    
    1.9
    
    
    
    0.3Fuel hedging gains
    
    
    117.3
    
    
    
    23.3Other  net
    
    
    (2.7
    )
    
    
    (0.1
    )106.5
    
    
    
    13.6Income (loss) before income tax and accounting change
    
    
    37.5
    
    
    
    (56.0
    )Income tax expense (benefit)
    
    
    15.3
    
    
    
    (18.9
    )Income (loss) before accounting change
    
    
    22.2
    
    
    
    (37.1
    )Cumulative effect of accounting change, net of tax
    
    
    (80.1
    )
    
    
    Net Loss
    
    $
    (57.9
    )
    
    $
    (37.1
    )Pro Forma Results(assuming change in method ofaccounting was applied retrospectively):Pro forma net loss
    
    NA
    
    $
    (30.7
    )
  6




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CONDENSED STATEMENT OF SHAREHOLDERS EQUITY (unaudited)
  Capital in
    
    
    DeferredCommon
    
    
    Excess of
    
    
    Stock-Based
    
    
    Accumulated Other
    
    
    Retained(In Millions)
    
    Stock
    
    
    Par Value
    
    
    Compensation
    
    
    Comprehensive Loss
    
    
    Earnings
    
    
    TotalBalances at December 31, 2004
    
    $
    0.0
    
    
    $
    451.4
    
    
    $
    (2.9
    )
    
    $
    (82.7
    )
    
    $
    310.8
    
    
    $
    676.6Net loss for the six months ended June 30, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (57.9
    )
    
    
    (57.9
    )Other comprehensive income (loss):Related to marketable securities:Change in fair value
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.5
    )Reclassification to earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.5Income tax effect
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.7
    )1.3
    
    
    
    
    
    
    
    1.3Related to fuel hedges:Reclassification to earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6.6
    )Income tax effect
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.4(4.2
    )
    
    
    
    
    
    
    (4.2
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (60.8
    )Amortization of deferred stock-based compensation
    
    
    
    
    
    
    
    
    
    
    0.5
    
    
    
    
    
    
    
    
    
    
    
    0.5Balances at June 30, 2005
    
    $
    0.0
    
    
    $
    451.4
    
    
    $
    (2.4
    )
    
    $
    (85.6
    )
    
    $
    252.9
    
    
    $
    616.3
  7




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CONDENSED STATEMENTS OF CASH FLOWS (unaudited)
  Six Months Ended June 30 (In Millions)
    
    2005
    
    
    2004Cash flows from operating activities:Net loss
    
    $
    (57.9
    )
    
    $
    (37.1
    )Adjustments to reconcile net loss to net cash
provided by operating activities:Cumulative effect of accounting change, net of tax effect
    
    
    80.1
    
    
    
    Restructuring charges
    
    
    22.1
    
    
    
    Impairment of aircraft and related spare parts
    
    
    
    
    
    
    36.8Depreciation and amortization
    
    
    61.0
    
    
    
    63.2Amortization of airframe and engine overhauls
    
    
    
    
    
    
    31.3Stock-based compensation
    
    
    0.5
    
    
    
    Changes in fair values of open fuel hedge contracts
    
    
    (91.3
    )
    
    
    (17.2
    )Loss on sale of assets
    
    
    2.3
    
    
    
    1.9Changes in deferred income taxes
    
    
    13.5
    
    
    
    (12.5
    )Increase in receivables  net
    
    
    (47.6
    )
    
    
    (16.3
    )Increase in prepaid expenses and other current assets
    
    
    (8.8
    )
    
    
    (11.6
    )Increase in air traffic liability
    
    
    125.3
    
    
    
    103.8Increase (decrease) in other current liabilities
    
    
    (14.5
    )
    
    
    25.5Increase in deferred revenue and other-net
    
    
    7.8
    
    
    
    24.4Net cash provided by operating activities
    
    
    92.5
    
    
    
    192.2Cash flows from investing activities:Proceeds from disposition of assets
    
    
    2.2
    
    
    
    3.9Purchases of marketable securities
    
    
    (598.3
    )
    
    
    (440.3
    )Sales and maturities of marketable securities
    
    
    751.3
    
    
    
    396.6Property and equipment additions:Aircraft purchase deposits
    
    
    (153.0
    )
    
    
    (5.2
    )Capitalized overhauls
    
    
    
    
    
    
    (20.3
    )Aircraft and other flight equipment
    
    
    (44.0
    )
    
    
    (40.6
    )Other property and equipment
    
    
    (19.8
    )
    
    
    (21.3
    )Restricted deposits and other
    
    
    (2.3
    )
    
    
    (2.6
    )Net cash used in investing activities
    
    
    (63.9
    )
    
    
    (129.8
    )Cash flows from financing activities:Proceeds from issuance of long-term debt, net
    
    
    
    
    
    
    94.6Long-term debt and capital lease payments
    
    
    (25.4
    )
    
    
    (144.8
    )Net cash used in financing activities
    
    
    (25.4
    )
    
    
    (50.2
    )Net change in cash and cash equivalents
    
    
    3.2
    
    
    
    12.2Cash and cash equivalents at beginning of period
    
    
    27.8
    
    
    
    158.4Cash and cash equivalents at end of period
    
    $
    31.0
    
    
    $
    170.6Supplemental disclosure of cash paid during the period for:Interest (net of amount capitalized)
    
    $
    21.5
    
    
    $
    21.4Income taxes
    
    
    1.1
    
    
    
    Noncash investing and financing activities:Credit received for flight deposits deferred in other liabilities
    
    
    9.7
    
    
    
    
  8




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NOTES TO CONDENSED FINANCIAL STATEMENTS (unaudited)
  Note 1. Basis of Presentation and Significant Accounting Policies
 Organization and Basis of Presentation
   Reclassifications
  Stock Options
   9




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Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Income (loss) before accounting change
As reported
    
    $
    12.9
    
    
    $
    (2.7
    )
    
    $
    22.2
    
    
    $
    (37.1
    )Add: Total stock-based compensation
expense recognized under the intrinsic
value-based method, net
of related tax
    
    
    0.2
    
    
    
    
    
    
    
    0.3
    
    
    
    Deduct: Total stock-based employee
compensation expense determined
under fair value based methods for
all awards, net of related tax effects
    
    
    (1.1
    )
    
    
    (0.9
    )
    
    
    (1.9
    )
    
    
    (1.8
    )Pro forma income (loss)
before accounting change
    
    $
    12.0
    
    
    $
    (3.6
    )
    
    $
    20.6
    
    
    $
    (38.9
    )Net income (loss) as reported
    
    $
    12.9
    
    
    $
    (2.7
    )
    
    $
    (57.9
    )
    
    $
    (37.1
    )Add: Total stock-based compensation
expense recognized under the intrinsic
value-based method, net
of related tax
    
    
    0.2
    
    
    
    
    
    
    
    0.3
    
    
    
    Deduct: Total stock-based compensation
expense determined under fair value-
based methods for all awards, net of
related tax
    
    
    (1.1
    )
    
    
    (0.9
    )
    
    
    (1.9
    )
    
    
    (1.8
    )Pro forma net income (loss)
    
    $
    12.0
    
    
    $
    (3.6
    )
    
    $
    (59.5
    )
    
    $
    (38.9
    )
  10




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Note 2. Change in Accounting Principle
 capitalize and amortize direct expense direct expense direct expense direct expense direct expense
 Note 3. Restructuring Charges
   11




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Accruals for Severance and Related CostsBalance at December 31, 2004
    
    $
    38.7Restructuring charges
    
    
    16.1Restructuring charge adjustments
    
    
    (2.0
    )Cash payments
    
    
    (29.5
    )Balance at June 30, 2005
    
    $
    23.3
   Note 4. Related Company Transactions
   12




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Note 5. Derivative Financial Instruments
    
    
    All changes in the fair value of fuel hedge contracts that existed as of March 31,
2004 or hedge positions entered into subsequent to March 31, 2004 are reported in other
non-operating income (expense).
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
    
    Reported fuel expense includes only 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 Loss at March 31, 2004.
  Three Months Ended June 30
    
    Six Months Ended June 302005
    
    2004
    
    2005
    
    2004Fuel expense before hedge activities
(raw or into-plane fuel cost)
    
    $
    154.7
    
    
    $
    117.0
    
    
    $
    285.7
    
    
    $
    213.7Less: gains on settled hedges included
in fuel expense
    
    
    (3.2
    )
    
    
    (4.4
    )
    
    
    (6.6
    )
    
    
    (7.5
    )GAAP fuel expense
    
    $
    151.5
    
    
    $
    112.6
    
    
    $
    279.1
    
    
    $
    206.2Less: gains on settled hedges included
in nonoperating income (expense)
    
    
    (21.3
    )
    
    
    (3.2
    )
    
    
    (37.0
    )
    
    
    (3.2
    )Economic fuel expense
    
    $
    130.2
    
    
    $
    109.4
    
    
    $
    242.1
    
    
    $
    203.0Mark-to-market hedging gains included
in nonoperating income (expense)
    
    $
    2.6
    
    
    $
    19.6
    
    
    $
    80.3
    
    
    $
    20.1
  Approximate % ofExpected Fuel
    
    Gallons Hedged
    
    Approximate CrudeRequirements
    
    (in millions)
    
    Oil Price per BarrelThird Quarter 2005
    
    
    50
    %
    
    
    48.5
    
    
    $
    28.81Fourth Quarter 2005
    
    
    50
    %
    
    
    43.8
    
    
    $
    31.85First Quarter 2006
    
    
    50
    %
    
    
    44.2
    
    
    $
    35.70Second Quarter 2006
    
    
    50
    %
    
    
    46.5
    
    
    $
    39.76Third Quarter 2006
    
    
    40
    %
    
    
    39.9
    
    
    $
    41.58Fourth Quarter 2006
    
    
    30
    %
    
    
    27.1
    
    
    $
    42.70First Quarter 2007
    
    
    20
    %
    
    
    18.2
    
    
    $
    43.09Second Quarter 2007
    
    
    19
    %
    
    
    18.5
    
    
    $
    45.11Third Quarter 2007
    
    
    22
    %
    
    
    22.6
    
    
    $
    45.27Fourth Quarter 2007
    
    
    17
    %
    
    
    15.5
    
    
    $
    47.89First Quarter 2008
    
    
    11
    %
    
    
    10.7
    
    
    $
    50.44Second Quarter 2008
    
    
    6
    %
    
    
    6.2
    
    
    $
    49.26Third Quarter 2008
    
    
    6
    %
    
    
    5.9
    
    
    $
    48.97Fourth Quarter 2008
    
    
    5
    %
    
    
    4.8
    
    
    $
    48.68
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Note 6. Other Assets
  June 30, 2005
    
    December 31, 2004Restricted deposits (primarily restricted investments)
    
    $
    69.3
    
    
    $
    66.3Deferred costs and other
    
    
    11.3
    
    
    
    11.3$
    80.6
    
    
    $
    77.6
 Note 7. Mileage Plan
  June 30, 2005
    
    December 31, 2004Current Liabilities:Other accrued liabilities
    
    $
    154.6
    
    
    $
    136.6Other Liabilities and Credits (non-current):Deferred revenue
    
    
    256.6
    
    
    
    252.9Other liabilities
    
    
    20.0
    
    
    
    19.8Total
    
    $
    431.2
    
    
    $
    409.3
 Note 8. Employee Benefit Plans
 Pension Plans-Qualified Defined Benefit
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Service cost
    
    $
    11.8
    
    
    $
    13.7
    
    
    $
    25.5
    
    
    $
    27.4Interest cost
    
    
    12.9
    
    
    
    12.0
    
    
    
    25.8
    
    
    
    24.0Expected return on assets
    
    
    (12.5
    )
    
    
    (10.7
    )
    
    
    (25.0
    )
    
    
    (21.4
    )Amortization of prior service cost
    
    
    1.2
    
    
    
    1.3
    
    
    
    2.4
    
    
    
    2.6Actuarial gain
    
    
    3.6
    
    
    
    3.7
    
    
    
    7.2
    
    
    
    7.4Net pension expense
    
    $
    17.0
    
    
    $
    20.0
    
    
    $
    35.9
    
    
    $
    40.0
  15




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##### Table of Contents



Pension Plans-Nonqualified Defined Benefit
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Service cost
    
    $
    0.3
    
    
    $
    0.3
    
    
    $
    0.6
    
    
    $
    0.6Interest cost
    
    
    0.4
    
    
    
    0.5
    
    
    
    0.8
    
    
    
    1.0Actuarial gain
    
    
    0.1
    
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.4Net pension expense
    
    $
    0.8
    
    
    $
    1.0
    
    
    $
    1.6
    
    
    $
    2.0
 Postretirement Medical Benefits
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Service cost
    
    $
    1.0
    
    
    $
    1.2
    
    
    $
    2.0
    
    
    $
    2.4Interest cost
    
    
    1.1
    
    
    
    1.3
    
    
    
    2.2
    
    
    
    2.6Amortization of prior service cost
    
    
    (0.1
    )
    
    
    (0.1
    )
    
    
    (0.2
    )
    
    
    (0.2
    )Actuarial gain
    
    
    0.5
    
    
    
    0.7
    
    
    
    1.0
    
    
    
    1.4Net periodic benefit cost
    
    $
    2.5
    
    
    $
    3.1
    
    
    $
    5.0
    
    
    $
    6.2
 Note 9. Long-term Debt and Capital Lease Obligations
  2005
    
    2004Fixed rate notes payable due through 2017
    
    $
    473.8
    
    
    $
    361.3Variable rate notes payable due through 2020
    
    
    349.8
    
    
    
    487.6Long-term debt
    
    
    823.6
    
    
    
    848.9Capital lease obligations
    
    
    0.3
    
    
    
    0.4Less current portion
    
    
    (52.9
    )
    
    
    (51.1
    )$
    771.0
    
    
    $
    798.2
 16




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##### Table of Contents



Note 10. Aircraft Commitments
   Note 11. Contingencies
  17




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18




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##### Table of Contents



Alaska Airlines Financial and Statistical Data (unaudited)
 Three Months Ended June 30
    
    Six Months Ended June 30%
    
    
    
    
    
    
    
    
    
    %2005
    
    2004
    
    Change
    
    2005
    
    2004
    
    ChangeFinancial Data (in millions):Operating Revenues:Passenger
    
    $
    561.2
    
    
    $
    519.9
    
    
    
    7.9
    
    
    $
    1,032.5
    
    
    $
    969.2
    
    
    
    6.5Freight and mail
    
    
    23.9
    
    
    
    23.1
    
    
    
    3.5
    
    
    
    43.2
    
    
    
    40.8
    
    
    
    5.9Other  net
    
    
    31.2
    
    
    
    34.6
    
    
    
    (9.8
    )
    
    
    63.9
    
    
    
    58.9
    
    
    
    8.5Total Operating Revenues
    
    
    616.3
    
    
    
    577.6
    
    
    
    6.7
    
    
    
    1,139.6
    
    
    
    1,068.9
    
    
    
    6.6Operating Expenses:Wages and benefits
    
    
    182.0
    
    
    
    203.7
    
    
    
    (10.7
    )
    
    
    381.7
    
    
    
    404.5
    
    
    
    (5.6
    )Contracted services
    
    
    31.6
    
    
    
    29.4
    
    
    
    7.5
    
    
    
    59.4
    
    
    
    52.5
    
    
    
    13.1Aircraft fuel
    
    
    151.5
    
    
    
    112.6
    
    
    
    34.5
    
    
    
    279.1
    
    
    
    206.2
    
    
    
    35.4Aircraft maintenance
    
    
    50.2
    
    
    
    40.7
    
    
    
    23.3
    
    
    
    100.3
    
    
    
    84.2
    
    
    
    19.1Aircraft rent
    
    
    29.3
    
    
    
    27.9
    
    
    
    5.0
    
    
    
    57.7
    
    
    
    57.4
    
    
    
    0.5Food and beverage service
    
    
    11.5
    
    
    
    13.0
    
    
    
    (11.5
    )
    
    
    22.4
    
    
    
    24.2
    
    
    
    (7.4
    )Other selling expenses and commissions
    
    
    31.2
    
    
    
    31.3
    
    
    
    (0.3
    )
    
    
    63.9
    
    
    
    65.2
    
    
    
    (2.0
    )Depreciation and amortization
    
    
    30.7
    
    
    
    30.4
    
    
    
    1.0
    
    
    
    61.0
    
    
    
    63.2
    
    
    
    (3.5
    )Landing fees and other rentals
    
    
    40.5
    
    
    
    35.3
    
    
    
    14.7
    
    
    
    81.1
    
    
    
    68.5
    
    
    
    18.4Other
    
    
    41.5
    
    
    
    38.1
    
    
    
    8.9
    
    
    
    79.9
    
    
    
    75.8
    
    
    
    5.4Restructuring charges
    
    
    14.7
    
    
    
    
    
    
    NM
    
    
    22.1
    
    
    
    
    
    
    NMImpairment of aircraft and related spare parts
    
    
    
    
    
    
    36.8
    
    
    NM
    
    
    
    
    
    
    36.8
    
    
    NMTotal Operating Expenses
    
    
    614.7
    
    
    
    599.2
    
    
    
    2.6
    
    
    
    1,208.6
    
    
    
    1,138.5
    
    
    
    6.2Operating Income (Loss)
    
    
    1.6
    
    
    
    (21.6
    )
    
    NM
    
    
    (69.0
    )
    
    
    (69.6
    )
    
    
    NMInterest income
    
    
    7.6
    
    
    
    6.3
    
    
    
    
    
    
    
    13.9
    
    
    
    11.6Interest expense
    
    
    (12.4
    )
    
    
    (10.7
    )
    
    
    
    
    
    
    (23.9
    )
    
    
    (21.5
    )Interest capitalized
    
    
    1.2
    
    
    
    0.2
    
    
    
    
    
    
    
    1.9
    
    
    
    0.3Fuel hedging gains
    
    
    23.9
    
    
    
    
    
    
    
    
    
    
    
    117.3
    
    
    
    23.3Other  net
    
    
    0.2
    
    
    
    23.0
    
    
    
    
    
    
    
    (2.7
    )
    
    
    (0.1
    )20.5
    
    
    
    18.8
    
    
    
    
    
    
    
    106.5
    
    
    
    13.6Income (Loss) Before Income Tax
    
    $
    22.1
    
    
    $
    (2.8
    )
    
    NM
    
    $
    37.5
    
    
    $
    (56.0
    )
    
    NMOperating Statistics:Revenue passengers (000)
    
    
    4,232
    
    
    
    4,116
    
    
    
    2.8
    
    
    
    8,083
    
    
    
    7,707
    
    
    
    4.9RPMs (000,000)
    
    
    4,317
    
    
    
    4,104
    
    
    
    5.2
    
    
    
    8,214
    
    
    
    7,684
    
    
    
    6.9ASMs (000,000)
    
    
    5,543
    
    
    
    5,635
    
    
    
    (1.6
    )
    
    
    10,913
    
    
    
    10,813
    
    
    
    0.9Passenger load factor
    
    
    77.9
    %
    
    
    72.8
    %
    
    5.1 pts
    
    
    75.3
    %
    
    
    71.1
    %
    
    4.2 ptsYield per passenger mile
    
    
    13.00¢
    
    
    
    12.67¢
    
    
    
    2.5
    
    
    
    12.57¢
    
    
    
    12.61¢
    
    
    
    (0.3
    )Operating revenue per ASM
    
    
    11.12¢
    
    
    
    10.25¢
    
    
    
    8.4
    
    
    
    10.44¢
    
    
    
    9.89¢
    
    
    
    5.6Operating expenses per ASM (a)
    
    
    11.09¢
    
    
    
    10.63¢
    
    
    
    4.2
    
    
    
    11.07¢
    
    
    
    10.53¢
    
    
    
    5.2Operating expenses per ASM excluding fuel and restructuring charges (a)
    
    
    8.09¢
    
    
    
    7.98¢
    
    
    
    1.4
    
    
    
    8.31¢
    
    
    
    8.28¢
    
    
    
    0.4Raw fuel cost per gallon (a)
    
    
    179.5¢
    
    
    
    131.6¢
    
    
    
    36.4
    
    
    
    167.7¢
    
    
    
    124.4¢
    
    
    
    34.8GAAP fuel cost per gallon (a)
    
    
    175.8¢
    
    
    
    126.7¢
    
    
    
    38.8
    
    
    
    163.8¢
    
    
    
    120.0¢
    
    
    
    36.5Economic fuel cost per gallon (a)
    
    
    151.1¢
    
    
    
    123.1¢
    
    
    
    22.7
    
    
    
    142.1¢
    
    
    
    118.2¢
    
    
    
    20.2Fuel gallons (000,000)
    
    
    86.2
    
    
    
    88.9
    
    
    
    (3.1
    )
    
    
    170.4
    
    
    
    171.8
    
    
    
    (0.8
    )Average number of employees
    
    
    9,144
    
    
    
    10,255
    
    
    
    (10.8
    )
    
    
    9,180
    
    
    
    10,120
    
    
    
    (9.3
    )Aircraft utilization (blk hrs/day)
    
    
    10.7
    
    
    
    11.1
    
    
    
    (3.6
    )
    
    
    10.3
    
    
    
    10.7
    
    
    
    (3.7
    )Operating fleet at period-end
    
    
    109
    
    
    
    108
    
    
    
    0.9
    
    
    
    109
    
    
    
    108
    
    
    
    0.9
 
  19




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Note A:
   ($ in millions)
    
    Three Months Ended June 30,
    
    
    Six Months Ended June 30Unit cost reconciliations:
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Operating expenses
    
    $
    614.7
    
    
    $
    599.2
    
    
    $
    1,208.6
    
    
    
    1,138.5ASMs (000,000)
    
    
    5,543
    
    
    
    5,635
    
    
    
    10,913
    
    
    
    10,813Operating expenses per ASM
    
    
    11.09¢
    
    
    
    10.63¢
    
    
    
    11.07¢
    
    
    
    10.53¢Operating expenses
    
    $
    614.7
    
    
    $
    599.2
    
    
    $
    1,208.6
    
    
    $
    1,138.5Less: aircraft fuel
    
    
    (151.5
    )
    
    
    (112.6
    )
    
    
    (279.1
    )
    
    
    (206.2
    )Less: restructuring charges
    
    
    (14.7
    )
    
    
    
    
    
    
    (22.1
    )Less: impairment of aircraft
    
    
    
    
    
    
    (36.8
    )
    
    
    
    
    
    
    (36.8
    )Operating expense excluding fuel & restructuring charges
    
    $
    448.5
    
    
    $
    449.8
    
    
    $
    907.4
    
    
    $
    895.5ASMs (000,000)
    
    
    5,543
    
    
    
    5,635
    
    
    
    10,913
    
    
    
    10,813Operating expense per ASM excluding fuel
    
    
    8.09¢
    
    
    
    7.98¢
    
    
    
    8.31¢
    
    
    
    8.28¢Reconciliation from GAAP pre-tax income (loss):Pretax income (loss) reported GAAP amounts
    
    $
    22.1
    
    
    $
    (2.8
    )
    
    $
    37.5
    
    
    $
    (56.0
    )Less: mark-to-market hedging gains included
in nonoperating income (expense)
    
    
    (2.6
    )
    
    
    (19.6
    )
    
    
    (80.3
    )
    
    
    (20.1
    )Add: restructuring charges
    
    
    14.7
    
    
    
    
    
    
    
    22.1
    
    
    
    Less: impairment of aircraft and related spare parts
    
    
    
    
    
    
    36.8
    
    
    
    
    
    
    
    36.8Pretax loss excluding restructuring charges and
mark-to-market hedging gains
    
    $
    34.2
    
    
    $
    14.4
    
    
    $
    (20.7
    )
    
    $
    (39.3
    )
 Aircraft fuel reconciliations:
 Three Months Ended June 30,2005
    
    2004(in millions)
    
    Cost/Gal
    
    (in millions)
    
    Cost/GalFuel expense before hedge activities (raw or into-plane fuel cost)
    
    $
    154.7
    
    
    $
    1.80
    
    
    $
    117.0
    
    
    $
    1.32Less: gains on settled hedges included in fuel expense
    
    
    (3.2
    )
    
    
    (0.04
    )
    
    
    (4.4
    )
    
    
    (0.05
    )GAAP fuel expense
    
    $
    151.5
    
    
    $
    1.76
    
    
    $
    112.6
    
    
    $
    1.27Less: gains on settled hedges included in nonoperating
income (expense)
    
    
    (21.3
    )
    
    
    (0.25
    )
    
    
    (3.2
    )
    
    
    (0.04
    )Economic fuel expense
    
    $
    130.2
    
    
    $
    1.51
    
    
    $
    109.4
    
    
    $
    1.23Fuel gallons (000,000)
    
    
    86.2
    
    
    
    
    
    
    
    88.9Mark-to-market gains (losses) included in non-operating income
related to hedges that settle in future periods
    
    $
    2.6
    
    
    
    
    
    
    $
    19.6
 Six Months Ended June 30,2005
    
    2004(in millions)
    
    Cost/Gal
    
    (in millions)
    
    Cost/GalFuel expense before hedge activities (raw or into-plane fuel cost)
    
    $
    285.7
    
    
    $
    1.68
    
    
    $
    213.7
    
    
    $
    1.24Less: gains on settled hedges included in fuel expense
    
    
    (6.6
    )
    
    
    (0.04
    )
    
    
    (7.5
    )
    
    
    (0.04
    )GAAP fuel expense
    
    $
    279.1
    
    
    $
    1.64
    
    
    $
    206.2
    
    
    $
    1.20Less: gains on settled hedges included in nonoperating
income (expense)
    
    
    (37.0
    )
    
    
    (0.22
    )
    
    
    (3.2
    )
    
    
    (0.02
    )Economic fuel expense
    
    $
    242.1
    
    
    $
    1.42
    
    
    $
    203.0
    
    
    $
    1.18Fuel gallons (000,000)
    
    
    170.4
    
    
    
    
    
    
    
    171.8Mark-to-market gains (losses) included in non-operating income
related to hedges that settle in future periods
    
    $
    80.3
    
    
    
    
    
    
    $
    20.1
 20




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##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  www.alaskaair.com
 Second Quarter in Review and Current Events
   Labor Costs and Negotiations
  21




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##### Table of Contents



22




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##### Table of Contents



Mark-to-Market Fuel Hedging Gains
     Impairment of 737-200C Aircraft in 2004
  Aircraft Commitment
  23




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##### Table of Contents



Capacity
Outlook
   Results of Operations
 Comparison of Three Months Ended June 30, 2005 to Three Months Ended June 30, 2004
    Revenues
   24




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##### Table of Contents



Operating Expenses
   
    
    Wages and benefits decreased $21.7 million, or 10.7%, during the second quarter.
Wages have been favorably impacted by the restructuring initiatives announced in August
and September of 2004 and the reduction in pilot wages resulting from the arbitrators
decision in May 2005. Additionally, during the second quarter of 2005, we subcontracted
our ramp services operation in Seattle. We expect a greater year-over-year decline in
wages in the third quarter of 2005 as we see the full effect of some of these changes,
with the increase tapering down as we get into the fourth quarter. We estimate that
wages and benefits will decline approximately $34 million, or 16%, in the third quarter
and $19 million, or 10% in the fourth quarter as compared to the same periods in 2004 as
we complete a full year under some of the restructuring changes that were made in the fourth
quarter of the prior year. The period over period declines in wages and benefits are
partially offset by increases in contracted services and maintenance expense due to the
subcontracting of certain operations.
 25




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##### Table of Contents




    
    Contracted services increased $2.2 million, or 7.5%, due largely to the contracting
out of the Companys fleet service and ground service equipment and facility maintenance
in the fourth quarter of 2004, and the Seattle ramp operations in the second quarter of
2005. We expect a larger increase from prior year in the third and fourth quarters due
to the ramp service operations being subcontracted for the full quarters.
    
    Aircraft fuel increased $38.9 million, or 34.5%, due to a 38.8% increase in the GAAP
fuel cost per gallon, offset by a 3.1% decrease in fuel gallons consumed. The increase
in aircraft fuel expense is inclusive of $3.2 million of gains from settled hedges.
During the second quarter of 2005, Alaska also realized $21.3 million of gains from
settled hedges, which are recorded in other non-operating income. After including all
gains on settled hedges recorded during the quarter, our economic, or net, fuel expense
increased $20.8 million, or 19.0%, over the same period in 2004. Our economic fuel cost
per gallon increased 22.7% over the second quarter of 2004 from $1.23 to $1.51. At
current market prices, we expect that the cost per gallon in the third and fourth
quarters will meet or exceed second quarter levels.See page 20 for a table summarizing fuel cost per gallon realized by us (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.
    
    Aircraft maintenance increased $9.5 million, or 23.3%, due largely to our
power-by-the-hour maintenance agreement, whereby we expense B737-400 engine maintenance
on a flight-hour basis, regardless of whether the work was actually performed during the
period. Other factors causing the increase were the contracting out of related heavy
maintenance to third parties, which resulted in a shift of costs from wages and benefits
into aircraft maintenance, more airframe work and engine overhauls in 2005 compared to
2004, and the change in our accounting policy regarding engine and airframe overhauls
(see Note 2 to our condensed consolidated financial statements). We expect that
maintenance expense will be higher by $15 million and $6 million in the third and fourth
quarters of 2005, respectively, compared to the same periods in 2004 as a result of the
factors above and our decision to move the timing of some maintenance activities up from
2006.
    
    Aircraft rent increased $1.4 million, or 5.0%, due to the additional operating lease
on a B737-800 that was delivered in March 2005, offset by lower rates on extended leases.
    
    Food and beverage service expense decreased $1.5 million, or 11.5%, due primarily to
increased focus on cost reduction resulting in a decrease in average food and beverage
cost per passenger.
 26




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##### Table of Contents




    
    Landing fees and other rentals increased $5.2 million, or 14.7% despite a decrease in
the number of departures. The higher rates reflect increased rental costs, primarily in
Seattle, Portland and Los Angeles. We expect landing fees and other rentals to continue
to increase by 10% to 15% in the third and fourth quarters compared to 2004 as a result
of airport facility expansions and higher costs related to airport
security.
    
    Other expense increased $3.4 million, or 8.9%, primarily reflecting increases in
passenger remuneration costs, professional services costs, legal settlement costs and
personnel and crew costs.
 Nonoperating Income (Expense)
   Comparison of Six Months Ended June 30, 2005 to Six Months Ended June 30, 2004
   27




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##### Table of Contents



Revenues
     Expenses
   
    
    Wages and benefits decreased $22.8 million, or 5.6%, during the first six months of
2005 compared to the same period in 2004. Wages have been favorably impacted by the
restructuring initiatives announced in August and September of 2004 and the reduction in
pilot wages resulting from the arbitrators decision in May 2005. Additionally, during
the second quarter of 2005, we subcontracted our ramp services operation in Seattle.
During the first six months of 2005, there were 9,180 full-time equivalents (FTEs), which
is down by 940 FTEs from 2004.
 28




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##### Table of Contents




    
    Contracted services increased $6.9 million, or 13.1%, due largely to the contracting
out of the Companys fleet service and ground service equipment and facility maintenance
in the fourth quarter of 2004, and the Seattle ramp operations in May 2005.
    
    Aircraft fuel increased $72.9 million, or 35.4%, due to a 36.5% increase in the GAAP
fuel cost per gallon, offset by a 0.8% decrease in fuel gallons consumed. The increase
in aircraft fuel expense is inclusive of $6.6 million of gains from settled hedges.
During the first six months of 2005, Alaska also realized $37.0 million of gains from
settled hedges, which are recorded in other non-operating income. After including all
gains from settled hedges recorded during the period, our economic, or net, fuel
expense increased $39.1 million, or 19.3%, over the same period in 2004. Our economic
fuel cost per gallon increased 20.2% over the first six months of 2004 from $1.42 to
$1.18.See page 20 for a table summarizing 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.
    
    Aircraft maintenance increased $16.1 million, or 19.1%, due largely to our
power-by-the-hour maintenance agreement, whereby we expense B737-400 engine maintenance
on a flight-hour basis, regardless of whether the work was actually performed during the
period. Other factors causing the increase were the contracting out of related heavy
maintenance to third parties, which resulted in a shift of costs from wages and benefits
into aircraft maintenance, more airframe work and engine overhauls in 2005 compared to
2004, and the change in our accounting policy regarding engine and airframe overhauls
(see Note 2 to our condensed consolidated financial statements).
    
    Food and beverage service expense decreased $1.8 million, or 7.4%, due primarily to
increased focus on cost reduction resulting in a decrease in average food and beverage
cost per passenger.
    
    Other selling expenses and commissions decreased $1.3 million, or 2.0% due to a
decline in advertising expense, offset by increases in commissions and codeshare fees.
    
    Depreciation and amortization decreased $2.2 million, or 3.5%. In the second quarter
of 2004, we recorded an impairment charge of $36.8 million to reduce the carrying value
of the Boeing 737-200C fleet, which results in lower depreciation expense in future
periods. This is offset by the increased depreciation on two new owned aircraft
delivered during the first six months of 2005.
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##### Table of Contents




    
    Landing fees and other rentals increased $12.6 million, or 18.4%. The higher rates
reflect increased rental costs, primarily in Seattle, Portland and Los Angeles.
    
    Other expenses increased $4.1 million, or 5.4%, primarily reflecting increases in
passenger remuneration costs, professional services costs, legal settlement costs and
personnel and crew costs.
 Nonoperating Income (Expense
   Income Tax Expense (Benefit)
  Change in Accounting Policy
 capitalize and amortize direct expense
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Critical Accounting Estimates
  Liquidity and Capital Resources
  June 30, 2005
    
    
    December 31, 2004
    
    
    Change(In millions, except per share and debt-to-capital amounts)Cash and marketable securities
    
    $
    725.9
    
    
    $
    873.7
    
    
    $
    (147.8
    )Working capital
    
    
    132.6
    
    
    
    299.2
    
    
    
    (166.6
    )Long-term debt and
capital lease obligations
    
    
    771.0
    
    
    
    798.2
    
    
    
    (27.2
    )Shareholders equity
    
    
    616.3
    
    
    
    676.6
    
    
    
    (60.3
    )Long-term debt-to-capital
    
    
    56%:44
    %
    
    
    54%:46
    %
    
    NALong-term debt-to-capital assuming
aircraft operating leases are capitalized
at seven times annualized rent
    
    
    72%:28
    %
    
    
    70%:30
    %
    
    NA
  Cash Provided by Operating Activities
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Cash Used in Investing Activities
  Cash Used in Financing Activities
   Bank Line of Credit Facility
  Contractual Obligations, Commitments and Off-Balance Sheet Arrangements
 Aircraft Purchase Commitments
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##### Table of Contents



Delivery Period - Firm OrdersApril 1  December 31,
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    BeyondAircraft
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2009
    
    
    TotalBoeing 737-800
    
    
    1
    
    
    
    10
    
    
    
    8
    
    
    
    5
    
    
    
    3
    
    
    
    9
    
    
    
    36Payments (Millions)
    
    $
    62.2
    
    
    $
    311.3
    
    
    $
    231.4
    
    
    $
    169.5
    
    
    $
    119.9
    
    
    $
    261.2
    
    
    $
    1,155.5
 Contractual Obligations
 July 1  December 31,
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Beyond(in millions)
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2009
    
    
    TotalCurrent and long-term debt
and capital lease obligations
    
    $
    25.7
    
    
    $
    54.6
    
    
    $
    57.6
    
    
    $
    60.7
    
    
    $
    64.4
    
    
    $
    560.9
    
    
    $
    823.9Operating lease commitments
    
    
    100.2
    
    
    
    153.5
    
    
    
    132.9
    
    
    
    129.1
    
    
    
    118.5
    
    
    
    502.1
    
    
    
    1,136.3Aircraft purchase commitments
    
    
    62.2
    
    
    
    311.3
    
    
    
    231.4
    
    
    
    169.5
    
    
    
    119.9
    
    
    
    261.2
    
    
    
    1,155.5Interest obligations (1)
    
    
    23.2
    
    
    
    50.0
    
    
    
    49.1
    
    
    
    47.5
    
    
    
    45.2
    
    
    
    149.2
    
    
    
    364.2Other purchase obligations (2)
    
    
    13.6
    
    
    
    29.1
    
    
    
    29.4
    
    
    
    29.7
    
    
    
    30.0
    
    
    
    154.5
    
    
    
    286.3Total
    
    $
    224.9
    
    
    $
    598.5
    
    
    $
    500.4
    
    
    $
    436.5
    
    
    $
    378.0
    
    
    $
    1,627.9
    
    
    $
    3,766.2
 (1)
    
    For variable rate debt, future obligations are shown above using interest rates in effect as of
June 30, 2005.(2)
    
    Includes obligations under our long-term power-by-the-hour engine maintenance agreement. New Accounting Standards
  33




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##### Table of Contents



Effect of Inflation and Price Changes
  
 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
  Fuel Hedging
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##### Table of Contents



Financial Market Risk
  
 ITEM 4. Controls and Procedures
     
 PART II OTHER INFORMATION
 
 ITEM 1. Legal Proceedings
  35




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ITEM 6. Exhibits
  36




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##### Table of Contents



Signatures
  Alaska Airlines, Inc.RegistrantDate:
    
    August 5, 2005By:
    /s/ Brandon S. PedersenBrandon S. PedersenStaff Vice President/Finance and ControllerBy:
    /s/ Bradley D. TildenBradley D. TildenExecutive Vice President/Finance and Chief Financial Officer
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##### Table of Contents



EXHIBIT INDEX
   Exhibit No.
    
    Description10.1 (1)
    
    Aircraft General Terms Agreement dated June 15, 2005, between the Boeing Company and
Alaska Airlines, Inc.*10.2 (1)
    
    Purchase Agreement No. 2497 dated June 15, 2005, between the Boeing Company and Alaska
Airlines, Inc.*31.1 (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.*
    
    Pursuant to 17 CFR 240.24b-2, confidential information has been omitted and has been filed
separately with the Securities and Exchange Commission pursuant to a Confidential Treatment
Application filed with the Commission. 38