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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549


FORM 10-Q

|                                                   |  |                                                                                         
|-------------------------------------------------- |  | ----------------------------------------------------------------------------------------
|(Mark One)                                        
|(X)                                                |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|For the quarterly period ended September 30, 2003.
|OR                                                
|(  )                                               |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from  to


Commission file number 1-8957

ALASKA AIRLINES, INC.

(Exact name of registrant as specified in its charter)


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

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

Registrants telephone number, including area code: (206) 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 (X)  No (  )

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes (X)  No (  )

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

The registrant has 500 common shares, par value $1.00, outstanding at
October 31, 2003.





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TABLE OF CONTENTS



|                             |                                                                                               |  |  |  |  |  |  | 
|---------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I. FINANCIAL STATEMENTS
|                             | ITEM 1. Financial Statements                                                                 
|                             | ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                             | ITEM 3. Quantitative and Qualitative Disclosure about Market Risk                            
|                             | ITEM 4. Controls and Procedures                                                              
|PART II. OTHER INFORMATION  
|                             | ITEM 1. Legal Proceedings                                                                    
|                             | ITEM 6. Exhibits and Reports on Form 8-K                                                     
|Signatures                  
|EXHIBIT INDEX               
|EXHIBIT 31.1                
|EXHIBIT 31.2                
|EXHIBIT 32.1                
|EXHIBIT 32.2                



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##### Table of Contents



TABLE OF CONTENTS

|           |  |                                                                                      
|---------- |  | -------------------------------------------------------------------------------------
|           |  | PART I. FINANCIAL INFORMATION                                                        
|Item 1.    |  | Financial Statements                                                                 
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and
Results of Operations
|Item 3.    |  | Quantitative and Qualitative Disclosure About Market Risk                            
|Item 4.    |  | Controls and Procedures                                                              
|           |  | PART II. OTHER INFORMATION                                                           
|Item 1.    |  | Legal Proceedings                                                                    
|Item 6.    |  | Exhibits and Reports on Form 8-K                                                     
|Signatures

Cautionary Note regarding Forward-Looking Statements

In addition to historical information, this Quarterly Report on Form 10-Q 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. These statements relate to future events or our future financial
performance and involve known and unknown risks and uncertainties that may
cause our actual results or performance to be materially different from those
indicated by any forward-looking statements. 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: economic
conditions; the continued impact of terrorist attacks, global instability and
potential U.S. military involvement; our significant indebtedness; downgrades
of our credit ratings; the competitive environment and other trends in our
industry; changes in laws and regulations; changes in our operating costs
including fuel; changes in our business plans; interest rates and the
availability of financing; liability and other claims asserted against us;
labor disputes; our ability to attract and retain qualified personnel; and
inflation. For a discussion of these and other risk factors, review the
information under the caption Risk Factors in Amendment No. 1 to our
Registration Statement on Form S-1 filed August 23, 2003 as well as Item 1 of
the Companys Annual Report on Form 10-K for the year ended December 31, 2002.
All of the forward-looking statements are qualified in their entirety by
reference to the risk factors discussed therein. These risk factors may not be
exhaustive. We operate in a continually changing business environment, and new
risk factors emerge from time to time. Management cannot predict such new risk
factors, nor can it assess the impact, if any, of such new risk factors on our
business or events described in any forward-looking statements. We disclaim any
obligation to publicly update or revise any forward-looking statements after
the date of this report to conform them to actual results.

2



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PART I. FINANCIAL STATEMENTS
ITEM 1. Financial Statements
BALANCE SHEETS (unaudited)
Alaska Airlines, Inc.

ASSETS

|                                               |  |              |         |               |  |   |         | 
|---------------------------------------------- |  | ------------ | ------- | ------------- |  | - | ------- | 
|                                               |  | December 31, |         | September 30,
|(In Millions)                                  |  | 2002         |         | 2003         
|                                               |  |              |         |              
|Current Assets                                 |  |              |         |               |  |   |         | 
|Cash and cash equivalents                      |  | $            | 268.9   |               |  | $ | 221.3   | 
|Marketable securities                          |  |              | 366.8   |               |  |   | 526.9   | 
|Receivables from related companies             |  |              | 126.7   |               |  |   | 154.3   | 
|Receivables  -  net                            |  |              | 81.8    |               |  |   | 97.6    | 
|Inventories and supplies  -  net               |  |              | 38.3    |               |  |   | 34.8    | 
|Deferred income taxes                          |  |              | 60.2    |               |  |   | 83.9    | 
|Prepaid expenses and other current assets      |  |              | 47.5    |               |  |   | 34.9    | 
|                                               |  |              |         |               |  |   |         | 
|Total Current Assets                           |  |              | 990.2   |               |  |   | 1,153.7 | 
|                                               |  |              |         |               |  |   |         | 
|Property and Equipment                         |  |              |         |               |  |   |         | 
|Flight equipment                               |  |              | 1,945.5 |               |  |   | 2,183.1 | 
|Other property and equipment                   |  |              | 359.3   |               |  |   | 376.7   | 
|Deposits for future flight equipment           |  |              | 64.7    |               |  |   | 32.6    | 
|                                               |  |              |         |               |  |   |         | 
|                                               |  |              | 2,369.5 |               |  |   | 2,592.4 | 
|Less accumulated depreciation and amortization |  |              | 709.4   |               |  |   | 788.6   | 
|                                               |  |              |         |               |  |   |         | 
|Total Property and Equipment -  Net            |  |              | 1,660.1 |               |  |   | 1,803.8 | 
|                                               |  |              |         |               |  |   |         | 
|Intangible Assets                              |  |              | 50.9    |               |  |   | 50.9    | 
|                                               |  |              |         |               |  |   |         | 
|Other Assets                                   |  |              | 49.9    |               |  |   | 64.3    | 
|                                               |  |              |         |               |  |   |         | 
|Total Assets                                   |  | $            | 2,751.1 |               |  | $ | 3,072.7 | 
|                                               |  |              |         |               |  |   |         | 

See accompanying notes to financial statements.

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BALANCE SHEETS (unaudited)
Alaska Airlines, Inc.

LIABILITIES AND SHAREHOLDERS EQUITY

|                                                                |                                    |      |              |       |               |   |         |       | 
|--------------------------------------------------------------- | ---------------------------------- | ---- | ------------ | ----- | ------------- | - | ------- | ----- | 
|                                                                |                                    |      | December 31, |       | September 30,
|(In Millions)                                                   |                                    | 2002 |              | 2003 
|                                                                |                                    |      |              |      
|Current Liabilities                                             |                                    |      |              |       |               |   |         |      
|Accounts payable                                                |                                    | $    | 118.5        |       |               | $ | 106.5   |      
|Payables to related companies                                   |                                    |      | 1.7          |       |               |   | 3.8     |      
|Accrued aircraft rent                                           |                                    |      | 67.5         |       |               |   | 64.9    |      
|Accrued wages, vacation and payroll taxes                       |                                    |      | 76.3         |       |               |   | 74.9    |      
|Other accrued liabilities                                       |                                    |      | 226.5        |       |               |   | 263.6   |      
|Air traffic liability                                           |                                    |      | 211.1        |       |               |   | 265.3   |      
|Current portion of long-term debt and
capital lease obligations |                                    |      | 48.6         |       |               |   | 55.7    |      
|                                                                |                                    |      |              |       |               |   |         |      
|Total Current Liabilities                                       |                                    |      | 750.2        |       |               |   | 834.7   |      
|                                                                |                                    |      |              |       |               |   |         |      
|Long-Term Debt and Capital Lease Obligations                    |                                    |      | 856.7        |       |               |   | 954.6   |      
|                                                                |                                    |      |              |       |               |   |         |      
|Other Liabilities and Credits                                   |                                    |      |              |       |               |   |         |      
|Deferred income taxes                                           |                                    |      | 153.7        |       |               |   | 193.3   |      
|Deferred revenue                                                |                                    |      | 224.5        |       |               |   | 232.1   |      
|Other liabilities                                               |                                    |      | 196.3        |       |               |   | 210.2   |      
|                                                                |                                    |      |              |       |               |   |         |      
|                                                                |                                    |      | 574.5        |       |               |   | 635.6   |      
|                                                                |                                    |      |              |       |               |   |         |      
|Shareholders Equity                                            |                                    |      |              |       |               |   |         |      
|Common stock, $1 par value                                      |                                    |      |              |       |               |   |         |      
|                                                                | Authorized: 1,000 shares           |      |              |       |               |   |         |       | 
|                                                                | Issued: 2001 and 2002 - 500 shares |      |              |      |               |   |         |      | 
|                                                                | Capital in excess of par value     |      |              | 324.8 |               |   |         | 384.8 | 
|Accumulated other comprehensive income (loss)                   |                                    |      | (82.0        | )     |               |   | (85.2   | )    
|Retained earnings                                               |                                    |      | 326.9        |       |               |   | 348.2   |      
|                                                                |                                    |      |              |       |               |   |         |      
|                                                                |                                    |      | 569.7        |       |               |   | 647.8   |      
|                                                                |                                    |      |              |       |               |   |         |      
|Total Liabilities and Shareholders Equity                      |                                    | $    | 2,751.1      |       |               | $ | 3,072.7 |      
|                                                                |                                    |      |              |       |               |   |         |      

See accompanying notes to financial statements.

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STATEMENTS OF OPERATIONS (unaudited)
Alaska Airlines, Inc.

|                                |  |      |       |      |  |   |       |  
|------------------------------- |  | ---- | ----- | ---- |  | - | ----- | -
|Three Months Ended September 30 |  |      |       |      |  |   |       |  
|(In Millions)                   |  | 2002 |       | 2003
|                                |  |      |       |     
|Operating Revenues              |  |      |       |      |  |   |       |  
|Passenger                       |  | $    | 468.0 |      |  | $ | 532.5 |  
|Freight and mail                |  |      | 19.7  |      |  |   | 21.4  |  
|Other  -  net                   |  |      | 24.7  |      |  |   | 31.4  |  
|                                |  |      |       |      |  |   |       |  
|Total Operating Revenues        |  |      | 512.4 |      |  |   | 585.3 |  
|                                |  |      |       |      |  |   |       |  
|Operating Expenses              |  |      |       |      |  |   |       |  
|Wages and benefits              |  |      | 184.9 |      |  |   | 198.7 |  
|Contracted services             |  |      | 18.9  |      |  |   | 20.5  |  
|Aircraft fuel                   |  |      | 70.7  |      |  |   | 81.6  |  
|Aircraft maintenance            |  |      | 31.6  |      |  |   | 35.2  |  
|Aircraft rent                   |  |      | 32.1  |      |  |   | 31.1  |  
|Food and beverage service       |  |      | 17.8  |      |  |   | 17.0  |  
|Commissions                     |  |      | 13.2  |      |  |   | 17.6  |  
|Other selling expenses          |  |      | 26.1  |      |  |   | 25.8  |  
|Depreciation and amortization   |  |      | 29.2  |      |  |   | 29.7  |  
|Loss on sale of assets          |  |      | 0.5   |      |  |   | 0.8   |  
|Landing fees and other rentals  |  |      | 30.1  |      |  |   | 33.6  |  
|Other                           |  |      | 38.5  |      |  |   | 34.5  |  
|                                |  |      |       |      |  |   |       |  
|Total Operating Expenses        |  |      | 493.6 |      |  |   | 526.1 |  
|                                |  |      |       |      |  |   |       |  
|Operating Income                |  |      | 18.8  |      |  |   | 59.2  |  
|                                |  |      |       |      |  |   |       |  
|Nonoperating Income (Expense)   |  |      |       |      |  |   |       |  
|Interest income                 |  |      | 6.4   |      |  |   | 4.6   |  
|Interest expense                |  |      | (11.3 | )    |  |   | (11.2 | )
|Interest capitalized            |  |      | 0.5   |      |  |   | 0.2   |  
|U.S. government compensation    |  |      | 0.2   |      |  |   |      |  
|Other  -  net                   |  |      | (1.5  | )    |  |   | (2.7  | )
|                                |  |      |       |      |  |   |       |  
|                                |  |      | (5.7  | )    |  |   | (9.1  | )
|                                |  |      |       |      |  |   |       |  
|Income before income tax        |  |      | 13.1  |      |  |   | 50.1  |  
|Income tax expense              |  |      | 4.2   |      |  |   | 20.5  |  
|                                |  |      |       |      |  |   |       |  
|Net Income                      |  | $    | 8.9   |      |  | $ | 29.6  |  
|                                |  |      |       |      |  |   |       |  

See accompanying notes to financial statements.

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STATEMENTS OF OPERATIONS (unaudited)
Alaska Airlines, Inc.

|                                                            |  |      |         |      |  |   |         |  
|----------------------------------------------------------- |  | ---- | ------- | ---- |  | - | ------- | -
|Nine Months Ended September 30                              |  |      |         |      |  |   |         |  
|(In Millions)                                               |  | 2002 |         | 2003
|                                                            |  |      |         |     
|Operating Revenues                                          |  |      |         |      |  |   |         |  
|Passenger                                                   |  | $    | 1,275.5 |      |  | $ | 1,380.1 |  
|Freight and mail                                            |  |      | 55.6    |      |  |   | 59.8    |  
|Other  -  net                                               |  |      | 72.2    |      |  |   | 83.0    |  
|                                                            |  |      |         |      |  |   |         |  
|Total Operating Revenues                                    |  |      | 1,403.3 |      |  |   | 1,522.9 |  
|                                                            |  |      |         |      |  |   |         |  
|Operating Expenses                                          |  |      |         |      |  |   |         |  
|Wages and benefits                                          |  |      | 524.1   |      |  |   | 578.7   |  
|Contracted services                                         |  |      | 59.8    |      |  |   | 60.9    |  
|Aircraft fuel                                               |  |      | 190.1   |      |  |   | 227.6   |  
|Aircraft maintenance                                        |  |      | 103.3   |      |  |   | 117.7   |  
|Aircraft rent                                               |  |      | 95.7    |      |  |   | 92.8    |  
|Food and beverage service                                   |  |      | 47.9    |      |  |   | 44.8    |  
|Commissions                                                 |  |      | 43.9    |      |  |   | 38.0    |  
|Other selling expenses                                      |  |      | 78.8    |      |  |   | 71.0    |  
|Depreciation and amortization                               |  |      | 85.7    |      |  |   | 87.8    |  
|Loss on sale of assets                                      |  |      | 0.7     |      |  |   | 1.3     |  
|Landing fees and other rentals                              |  |      | 82.2    |      |  |   | 93.5    |  
|Other                                                       |  |      | 111.3   |      |  |   | 102.9   |  
|                                                            |  |      |         |      |  |   |         |  
|Total Operating Expenses                                    |  |      | 1,423.5 |      |  |   | 1,517.0 |  
|                                                            |  |      |         |      |  |   |         |  
|Operating Income (Loss)                                     |  |      | (20.2   | )    |  |   | 5.9     |  
|                                                            |  |      |         |      |  |   |         |  
|Nonoperating Income (Expense)                               |  |      |         |      |  |   |         |  
|Interest income                                             |  |      | 17.5    |      |  |   | 10.3    |  
|Interest expense                                            |  |      | (35.0   | )    |  |   | (33.9   | )
|Interest capitalized                                        |  |      | 1.0     |      |  |   | 1.3     |  
|U.S. government compensation                                |  |      | 0.3     |      |  |   | 52.8    |  
|Other  -  net                                               |  |      | 7.7     |      |  |   | 2.7     |  
|                                                            |  |      |         |      |  |   |         |  
|                                                            |  |      | (8.5    | )    |  |   | 33.2    |  
|                                                            |  |      |         |      |  |   |         |  
|Income (loss) before income tax and accounting change       |  |      | (28.7   | )    |  |   | 39.1    |  
|Income tax expense (benefit)                                |  |      | (9.9    | )    |  |   | 17.8    |  
|                                                            |  |      |         |      |  |   |         |  
|Income (loss) before cumulative effect of accounting change |  |      | (18.8   | )    |  |   | 21.3    |  
|Cumulative effect of accounting change                      |  |      | (12.5   | )    |  |   |        |  
|                                                            |  |      |         |      |  |   |         |  
|Net Income (Loss)                                           |  | $    | (31.3   | )    |  | $ | 21.3    |  
|                                                            |  |      |         |      |  |   |         |  

See accompanying notes to financial statements.

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

|                                                        |                                   |       |        |           |           |               |               |          |          |       |             |       |   |   |       |  |  |   |       |   | 
|------------------------------------------------------- | --------------------------------- | ----- | ------ | --------- | --------- | ------------- | ------------- | -------- | -------- | ----- | ----------- | ----- | - | - | ----- |  |  | - | ----- | - | 
|                                                        |                                   |       |        |           |           |               |               |          |          |       | Accumulated |       |   |   |       |  |  |   |      
|                                                        |                                   |       |        |           |           |               | Capital in    |          | Other    |       |             |       |   |   |       |  | 
|                                                        |                                   |       | Common |           | Excess of |               | Comprehensive |          | Retained |       |             |       |  
|(In Millions)                                           |                                   | Stock |        | Par Value |           | Income (Loss) |               | Earnings |          | Total
|                                                        |                                   |       |        |           |           |               |               |          |          |      
|Balances at December 31, 2002                           |                                   | $     |       |           |           | $             | 324.8         |          |          | $     | (82.0       | )     |   | $ | 326.9 |  |  | $ | 569.7 |  
|                                                        |                                   |       |        |           |           |               |               |          |          |       |             |       |   |   |       |  |  |   |       |  
|Net income for the nine months
ended September 30, 2003 |                                   |       |        |           |           |               |               |          |          |       |             |       |   |   | 21.3  |  |  |   | 21.3  |  
|Other comprehensive income (loss):                      |                                   |       |        |           |           |               |               |          |          |       |             |       |   |   |       |  |  |   |       |  
|                                                        | Related to marketable securities: |       |        |           |           |               |               |          |          |       |             |       |   |   |       |  |  |   |       |   | 
|                                                        | Change in fair value              |       |        |           |           |               |               |          |          |       |             | (3.6  | ) |   |       |  |  |   |       |   | 
|                                                        | Reclassification to earnings      |       |        |           |           |               |               |          |          |       |             | 3.8   |   |   |       |  |  |   |       |   | 
|                                                        | Income tax effect                 |       |        |           |           |               |               |          |          |       |             | (0.1  | ) |   |       |  |  |   |       |   | 
|                                                        |                                   |       |        |           |           |               |               |          |          |       |             |       |   |   |       |  |  |   |       |  
|                                                        |                                   |       |        |           |           |               |               |          |          |       | 0.1         |       |   |   |       |  |  |   | 0.1   |  
|                                                        |                                   |       |        |           |           |               |               |          |          |       |             |       |   |   |       |  |  |   |       |  
|                                                        | Related to fuel hedges:           |       |        |           |           |               |               |          |          |       |             |       |   |   |       |  |  |   |       |   | 
|                                                        | Change in fair value              |       |        |           |           |               |               |          |          |       |             | 13.2  |   |   |       |  |  |   |       |   | 
|                                                        | Reclassification to earnings      |       |        |           |           |               |               |          |          |       |             | (18.6 | ) |   |       |  |  |   |       |   | 
|                                                        | Income tax effect                 |       |        |           |           |               |               |          |          |       |             | 2.1   |   |   |       |  |  |   |       |   | 
|                                                        |                                   |       |        |           |           |               |               |          |          |       |             |       |   |   |       |  |  |   |       |  
|                                                        |                                   |       |        |           |           |               |               |          |          |       | (3.3        | )     |   |   |       |  |  |   | (3.3  | )
|                                                        |                                   |       |        |           |           |               |               |          |          |       |             |       |   |   |       |  |  |   |       |  
|Total comprehensive loss                                |                                   |       |        |           |           |               |               |          |          |       |             |       |   |   |       |  |  |   | 18.1  |  
|Capital contribution from Air Group                     |                                   |       |        |           |           |               | 60.0          |          |          |       |             |       |   |   |       |  |  |   | 60.0  |  
|                                                        |                                   |       |        |           |           |               |               |          |          |       |             |       |   |   |       |  |  |   |       |  
|Balances at September 30, 2003                          |                                   | $     |       |           |           | $             | 384.8         |          |          | $     | (85.2       | )     |   | $ | 348.2 |  |  | $ | 647.8 |  
|                                                        |                                   |       |        |           |           |               |               |          |          |       |             |       |   |   |       |  |  |   |       |  

See accompanying notes to financial statements.

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

|                                                                                |                                      |                                                       |        |       |       |   |        |        |       |  
|------------------------------------------------------------------------------- | ------------------------------------ | ----------------------------------------------------- | ------ | ----- | ----- | - | ------ | ------ | ----- | -
|Nine Months Ended September 30                                                  |                                      |                                                       |        |       |       |   |        |       
|(In Millions)                                                                   |                                      | 2002                                                  |        | 2003 
|                                                                                |                                      |                                                       |        |      
|Cash flows from operating activities:                                           |                                      |                                                       |        |       |       |   |        |       
|Net income (loss)                                                               |                                      | $                                                     | (31.3  | )     |       | $ | 21.3   |       
|Adjustments to reconcile net loss to
net cash provided by operating activities: |                                      |                                                       |        |       |       |   |        |       
|                                                                                |                                      | Cumulative effect of accounting change                |        |       | 12.5  |   |        |        |      |  
|                                                                                |                                      | Depreciation and amortization                         |        |       | 85.9  |   |        |        | 87.8  |  
|                                                                                |                                      | Amortization of airframe and engine overhauls         |        |       | 44.8  |   |        |        | 44.0  |  
|                                                                                |                                      | Loss (gain) on marketable securities                  |        |       |      |   |        |        | (0.1  | )
|                                                                                |                                      | Changes in derivative fair values                     |        |       | (4.7  | ) |        |        | 1.4   |  
|                                                                                |                                      | Loss on sale of assets                                |        |       | 0.7   |   |        |        | 1.3   |  
|                                                                                |                                      | Decrease in deferred income taxes                     |        |       | (10.3 | ) |        |        | 17.9  |  
|                                                                                |                                      | Increase in accounts receivable - net                 |        |       | (30.6 | ) |        |        | (43.1 | )
|                                                                                |                                      | Decrease in prepaid expenses and other current assets |        |       | 10.2  |   |        |        | 5.1   |  
|                                                                                |                                      | Increase in air traffic liability                     |        |       | 11.3  |   |        |        | 54.2  |  
|                                                                                |                                      | Increase (decrease) in other current liabilities      |        |       | (3.0  | ) |        |        | 23.3  |  
|                                                                                |                                      | Increase in deferred revenue and other-net            |        |       | 34.0  |   |        |        | 23.0  |  
|                                                                                |                                      |                                                       |        |       |       |   |        |       
|Net cash provided by operating activities                                       |                                      |                                                       | 119.5  |       |       |   | 236.1  |       
|                                                                                |                                      |                                                       |        |       |       |   |        |       
|Cash flows from investing activities:                                           |                                      |                                                       |        |       |       |   |        |       
|Proceeds from disposition of assets                                             |                                      |                                                       | 1.2    |       |       |   | 0.5    |       
|Purchases of marketable securities                                              |                                      |                                                       | (457.1 | )     |       |   | (695.3 | )     
|Sales and maturities of marketable securities                                   |                                      |                                                       | 275.7  |       |       |   | 535.3  |       
|Property and equipment additions:                                               |                                      |                                                       |        |       |       |   |        |       
|                                                                                | Aircraft purchase deposits           |                                                       |        | (18.6 | )     |   |        | (7.5   | )    
|                                                                                | Capitalized overhauls                |                                                       |        | (35.6 | )     |   |        | (45.4  | )    
|                                                                                | Aircraft                             |                                                       |        | (36.8 | )     |   |        | (194.4 | )    
|                                                                                | Other flight equipment               |                                                       |        | (5.8  | )     |   |        | (8.9   | )    
|                                                                                | Other property                       |                                                       |        | (32.3 | )     |   |        | (21.6  | )    
|Aircraft deposits returned                                                      |                                      |                                                       | 22.4   |       |       |   | 1.2    |       
|Restricted deposits and other                                                   |                                      |                                                       | (13.4  | )     |       |   | (12.6  | )     
|                                                                                |                                      |                                                       |        |       |       |   |        |       
|Net cash used in investing activities                                           |                                      |                                                       | (300.3 | )     |       |   | (448.7 | )     
|                                                                                |                                      |                                                       |        |       |       |   |        |       
|Cash flows from financing activities:                                           |                                      |                                                       |        |       |       |   |        |       
|Proceeds from issuance of long-term debt                                        |                                      |                                                       | 25.5   |       |       |   | 160.6  |       
|Long-term debt and capital lease payments                                       |                                      |                                                       | (26.8  | )     |       |   | (55.6  | )     
|Capital contribution from Air Group                                             |                                      |                                                       |       |       |       |   | 60.0   |       
|                                                                                |                                      |                                                       |        |       |       |   |        |       
|Net cash provided by financing activities                                       |                                      |                                                       | (1.3   | )     |       |   | 165.0  |       
|                                                                                |                                      |                                                       |        |       |       |   |        |       
|Net change in cash and cash equivalents                                         |                                      |                                                       | (182.1 | )     |       |   | (47.6  | )     
|Cash and cash equivalents at beginning of period                                |                                      |                                                       | 490.7  |       |       |   | 268.9  |       
|                                                                                |                                      |                                                       |        |       |       |   |        |       
|Cash and cash equivalents at end of period                                      |                                      | $                                                     | 308.6  |       |       | $ | 221.3  |       
|                                                                                |                                      |                                                       |        |       |       |   |        |       
|Supplemental disclosure of cash paid (refunded) during the period for:          |                                      |                                                       |        |       |       |   |        |       
|                                                                                | Interest (net of amount capitalized) |                                                       | $      | 32.1  |       |   | $      | 30.2   |      
|                                                                                | Income taxes                         |                                                       |        | (16.1 | )     |   |        |       |      

See accompanying notes to financial statements.

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



Note 1. Basis of Presentation and Significant Accounting Policies

The accompanying unaudited interim financial statements of Alaska Airlines,
Inc. (Alaska) should be read in conjunction with the consolidated financial
statements in our Annual Report on Form 10-K for the year ended December 31,
2002. As used in these Notes to Financial Statements, the terms we, us,
our and similar terms refer to Alaska. These interim financial statements are
unaudited and should be read in conjunction with the financial statements in
our Annual Report on Form 10-K for the year ended December 31, 2002. In the
opinion of management, all adjustments have been made which are necessary to
present fairly our financial position as of September 30, 2003, as well as the
results of our operations for the three and nine months ended September 30,
2002 and 2003. The adjustments made were of a normal recurring nature. We are
a wholly owned subsidiary of Alaska Air Group, Inc. (Air Group), whose
principal subsidiaries are Alaska and Horizon Air Industries, Inc. (Horizon).

Our financial statements have been prepared in conformity with accounting
principles generally accepted in the United States of America (GAAP) and we are
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 by us
include assumptions used to record liabilities, expenses and revenue associated
with our Mileage Plan, estimated useful lives of property and equipment and the
amounts of certain accrued liabilities. Actual results may differ from our
estimates.

Change in Accounting Principle

Effective January 1, 2002, we adopted Statement of Financial Accounting
Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. In
connection with the adoption of this statement, we determined that all of our
goodwill was impaired. As a result, effective January 1, 2002, we recorded a
one-time, non-cash charge of $12.5 million to write-off all of our goodwill.
This charge is reflected as a cumulative effect of accounting change in our
statement of operations for the nine months ended September 30, 2002.

New Accounting Standards

In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities,
which requires the consolidation of variable interest entities, as defined. A
variable interest entity is one in which a company absorbs a majority of the
entitys expected losses, receives a majority of the entitys expected returns,
or both, as a result of ownership, contractual or other financial interests in
the entity. The principal characteristics of variable interest entities are (1)
an insufficient amount of equity to absorb the entitys expected losses, (2)
equity owners as a group are not able to make decisions about the entitys
activities, or (3) equity that does not absorb the entitys losses or receive
the entitys residual returns. This Interpretation is currently applicable to
variable interest entities created after January 31, 2003. In October 2003,
the FASB agreed to defer the effective date of FIN 46 to December 31, 2003 for
variable interests held by public companies in entities that existed prior to
February 1, 2003. This deferral is to allow time for implementation issues to
be addressed through the issuance of a potential modification to the
interpretation. The deferral revised the effective date for consolidation of
these entities to the period ended December 31, 2003 for

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calendar year end
companies. While we are still evaluating the impact of this Interpretation, we
currently do not believe that any entities will be consolidated as a result of
Interpretation No. 46.

Note 2. Stock Option Plans

We have three stock option plans that provide for the grant of options to
purchase Air Group common stock at stipulated prices on the date of the grant
to officers and employees of Air Group and its subsidiaries. We
apply 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 of net income (loss) before
accounting change and net income (loss) if we had applied the fair value based
method and recognition provisions of SFAS No. 123 to our stock-based employee
compensation (in millions):

|                                                                                                                                             |  |                    |      |                   |  |      |      |      |  |   |       |   |  |   |      |  
|-------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ---- | ----------------- |  | ---- | ---- | ---- |  | - | ----- | - |  | - | ---- | -
|                                                                                                                                             |  | Three Months Ended |      | Nine Months Ended
|                                                                                                                                             |  | September 30,      |      | September 30,    
|                                                                                                                                             |  | 2002               |      | 2003              |  | 2002 |      | 2003
|                                                                                                                                             |  |                    |      |                   |  |      |      |     
|Income (loss) before accounting change:                                                                                                      |  |                    |      |                   |  |      |      |      |  |   |       |   |  |   |      |  
|As reported                                                                                                                                  |  | $                  | 8.9  |                   |  | $    | 29.6 |      |  | $ | (18.8 | ) |  | $ | 21.3 |  
|Deduct: Total stock-based employee
compensation expense determined
under fair value based methods for
all awards, net of related tax         |  |                    | (1.2 | )                 |  |      | (1.1 | )    |  |   | (3.6  | ) |  |   | (3.7 | )
|                                                                                                                                             |  |                    |      |                   |  |      |      |      |  |   |       |   |  |   |      |  
|Pro forma income (loss) before
accounting change                                                                                             |  | $                  | 7.7  |                   |  | $    | 28.5 |      |  | $ | (22.4 | ) |  | $ | 17.6 |  
|                                                                                                                                             |  |                    |      |                   |  |      |      |      |  |   |       |   |  |   |      |  
|Net income (loss):                                                                                                                           |  |                    |      |                   |  |      |      |      |  |   |       |   |  |   |      |  
|As reported                                                                                                                                  |  | $                  | 8.9  |                   |  | $    | 29.6 |      |  | $ | (31.3 | ) |  |   | 21.3 |  
|Deduct: Total stock-based employee
compensation expense determined
under fair value based methods for
all awards, net of related tax effects |  |                    | (1.2 | )                 |  |      | (1.1 | )    |  |   | (3.6  | ) |  |   | (3.7 | )
|                                                                                                                                             |  |                    |      |                   |  |      |      |      |  |   |       |   |  |   |      |  
|Pro forma net income (loss)                                                                                                                  |  | $                  | 7.7  |                   |  | $    | 28.5 |      |  | $ | (34.9 | ) |  | $ | 17.6 |  
|                                                                                                                                             |  |                    |      |                   |  |      |      |      |  |   |       |   |  |   |      |  

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure. SFAS No. 148 amends the transition
and disclosure provisions of SFAS No. 123. During the fourth quarter of 2002,
we adopted the disclosure provisions of SFAS No. 148 and we are currently
evaluating SFAS No. 148 to determine if we will adopt SFAS No. 123 to account
for employee stock options using the fair value method and, if so, when we will
transition to that method. If we had adopted the prospective transition method
as prescribed by SFAS No. 148 in the third quarter of 2003, compensation
expense of $0.2 million and $0.5 million would have been recorded on an
after-tax basis for the three and nine months ended September 30, 2003,
respectively.

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Note 3. Frequent Flyer Program

Alaskas Mileage Plan liabilities are included under the following balance sheet captions (in millions):

|                                             |  |                   |       |                    |  |   |       | 
|-------------------------------------------- |  | ----------------- | ----- | ------------------ |  | - | ----- | 
|                                             |  | December 31, 2002 |       | September 30, 2003
|                                             |  |                   |       |                   
|Current Liabilities:                         |  |                   |       |                    |  |   |       | 
|Other accrued liabilities                    |  | $                 | 87.0  |                    |  | $ | 106.3 | 
|Other Liabilities and Credits (non-current): |  |                   |       |                    |  |   |       | 
|Deferred revenue                             |  |                   | 183.9 |                    |  |   | 192.6 | 
|Other liabilities                            |  |                   | 32.1  |                    |  |   | 23.7  | 
|                                             |  |                   |       |                    |  |   |       | 
|Total                                        |  | $                 | 303.0 |                    |  | $ | 322.6 | 
|                                             |  |                   |       |                    |  |   |       | 

Note 4. Long-Term Debt and Capital Lease Obligations

At December 31, 2002, and September 30, 2003, long-term debt and capital lease
obligations were as follows (in millions):

|                                             |  |              |       |               |  |   |         |  
|-------------------------------------------- |  | ------------ | ----- | ------------- |  | - | ------- | -
|                                             |  | December 31, |       | September 30,
|                                             |  | 2002         |       | 2003         
|                                             |  |              |       |              
|Fixed rate notes payable due through 2015    |  | $            | 439.9 |               |  | $ | 396.7   |  
|Variable rate notes payable due through 2018 |  |              | 453.6 |               |  |   | 541.6   |  
|Senior convertible notes due through 2023    |  |              |      |               |  |   | 63.6    |  
|                                             |  |              |       |               |  |   |         |  
|Long-term debt                               |  |              | 893.5 |               |  |   | 1,001.9 |  
|Capital lease obligations                    |  |              | 11.8  |               |  |   | 8.4     |  
|Less current portion                         |  |              | (48.6 | )             |  |   | (55.7   | )
|                                             |  |              |       |               |  |   |         |  
|                                             |  | $            | 856.7 |               |  | $ | 954.6   |  
|                                             |  |              |       |               |  |   |         |  

During the first nine months of 2003, we issued $97.0 million ($65.0 million in
the second quarter of 2003 and $32.0 million in the third quarter of 2003) of
debt secured by flight equipment, having interest rates that vary with LIBOR
and payment terms ranging from 12 to 15 years.

On March 21, 2003, we received $63.6 million under a note with Air Group in
connection with the issuance of senior notes due in 2023 (the Notes). The
Notes bear interest for the first five years from the date of issuance at a
variable rate of 3-month LIBOR plus 2.5% (3.64% at September 30, 2003). This
interest is paid quarterly in arrears. Thereafter, the Notes will cease bearing
cash interest and instead, the principal value of the Notes will increase daily
by the unpaid interest which will be calculated at LIBOR plus 2.5%, up to a
maximum of 5.25%.

We may redeem all or a portion of the Notes for cash at any time on or after
the third anniversary of the issuance of the Notes. In addition, Air Group may
require us to purchase all or a portion of the Notes on the 5th, 10th, and 15th
anniversaries of the issuance of the Notes and upon the occurrence of a change
of control or tax event at principal plus accrued interest.

The Notes are senior unsecured obligations and rank equally with our existing
and future senior unsecured indebtedness.

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Note 5. Related Company Transactions

On March 21, 2003, the Company received a capital contribution of $60.0 million
from Air Group that is reflected in capital in excess of par value in our
September 30, 2003 balance sheet.

During 2000, Alaska transferred a flight simulator to Alaska Air Group Leasing,
Inc. (AAGL), a subsidiary of Air Group, in exchange for a $2.4 million note
receivable from AAGL and a $0.6 million reduction in its payable to Air Group.
The loan has repayment terms of 12 years at 6.5% interest. AAGL is leasing the
simulator to Alaska for 12 years.

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

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

We periodically loan Horizon funds at varying interest rates. All amounts are
payable on demand. Interest income recognized related to the Horizon loans
totaled $0.6 million for the quarters ended September 30, 2002 and 2003,
respectively, and $1.6 million and $1.9 million for the nine months ended
September 30, 2002 and 2003, respectively. At September 30, 2003, receivables
from related companies include $94.4 million from Horizon, $9.9 million from
AAGL and $50.0 million from Air Group.

Alaska has an agreement with Horizon, the Incentive Payment Program (IPP), to
provide revenue sharing on certain markets. Under the IPP, 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 full-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 $6.2 million and
$13.8 million during each of the quarters ended September 30, 2002 and 2003,
respectively, and $15.2 million and $28.7 million during the nine months ending
September 30, 2002 and 2003, respectively. These amounts are reflected as
commission expense in the 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 $1.1 million and $2.4 million for the
quarters ended September 30, 2002 and 2003, respectively. For the nine months
ending September 30, 2002 and 2003, total amounts received by Alaska from
Horizon were $3.2 million and $6.0 million, respectively.

In the normal course of business, Alaska and Horizon provide certain ground
handling services to the other company. Charges for ground services provided by
Alaska to Horizon totaled $0.5 million and $0.6 million for the quarters ended
September 30, 2002 and 2003, respectively. For

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the nine months ending September
30, 2002 and 2003, charges for ground services provided by Alaska to Horizon
totaled $1.2 million and $1.7 million, respectively. For the quarters ended
September 30, 2002 and 2003, charges for ground services provided by Horizon to
Alaska totaled $0.7 million and $1.2 million, respectively. For the nine months
ending September 30, 2002 and 2003, charges for ground services provided by
Horizon to Alaska totaled $2.0 million and $3.0 million, respectively.

Note 6. Contingencies

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.

Note 7. U.S. Government Compensation

On April 16, 2003, the Emergency Wartime Supplemental Appropriations Act (the
Act) was signed into legislation. The Act includes $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. Additionally,
passenger security fees were not imposed by the TSA and carrier fees were not
paid during the period June 1, 2003 through September 30, 2003. In May 2003, we
received our share of the one-time cash grant in the amount of $52.8 million.

In August 2003, we received $2.5 million from the Federal Aviation
Administration in reimbursement of flight deck reinforcement expenditures. The
reimbursement was recorded as an offset to our capital costs.

During the third quarter of 2002 we received $0.2 million under the Air
Transportation Safety and System Stabilization Act to compensate the us for
direct and incremental losses as a result of the
September 11th terrorist
attacks.

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Alaska Airlines Financial and Statistical Data

|                                                      |  |                                 |        |                                |  |        |        |      |  |      |       |        |       |   |         |   |      |   |         |    |  |  |       |    
|----------------------------------------------------- |  | ------------------------------- | ------ | ------------------------------ |  | ------ | ------ | ---- |  | ---- | ----- | ------ | ----- | - | ------- | - | ---- | - | ------- | -- |  |  | ----- | ---
|                                                      |  | Three Months Ended September 30 |        | Nine Months Ended September 30
|                                                      |  |                                 |        |                               
|                                                      |  |                                 |        |                                |  |        |        |      |  | %    |       |        |       |   |         |   |      |   |         | % 
|                                                      |  | 2002                            |        | 2003                           |  | Change |        | 2002 |  | 2003 |       | Change
|                                                      |  |                                 |        |                                |  |        |        |      |  |      |       |       
|Financial Data (in millions):                         |  |                                 |        |                                |  |        |        |      |  |      |       |        |       |   |         |   |      |   |         |    |  |  |       |    
|Operating Revenues:                                   |  |                                 |        |                                |  |        |        |      |  |      |       |        |       |   |         |   |      |   |         |    |  |  |       |    
|Passenger                                             |  | $                               | 468.0  |                                |  | $      | 532.5  |      |  |      | 13.8  | %      |       | $ | 1,275.5 |   |      | $ | 1,380.1 |    |  |  | 8.2   | %  
|Freight and mail                                      |  |                                 | 19.7   |                                |  |        | 21.4   |      |  |      | 8.6   | %      |       |   | 55.6    |   |      |   | 59.8    |    |  |  | 7.6   | %  
|Other - net                                           |  |                                 | 24.7   |                                |  |        | 31.4   |      |  |      | 27.1  | %      |       |   | 72.2    |   |      |   | 83.0    |    |  |  | 15.0  | %  
|                                                      |  |                                 |        |                                |  |        |        |      |  |      |       |        |       |   |         |   |      |   |         |    |  |  |       |    
|Total Operating Revenues                              |  |                                 | 512.4  |                                |  |        | 585.3  |      |  |      | 14.2  | %      |       |   | 1,403.3 |   |      |   | 1,522.9 |    |  |  | 8.5   | %  
|                                                      |  |                                 |        |                                |  |        |        |      |  |      |       |        |       |   |         |   |      |   |         |    |  |  |       |    
|Operating Expenses:                                   |  |                                 |        |                                |  |        |        |      |  |      |       |        |       |   |         |   |      |   |         |    |  |  |       |    
|Wages and benefits                                    |  |                                 | 184.9  |                                |  |        | 198.7  |      |  |      | 7.5   | %      |       |   | 524.1   |   |      |   | 578.7   |    |  |  | 10.4  | %  
|Contracted services                                   |  |                                 | 18.9   |                                |  |        | 20.5   |      |  |      | 8.5   | %      |       |   | 59.8    |   |      |   | 60.9    |    |  |  | 1.8   | %  
|Aircraft fuel                                         |  |                                 | 70.7   |                                |  |        | 81.6   |      |  |      | 15.4  | %      |       |   | 190.1   |   |      |   | 227.6   |    |  |  | 19.7  | %  
|Aircraft maintenance                                  |  |                                 | 31.6   |                                |  |        | 35.2   |      |  |      | 11.4  | %      |       |   | 103.3   |   |      |   | 117.7   |    |  |  | 13.9  | %  
|Aircraft rent                                         |  |                                 | 32.1   |                                |  |        | 31.1   |      |  |      | -3.1  | %      |       |   | 95.7    |   |      |   | 92.8    |    |  |  | -3.0  | %  
|Food and beverage service                             |  |                                 | 17.8   |                                |  |        | 17.0   |      |  |      | -4.5  | %      |       |   | 47.9    |   |      |   | 44.8    |    |  |  | -6.5  | %  
|Commissions                                           |  |                                 | 13.2   |                                |  |        | 17.6   |      |  |      | 33.3  | %      |       |   | 43.9    |   |      |   | 38.0    |    |  |  | -13.4 | %  
|Other selling expenses                                |  |                                 | 26.1   |                                |  |        | 25.8   |      |  |      | -1.1  | %      |       |   | 78.8    |   |      |   | 71.0    |    |  |  | -9.9  | %  
|Depreciation and amortization                         |  |                                 | 29.2   |                                |  |        | 29.7   |      |  |      | 1.7   | %      |       |   | 85.7    |   |      |   | 87.8    |    |  |  | 2.5   | %  
|Loss on sale of assets                                |  |                                 | 0.5    |                                |  |        | 0.8    |      |  | NM   |       |        | 0.7   |   |         |   | 1.3  |   |         | NM
|Landing fees and other rentals                        |  |                                 | 30.1   |                                |  |        | 33.6   |      |  |      | 11.6  | %      |       |   | 82.2    |   |      |   | 93.5    |    |  |  | 13.7  | %  
|Other                                                 |  |                                 | 38.5   |                                |  |        | 34.5   |      |  |      | -10.4 | %      |       |   | 111.3   |   |      |   | 102.9   |    |  |  | -7.5  | %  
|                                                      |  |                                 |        |                                |  |        |        |      |  |      |       |        |       |   |         |   |      |   |         |    |  |  |       |    
|Total Operating Expenses                              |  |                                 | 493.6  |                                |  |        | 526.1  |      |  |      | 6.6   | %      |       |   | 1,423.5 |   |      |   | 1,517.0 |    |  |  | 6.6   | %  
|                                                      |  |                                 |        |                                |  |        |        |      |  |      |       |        |       |   |         |   |      |   |         |    |  |  |       |    
|Operating Income (Loss)                               |  |                                 | 18.8   |                                |  |        | 59.2   |      |  | NM   |       |        | (20.2 | ) |         |   | 5.9  |   |         | NM
|                                                      |  |                                 |        |                                |  |        |        |      |  |      |       |        |       |   |         |   |      |   |         |    |  |  |       |    
|Interest income                                       |  |                                 | 6.4    |                                |  |        | 4.6    |      |  |      |       |        |       |   | 17.5    |   |      |   | 10.3    |    |  |  |       |    
|Interest expense                                      |  |                                 | (11.3  | )                              |  |        | (11.2  | )    |  |      |       |        |       |   | (35.0   | ) |      |   | (33.9   | )  |  |  |       |    
|Interest capitalized                                  |  |                                 | 0.5    |                                |  |        | 0.2    |      |  |      |       |        |       |   | 1.0     |   |      |   | 1.3     |    |  |  |       |    
|U.S. government compensation                          |  |                                 | 0.2    |                                |  |        |       |      |  |      |       |        |       |   | 0.3     |   |      |   | 52.8    |    |  |  |       |    
|Other - net                                           |  |                                 | (1.5   | )                              |  |        | (2.7   | )    |  |      |       |        |       |   | 7.7     |   |      |   | 2.7     |    |  |  |       |    
|                                                      |  |                                 |        |                                |  |        |        |      |  |      |       |        |       |   |         |   |      |   |         |    |  |  |       |    
|                                                      |  |                                 | (5.7   | )                              |  |        | (9.1   | )    |  |      |       |        |       |   | (8.5    | ) |      |   | 33.2    |    |  |  |       |    
|                                                      |  |                                 |        |                                |  |        |        |      |  |      |       |        |       |   |         |   |      |   |         |    |  |  |       |    
|Income (Loss) Before Income Tax
and Accounting Change |  | $                               | 13.1   |                                |  | $      | 50.1   |      |  | NM   |       | $      | (28.7 | ) |         | $ | 39.1 |   |         | NM
|                                                      |  |                                 |        |                                |  |        |        |      |  |      |       |        |       |   |         |   |      |   |         |    |  |  |       |    
|Operating Statistics:                                 |  |                                 |        |                                |  |        |        |      |  |      |       |        |       |   |         |   |      |   |         |    |  |  |       |    
|Revenue passengers (000)                              |  |                                 | 3,978  |                                |  |        | 4,280  |      |  |      | 7.6   | %      |       |   | 10,787  |   |      |   | 11,335  |    |  |  | 5.1   | %  
|RPMs (000,000)                                        |  |                                 | 3,673  |                                |  |        | 4,126  |      |  |      | 12.3  | %      |       |   | 10,022  |   |      |   | 10,946  |    |  |  | 9.2   | %  
|ASMs (000,000)                                        |  |                                 | 5,207  |                                |  |        | 5,693  |      |  |      | 9.3   | %      |       |   | 14,602  |   |      |   | 15,611  |    |  |  | 6.9   | %  
|Passenger load factor                                 |  |                                 | 70.5   | %                              |  |        | 72.5   | %    |  |      | 2.0   | pts    |       |   | 68.6    | % |      |   | 70.1    | %  |  |  | 1.5   | pts
|Breakeven load factor                                 |  |                                 | 69.4   | %                              |  |        | 65.9   | %    |  |      | -3.5  | pts    |       |   | 71.4    | % |      |   | 71.6    | %  |  |  | 0.2   | pts
|Yield per passenger mile                              |  |                                 | 12.74  | ¢                              |  |        | 12.91  | ¢    |  |      | 1.3   | %      |       |   | 12.73   | ¢ |      |   | 12.61   | ¢  |  |  | -0.9  | %  
|Operating revenue per ASM                             |  |                                 | 9.84   | ¢                              |  |        | 10.28  | ¢    |  |      | 4.5   | %      |       |   | 9.61    | ¢ |      |   | 9.76    | ¢  |  |  | 1.5   | %  
|Operating expenses per ASM (a)                        |  |                                 | 9.48   | ¢                              |  |        | 9.24   | ¢    |  |      | -2.5  | %      |       |   | 9.75    | ¢ |      |   | 9.72    | ¢  |  |  | -0.3  | %  
|Operating expenses per ASM excluding fuel (a)         |  |                                 | 8.12   | ¢                              |  |        | 7.81   | ¢    |  |      | -3.9  | %      |       |   | 8.45    | ¢ |      |   | 8.26    | ¢  |  |  | -2.2  | %  
|Fuel cost per gallon                                  |  |                                 | 81.6   | ¢                              |  |        | 88.7   | ¢    |  |      | 8.7   | %      |       |   | 77.9    | ¢ |      |   | 89.6    | ¢  |  |  | 15.0  | %  
|Fuel gallons (000,000)                                |  |                                 | 86.6   |                                |  |        | 92.0   |      |  |      | 6.2   | %      |       |   | 243.9   |   |      |   | 253.9   |    |  |  | 4.1   | %  
|Average number of employees                           |  |                                 | 10,465 |                                |  |        | 10,114 |      |  |      | -3.4  | %      |       |   | 10,167  |   |      |   | 10,079  |    |  |  | -0.9  | %  
|Aircraft utilization (blk hrs/day)                    |  |                                 | 11.2   |                                |  |        | 11.1   |      |  |      | -0.9  | %      |       |   | 10.7    |   |      |   | 10.6    |    |  |  | -0.9  | %  
|Operating fleet at period-end                         |  |                                 | 102    |                                |  |        | 109    |      |  |      | 6.9   | %      |       |   | 102     |   |      |   | 109     |    |  |  | 6.9   | %  

NM = Not Meaningful

(a) See Note 1 on Page 15

Note:

Certain reclassifications have been made to the September 30, 2002 statements of operations to conform
to the September 30, 2003 presentation.

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##### Table of Contents



Note 1:

Pursuant to new guidelines issued by the Securities and Exchange Commission, we are providing the following reconciliation of non-GAAP
performance indicators to their comparable financial measures reported on a GAAP basis. Our disclosure of operating expenses and operating
expenses per available seat mile, excluding fuel, provides us the ability to measure and monitor our performance both with and without the cost of
aircraft fuel as both the cost and availability of fuel are subject to economic and political factors beyond our control. We also believe that
disclosing earnings (loss) and diluted earnings (loss) per share excluding reimbursements received from the government and the write-off
of goodwill is useful to investors because it helps them see what our results would have been had these non-recurring items not been present.
The following table reconciles operating expenses excluding fuel and operating expense per ASM excluding fuel for Alaska Airlines, Inc.:

Alaska Airlines, Inc.:

|                                          |  |                                  |       |                                 |  |      |       |      |  |   |         |   |  |   |         |  
|----------------------------------------- |  | -------------------------------- | ----- | ------------------------------- |  | ---- | ----- | ---- |  | - | ------- | - |  | - | ------- | -
|($ in millions)                           |  | Three Months Ended September 30, |       | Nine Months Ended September 30,
|                                          |  |                                  |       |                                
|                                          |  | 2002                             |       | 2003                            |  | 2002 |       | 2003
|                                          |  |                                  |       |                                 |  |      |       |      |  |   |         |   |  |   |         |  
|Operating expenses                        |  | $                                | 493.6 |                                 |  | $    | 526.1 |      |  | $ | 1,423.5 |   |  | $ | 1,517.0 |  
|ASMs (000,000)                            |  |                                  | 5,207 |                                 |  |      | 5,693 |      |  |   | 14,602  |   |  |   | 15,611  |  
|Operating expenses per ASM                |  |                                  | 9.48  | ¢                               |  |      | 9.24  | ¢    |  |   | 9.75    | ¢ |  |   | 9.72    | ¢
|                                          |  |                                  |       |                                 |  |      |       |      |  |   |         |   |  |   |         |  
|Operating expenses                        |  | $                                | 493.6 |                                 |  | $    | 526.1 |      |  | $ | 1,423.5 |   |  | $ | 1,517.0 |  
|Less: aircraft fuel                       |  |                                  | 70.7  |                                 |  |      | 81.6  |      |  |   | 190.1   |   |  |   | 227.6   |  
|                                          |  |                                  |       |                                 |  |      |       |      |  |   |         |   |  |   |         |  
|Operating expenses excluding fuel         |  | $                                | 422.9 |                                 |  | $    | 444.5 |      |  | $ | 1,233.4 |   |  | $ | 1,289.4 |  
|ASMs (000,000)                            |  |                                  | 5,207 |                                 |  |      | 5,693 |      |  |   | 14,602  |   |  |   | 15,611  |  
|Operating expenses per ASM excluding fuel |  |                                  | 8.12  | ¢                               |  |      | 7.81  | ¢    |  |   | 8.45    | ¢ |  |   | 8.26    | ¢
|                                          |  |                                  |       |                                 |  |      |       |      |  |   |         |   |  |   |         |  

The following table summarizes Alaska Airlines, Inc.s net earnings (loss) during 2002 and 2003 excluding the change in accounting
principle relating to goodwill and the receipt of government compensation and as reported in accordance with GAAP.

|                                                    |  |                                  |     |                                 |  |      |      |      |  |  |        |   |  |    |      |  
|--------------------------------------------------- |  | -------------------------------- | --- | ------------------------------- |  | ---- | ---- | ---- |  |  | ------ | - |  | -- | ---- | -
|                                                    |  | Three Months Ended September 30, |     | Nine Months Ended September 30,
|                                                    |  |                                  |     |                                
|                                                    |  | 2002                             |     | 2003                            |  | 2002 |      | 2003
|                                                    |  |                                  |     |                                 |  |      |      |     
|Net income (loss) excluding non-recurring
items     |  | $                                | 8.8 |                                 |  | $    | 29.6 |      |  |  | ($19.0 | ) |  | ($ | 11.3 | )
|Change in accounting principle relating to goodwill |  |                                  |    |                                 |  |      |     |      |  |  | ($12.5 | ) |  |    |     |  
|Government compensation, net of tax                 |  |                                  | 0.1 |                                 |  |      |     |      |  |  | 0.2    |   |  |    | 32.6 |  
|                                                    |  |                                  |     |                                 |  |      |      |      |  |  |        |   |  |    |      |  
|Reported GAAP amounts                               |  | $                                | 8.9 |                                 |  | $    | 29.6 |      |  |  | ($31.3 | ) |  | $  | 21.3 |  
|                                                    |  |                                  |     |                                 |  |      |      |      |  |  |        |   |  |    |      |  

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

Forward-Looking Information

The following discussion should be read in conjunction with our financial
statements and the related notes contained elsewhere in this quarterly report
on Form 10-Q. 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.

References in the Quarterly Report on Form 10-Q to Alaska Airlines, the
Company, we, us and our refer to Alaska Airlines, Inc. unless otherwise
specified. Alaska Air Group, Inc. and Horizon Air Industries, Inc. are
referred to as Air Group and Horizon, respectively.

Air Groups filings with the Securities and Exchange Commission, including its
annual report on Form 10-K, quarterly reports on Form 8-K and amendments to
those reports are accessible free of charge at www.alaskaair.com as soon as
reasonably practicable after they are filed with, or furnished to, the
Securities and Exchange Commission.

Summary

Summer demand from West Coast vacationers and the State of Alaska combined with
a continued focus on our cost management initiatives and the governments
temporary waiver of security fees resulted in a profitable third quarter 2003
for us. Historically, our operating income is lowest during the first and
fourth quarters, gradually increases in the second quarter and reaches its
highest level during the third quarter. Consistent with this seasonal trend,
we experienced our highest demand during the third quarter of 2003 as traffic
and revenue trends began improving in the latter half of the second quarter and
peaked in August before decreasing in September. In the fourth quarter of
2003, we expect this seasonal trend to continue. In addition, we believe our
year-end results of operations may be negatively impacted by declines in
business traffic, rising fuel prices and increased competition in the markets
we serve.

To mitigate these negative influences, in 2002 and throughout 2003, we have
engaged in extensive cost reduction and revenue enhancement initiatives. In
June 2003, we met with leaders of our labor unions to begin a dialog over how
we and our labor groups can work cooperatively to better position us for growth
and success. Our meetings focused on our desire to achieve a cost structure
that enables us to offer customers the services they want at fares they are
willing to pay; to earn a reasonable profit; to grow our business and take
advantage of competitive opportunities; and to secure the futures of our
employees. We are seeking to lower our operating cost per available seat mile,
excluding fuel, to 7.25 cents by 2005. However, this is our goal and should
not be viewed as a prediction of future performance.

As discussed in Note 7 to the unaudited interim financial statements, on April
16, 2003, the Emergency Wartime Supplemental Appropriations Act (the Act) was
signed into legislation. The Act includes $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. Additionally,
passenger security fees were not imposed by the

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TSA and carrier fees were not paid during the period June 1, 2003 through
September 30, 2003. In May 2003, we received our share of the one-time cash
grant in the amount of $52.8 million.

In August 2003, we received $2.5 million from the Federal Aviation
Administration in reimbursement of flight deck reinforcement expenditures. The
reimbursement was recorded as an offset to our capital costs.

During the third quarter of 2002 we received $0.2 million under the Air
Transportation Safety and System Stabilization Act to compensate us for direct
and incremental losses as a result of the
September 11th terrorist attacks.

Results of Operations

Third Quarter 2003 Compared with Third Quarter 2002

During the third quarter 2003, we reported net income of $29.6 million,
compared to a net income of $8.9 million in 2002. We recorded operating and
pre-tax income of $59.2 million and $50.1 million, respectively, in 2003 versus
operating and pre-tax income of $18.8 million and $13.1 million, respectively,
in 2002. Financial and statistical data is shown on page 14. A discussion of
the three-month data follows. On page 15, we have included a reconciliation of
reported non-GAAP financial measures to the most directly comparable GAAP
financial measure.

Alaska Airlines Revenues

Operating revenues increased $72.9 million, or 14.2%, during 2003 as compared
to 2002. For the quarter, available seat miles (ASMs or Capacity) increased
9.3% and revenue passenger miles (RPMs or Traffic) increased 12.3% as compared
to the same period in 2002. Capacity increased 10.5% in July, 9.4% in August
and 7.9% in September as compared to the same periods in 2002. The capacity
increases are primarily due to the addition of service to new cities (Boston,
Washington D.C., Denver, Orlando, Newark and Miami) and an increase in service
in the Mexico, Pacific Northwest and Canada markets, partially offset by lower
capacity in Arizona, Northern Alaska and the Bay Area. Traffic increases
primarily reflect service to new cities and traffic increases in the Pacific
Northwest, Mexico, Nevada and Canada markets, partially offset by decreases in
traffic in Northern Alaska, Arizona and the Bay Area.

Yield per passenger mile was up 1.3% and passenger load factor increased 2.0
points during the third quarter of 2003 as compared to the same period in 2002.
These increases were largely driven by strong demand during the quarter and
resulted in a 13.8% increase in passenger revenues.

Freight and mail revenues increased $1.7 million, or 8.6%, compared to the same
period in 2002. This increase is due to increases of $1.2 million and $0.5
million in freight and mail revenue, respectively.

Other-net revenues increased $6.7 million, or 27.1%, due largely to increased
revenue from the redemption of miles in Alaskas frequent flyer program as well
as a $2.2 million increase in contract maintenance revenue as compared to the
prior year.

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##### Table of Contents



Alaska Airlines Expenses

For the quarter, total operating expenses increased $32.5 million, or 6.6%, as
compared to the same period in 2002. This increase is due largely to the 9.3%
increase in capacity combined with higher commissions, fuel, maintenance,
landing fees and other rentals, contracted services and wages and benefits
costs, partially offset by lower food and beverage service, other selling
expenses and other operating expenses. Operating expense per ASM excluding
fuel decreased 3.9% as compared to the same period in 2002. Explanations of
significant period-over-period changes in the components of operating expenses
are as follows:



| |  |  | Wages and benefits increased $13.8 million, or 7.5%, during the
quarter as compared to 2002. Approximately $11.1 million of this
increase reflects higher benefits costs, resulting from increases in
pension costs of approximately $8.4 million and higher health
insurance and workers compensation costs. The remaining $2.7 million
wage increase reflects scale and step increases of 5.5%, partially
offset by a 3.4% decrease in the number of employees.                                                                                                                                                                                                                              
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Aircraft fuel increased $10.9 million, or 15.4%, due to an 8.7%
increase in the fuel cost per gallon and a 6.2% increase in fuel
gallons consumed. Air Groups fuel hedging program resulted in Alaska
recognizing a $6.0 million reduction in aircraft fuel expense for
hedging gains realized on hedge positions settled during the third
quarter of 2003. For the remainder of 2003, Air Group has fuel hedges
in place for 35% of its expected fuel consumption, principally crude
oil swaps at prices below $22 per barrel. In 2004 and 2005, Alaska
has crude oil options in place to hedge 25% and 16%, respectively, of
its expected fuel consumption at prices ranging from $24 to $29.
|
| |  |  | Aircraft maintenance increased $3.6 million, or 11.4%, due to
increases in the number of outside airframe and engine checks and
other outside repairs. There were 19 engine removals during the third
quarter of 2003 compared to 16 during the same period in 2002.                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  |  | Commissions increased $4.4 million, or 33.3%, due to increased
incentive payments to Horizon partially offset by the elimination of
travel agent base commissions starting in June 2002, and the
continuing shift to direct sales channels. Incentive payments to
Horizon are eliminated in consolidation at the Air Group level. In
2003, 40.8% of Air Group ticket sales were made through traditional
travel agents, compared to 45.0% in 2002. In 2003, 28.8% of the
ticket sales were made through Alaskas Internet web site,
www.alaskaair.com, compared to 22.5% in 2002.                                                                                                               
|
| |  |  | Other selling expenses decreased $0.3 million, or 1.1%, due to
decreased Mileage Plan redemptions on partner carriers, partially
offset by increased advertising spending.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  |  | Landing fees and other rentals increased $3.5 million, or 11.6%,
due to higher landing fee rates at our new stations and higher rental
rates in several of our large airport locations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

Other expense decreased $4.0 million, or 10.4%, primarily reflecting a decrease
in insurance costs. Insurance expense decreases are a reflection of several
factors including a $2.8 million insurance reimbursement received in the third
quarter of 2003 resulting from a clarification of liability related to

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##### Table of Contents



Flight 261, lower cost coverage from a government aviation war risk insurance
program and competitive pressures in the aviation war risk insurance market.
However, aviation insurance remains substantially higher than before September
11, 2001.

Nonoperating Income (Expense)

Net nonoperating items were $5.7 million and $9.1 million expense in 2002 and
2003, respectively. Interest income decreased $1.8 million due to lower
interest rates in 2003. Interest expense (net of capitalized interest)
decreased $0.2 million, or 1.9%, due to lower variable interest rates in 2003.

Other-net includes $1.6 million and $2.5 million in hedging losses resulting
from hedge ineffectiveness on fuel hedging contracts in 2002 and 2003,
respectively.

Nine Months 2003 Compared with Nine Months 2002

Our net income for the first nine months of 2003 was $21.3 million, compared
with a net loss of $31.3 million in 2002. Our 2003 net income and 2002 net
loss include $52.8 million and $0.3 million, respectively, received in connection with
government assistance received under the Act. Our 2002 net loss includes $12.5
million related to the write-off of goodwill in connection with the adoption of
SFAS No. 142 (see discussion in Note 1 in the Notes to Financial Statements).
Excluding the government compensation received in 2002 and 2003 and the
goodwill write-off in 2002, our net loss for the nine months ended 2003 was
$11.3 million compared to $19.0 million for 2002.

Our operating income for the first nine months of 2003 was $5.9 million
compared to an operating loss of $20.2 million for 2002. Our pre-tax income for
the first nine months of 2003 was $39.1 million compared with a pre-tax loss
before accounting change of $28.7 million for 2002. Financial and statistical
data comparisons are shown on page 14. On page 15, 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 $119.6 million, or 8.5%, during the first nine
months of 2003 as compared to the same period in 2002. For the nine months
ended September 30, 2003, capacity increased 6.9% and traffic increased 9.2% as
compared to the same period in 2002. The capacity increases are primarily due
to the addition of service to new cities (Boston, Denver, Newark, Washington
D.C., Orlando and Miami) and an increase in service in the Pacific Northwest,
Mexico, and Canada markets, partially offset by lower capacity in the Bay Area,
Arizona and Northern Alaska. Traffic increases primarily reflect service to
new cities and traffic increases in the Pacific Northwest, Mexico and Nevada,
partially offset by decreases in traffic in the Bay Area, Northern Alaska and
Arizona. Passenger load factor increased 1.5 percentage points to 70.1% during
the first nine months of 2003 as compared to 2002.

Yield per passenger mile decreased 0.9% due to a combination of fewer business
travelers and a drop off in demand. Higher traffic combined with lower yields
resulted in a $104.6 million, or 8.2%, increase in passenger revenues.

Freight and mail revenues increased $4.2 million, or 7.6%, due principally to
higher freight and mail volumes attributable to a reduction of security
restrictions. Other-net revenues increased $10.8

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##### Table of Contents



million, or 15.0%, due largely to increased revenue from the redemption of
miles in Alaskas frequent flyer program.

Alaska Airlines Expenses

For the nine months ended September 30, 2003, total operating expenses
increased $93.5 million, or 6.6%, as compared to the same period in 2002.
This increase is due largely to a 6.9% increase in ASMs combined with higher
fuel, maintenance, wages and benefits costs and landing fees and other rentals.
Operating expense per ASM excluding fuel decreased 2.2% as compared to the
same period in 2002. Explanations of significant period-over-period changes in
the components of operating expenses are as follows:



| |  |  | Wages and benefits increased $54.6 million, or 10.4%, for the
first nine months of 2003 as compared to 2002. Approximately $37.0
million of this increase reflects higher benefits, resulting from
increases in pension costs of approximately $27.4 million and higher
health insurance and workers compensation costs. The remaining $17.6
million increase reflects wage rate increases, partially offset by a
0.9% decrease in the number of employees.                                                                                                       
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Aircraft fuel increased $37.5 million, or 19.7%, due to a 15.0%
increase in the fuel cost per gallon and a 4.1% increase in fuel
gallons consumed. Air Groups fuel hedging program resulted in Alaska
recognizing an $18.6 million reduction in aircraft fuel expense for
hedging gains realized on hedge positions settled during the nine
months of 2003.                                                                                                                                                                                                       
|
| |  |  | Aircraft maintenance increased $14.4 million, or 13.9%, due to
increases in the number of outside airframe and engine checks and
other outside repairs.                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  |  | Commissions decreased $5.9 million, or 13.4%, due primarily to
the elimination of travel agent base commissions starting in June
2002, and the continuing shift to direct sales channels, offset by an
increase in incentive payments to Horizon. Incentive payments to
Horizon are eliminated in consolidation at the Air Group level. In
2003, 44.0% of Air Group ticket sales were made through traditional
travel agents, compared to 49.8% in 2002. In 2003, 26.9% of the
ticket sales were made through Alaskas Internet web site compared to
20.6% in 2002.
|
| |  |  | Other selling expenses decreased $7.8 million, or 9.9%, due
principally to lower computer reservation system costs and Mileage
Plan costs, partially offset by an increase in credit card commissions
and advertising costs.                                                                                                                                                                                                                                                                                                                                       
|
| |  |  | Landing fees and other rentals increased $11.3 million, or 13.7%.
The higher rates reflect modest volume growth and an increase in
airports cost of operations, including facility expansion
initiatives, and increased costs for security.                                                                                                                                                                                                                                                                                                                       

Other expense decreased $8.4 million, or 7.5%, primarily reflecting lower
expenditures for insurance, supplies, data lines and other communication
services and property taxes, partially offset by increases in expenditures for
professional services and per diems. Insurance expense decreases are a
reflection of several factors including a $2.8 million insurance reimbursement
received in the third

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##### Table of Contents



quarter of 2003 resulting from a clarification of liability related to Flight
261, lower cost coverage from a government aviation war risk insurance program
and competitive pressures in the aviation war risk insurance market. However,
aviation insurance remains substantially higher than before September 11, 2001.

Nonoperating Income (Expense)

Net nonoperating items were $8.5 million expense and $33.2 million income in
2002 and 2003, respectively. The 2003 results include $52.8 million received
in connection with the government reimbursement of security fees remitted and
carrier fees paid under the Act. Interest income decreased $7.2 million due
principally to lower interest rates and an adjustment of premium and discount
amortization on our marketable securities portfolio. Interest expense (net of
capitalized interest) increased $1.4 million, or 4.1%, due primarily to
increases in debt (See Note 7 in the Notes to Financial Statements).

Other-net includes $5.2 million in hedging gains and $0.8 million in hedging
losses resulting from hedge ineffectiveness on fuel hedging contracts in 2002
and 2003, respectively. Also included in 2003 Other-net is an insurance
recovery of $3.1 million in connection with legal fees associated with the U.S.
Attorney investigation in Oakland.

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 45.5% tax rate for 2003, we 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 income. We
evaluate this rate each quarter and make adjustments when necessary.

Critical Accounting Policies

For more information on our critical accounting policies, see Item 7 of our
Annual Report on Form 10-K for the year ended December 31, 2002.

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Liquidity and Capital Resources

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

|                                                                                                   |  |                                               |        |                    |  |        |        |   |  |   |       | 
|-------------------------------------------------------------------------------------------------- |  | --------------------------------------------- | ------ | ------------------ |  | ------ | ------ | - |  | - | ----- | 
|                                                                                                   |  | December 31, 2002                             |        | September 30, 2003 |  | Change
|                                                                                                   |  |                                               |        |                    |  |       
|                                                                                                   |  | (In millions, except debt-to-capital amounts)
|Cash and marketable securities                                                                     |  | $                                             | 635.7  |                    |  | $      | 748.2  |   |  | $ | 112.5 | 
|Working capital                                                                                    |  |                                               | 240.0  |                    |  |        | 319.0  |   |  |   | 79.0  | 
|Long-term debt and
capital lease obligations*                                                      |  |                                               | 856.7  |                    |  |        | 954.6  |   |  |   | 97.9  | 
|Shareholders equity                                                                               |  |                                               | 569.7  |                    |  |        | 647.8  |   |  |   | 78.1  | 
|Debt-to-capital*                                                                                   |  |                                               | 60%:40 | %                  |  |        | 60%:40 | % |  |   | NA    | 
|Debt-to-capital assuming aircraft
operating leases are capitalized
at seven times annualized rent* |  |                                               | 75%:25 | %                  |  |        | 66%:34 | % |  |   | NA    | 
|                                                                                                   |  |                                               |        |                    |  |        |        |   |  |   |       | 

*     Excludes current portion of long-term debt and capital lease obligations

We have various options available to meet our capital and operating commitments
in 2003, including cash and marketable securities on hand at September 30, 2003
of $748.2 million. In addition, to supplement cash requirements, we utilize
various borrowing or leasing options. In the first quarter of 2003, we
received $60.0 million and $63.6 million, respectfully, from Air Group in
connection with a capital contribution and issuance of senior notes due 2023
(See discussion in Note 4 and Note 5 in the Notes to Financial Statements).
Funds from these transactions are expected to provide additional liquidity to
be used in our operations.

During the first nine months of 2003, our shareholders equity increased $78.1
million, primarily reflecting the $60 million capital contribution from Air
Group and our net income of $21.3 million.

During the first nine months of 2003, our cash and marketable securities
increased by $112.5 million to $748.2 million at September 30, 2003. This
increase primarily reflects cash provided by operating activities of $236.1
million and cash provided by financing activities of $165.0 million, partially
offset by cash used for the purchase of property and equipment of $276.1
million and $12.6 million paid for restricted deposits and other.

Cash Provided by Operating Activities

During the first nine months of 2003, operating activities provided $236.1
million of cash, primarily reflecting our net income of $21.3 million,
depreciation and amortization of $87.8 million, amortization of airframe and
engine overhauls of $44.0 million, increases in air traffic liability of $54.2
million, increases in other current liabilities of $23.3 million, increases in
deferred income taxes of $17.9 million and increases in deferred revenue and
other-net of $23.0 million, partially offset by an increase in accounts
receivable of $43.1 million and $7.7 million of other changes in operating
assets and liabilities.

Cash Used in Investing Activities

During the first nine months of 2003, cash used in investing activities totaled
$448.7 million, primarily reflecting capital expenditures of $276.6 million,
restricted cash deposits and other of $12.6 million

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and an increase in marketable securities of $160.0 million, partially offset by
cash provided by disposition of assets of $0.5 million.

Cash Provided by Financing Activities

In 2003, cash provided by financing activities was $165.0 million, reflecting a
capital contribution received from Air Group of $60.0 million and new debt
issuances of $160.6 million, partially offset by long-term debt and capital
lease payments of $55.6 million. During the first nine months of 2003, we
issued $97.0 million of debt secured by flight equipment, having interest rates
that vary with LIBOR and payment terms ranging from 12 to 15 years. On March
21, 2003, we received $63.6 million from Air Group in connection with the
issuance of senior notes due 2023. See Note 4 in the Notes to the Financial
Statements.

Commitments- At September 30, 2003, we had firm orders for 14 aircraft
requiring aggregate payments of approximately $111.5 million, as set forth
below. In addition, we have options to acquire 26 additional B737s. We
expect to finance the new planes with leases, long-term debt or internally
generated cash. During the second quarter of 2003, we deferred the delivery of
two Boeing 737-900s from 2004 to 2005. The following table summarizes
aircraft deliveries by year and payments from October 1, 2003 to December 31,
2003, and by fiscal year thereafter:

|                    |  |                               |     |      |  |      |      |      |  |       |      |  |  |        |   |  |  |   |       | 
|------------------- |  | ----------------------------- | --- | ---- |  | ---- | ---- | ---- |  | ----- | ---- |  |  | ------ | - |  |  | - | ----- | 
|                    |  | Delivery Period - Firm Orders
|                    |  |                              
|                    |  |                               |     |      |  |      |      |      |  |       |      |  |  | Beyond |   |  |  |  
|Aircraft            |  | 2003                          |     | 2004 |  | 2005 |      | 2005 |  | Total
|                    |  |                               |     |      |  |      |      |      |  |      
|Boeing 737-700      |  |                               | 6   |      |  |      |     |      |  |       |     |  |  |        |  |  |  |   | 6     | 
|Boeing 737-900      |  |                               | 5   |      |  |      | 1    |      |  |       | 2    |  |  |        |  |  |  |   | 8     | 
|                    |  |                               |     |      |  |      |      |      |  |       |      |  |  |        |   |  |  |   |       | 
|Total               |  |                               | 11  |      |  |      | 1    |      |  |       | 2    |  |  |        |  |  |  |   | 14    | 
|                    |  |                               |     |      |  |      |      |      |  |       |      |  |  |        |   |  |  |   |       | 
|Payments (Millions) |  | $                             | 0.4 |      |  | $    | 54.0 |      |  | $     | 57.1 |  |  |        |  |  |  | $ | 111.5 | 
|                    |  |                               |     |      |  |      |      |      |  |       |      |  |  |        |   |  |  |   |       | 

We are party to a purchase agreement with an aircraft manufacturer. Under
the agreement, upon commitment to purchase the aircraft, we must make deposits
to the manufacturer for a portion of the purchase price of the aircraft, with
the remainder of the purchase price due at delivery. Concurrent with this
agreement, the manufacturer has an agreement with a Trust wherein the Trust
makes deposits to the manufacturer of additional pre-delivery deposits for the
aircraft. Under certain specified events, including default by the Trust, we
may be required to pay the manufacturer the amounts paid by the Trust in order
to retain the right to purchase the aircraft. We make monthly payments to the
Trust related to the advances made by the Trust to the manufacturer, which are
capitalized as part of the aircraft cost. The Trust is reimbursed for its
advances on or before the delivery of the applicable aircraft. As of September
30, 2003, our obligations relating to such advances equaled approximately $11.6
million which will be paid in 2004. These amounts are included as aircraft
purchase commitments in the summary of contractual obligations below.

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The following table is a summary of our material contractual obligations for
October 1, 2003 to December 31, 2003 and by fiscal year thereafter:

|                              |  |                                    |      |      |  |      |       |      |  |      |       |      |  |       |       |  |  |   |       |  |  |        |         |  |  |   |         | 
|----------------------------- |  | ---------------------------------- | ---- | ---- |  | ---- | ----- | ---- |  | ---- | ----- | ---- |  | ----- | ----- |  |  | - | ----- |  |  | ------ | ------- |  |  | - | ------- | 
|                              |  | Contractual Payments Due by Period
|                              |  |                                   
|                              |  |                                    |      |      |  |      |       |      |  |      |       |      |  |       |       |  |  |   |       |  |  | Beyond |         |  |  |  
|(in millions)                 |  | 2003                               |      | 2004 |  | 2005 |       | 2006 |  | 2007 |       | 2007 |  | Total
|                              |  |                                    |      |      |  |      |       |      |  |      |       |      |  |      
|Long-term debt                |  | $                                  | 15.6 |      |  | $    | 196.8 |      |  | $    | 44.1  |      |  | $     | 47.1  |  |  | $ | 49.8  |  |  | $      | 648.4   |  |  | $ | 1,001.8 | 
|Capital lease obligations     |  |                                    |     |      |  |      | 8.0   |      |  |      |      |      |  |       |      |  |  |   |      |  |  |        |        |  |  |   | 8.0     | 
|Operating lease commitments   |  |                                    | 34.8 |      |  |      | 138.6 |      |  |      | 234.0 |      |  |       | 223.6 |  |  |   | 191.1 |  |  |        | 1,233.3 |  |  |   | 2,055.4 | 
|Aircraft purchase commitments |  |                                    | 0.4  |      |  |      | 54.0  |      |  |      | 57.1  |      |  |       |      |  |  |   |      |  |  |        |        |  |  |   | 111.5   | 
|                              |  |                                    |      |      |  |      |       |      |  |      |       |      |  |       |       |  |  |   |       |  |  |        |         |  |  |   |         | 
|Total                         |  | $                                  | 50.8 |      |  | $    | 397.4 |      |  | $    | 335.2 |      |  | $     | 270.7 |  |  | $ | 240.9 |  |  | $      | 1,881.7 |  |  | $ | 3,176.7 | 
|                              |  |                                    |      |      |  |      |       |      |  |      |       |      |  |       |       |  |  |   |       |  |  |        |         |  |  |   |         | 

New Accounting Standards In January 2003, the Financial Accounting Standards
Board (FASB) issued Interpretation No. 46 (FIN 46), Consolidation of Variable
Interest Entities, which requires the consolidation of variable interest
entities, as defined. A variable interest entity is one in which a company
absorbs a majority of the entitys expected losses, receives a majority of the
entitys expected returns, or both, as a result of ownership, contractual or
other financial interests in the entity. The principal characteristics of
variable interest entities are (1) an insufficient amount of equity to absorb
the entitys expected losses, (2) equity owners as a group are not able to make
decisions about the entitys activities, or (3) equity that does not absorb the
entitys losses or receive the entitys residual returns. This Interpretation
is currently applicable to variable interest entities created after January 31,
2003. In October 2003, the FASB agreed to defer the effective date of FIN 46
to December 31, 2003 for variable interests held by public companies in
entities that existed prior to February 1, 2003. This deferral is to allow
time for implementation issues to be addressed through the issuance of a
potential modification to the interpretation. The deferral revised the
effective date for consolidation of these entities to the period ended December
31, 2003 for calendar year end companies. While we are still evaluating the
impact of this Interpretation, we currently do not believe that any entities
will be consolidated as a result of Interpretation No. 46.




ITEM 3. Quantitative and Qualitative Disclosure about Market Risk

During the first nine months of 2003, we issued $97.0 million ($65.0
million in the second quarter of 2003 and $32.0 million in the third
quarter of 2003) of debt secured by flight equipment, having interest
rates that vary with LIBOR and payment terms ranging from 12 to 15
years.

On March 21, 2003, we received $63.6 million from Air Group in
connection with the issuance of senior notes due 2023. See Note 4 in
the Notes to Financial Statements.

We utilize financial derivative instruments as hedges to decrease our
exposure to jet fuel price changes. We account for our fuel hedge
derivative instruments as cash flow hedges as defined by SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, as
amended. At September 30, 2003, we had crude oil option agreements in
place to hedge approximately 35%, 25% and 16% of our expected jet fuel
requirements in 2003, 2004 and 2005, respectively. Prices of these
agreements range from $22 to $29 per barrel. All changes in fair
value that are considered to be effective hedges are recorded in
accumulated other comprehensive income (loss) until the underlying jet
fuel is consumed. The fair value of our
hedge instruments at September 30, 2003 was

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approximately $8.9 million
($7.7 million in prepaid expenses and other current assets and $1.2
million in other assets) in our balance sheet as of September 30,
2003.

During the three months ended September 30, 2002 and 2003, we recognized $4.6
million and $6.0 million in realized hedging gains, respectively. During the
nine months ended September 30, 2002 and September 30, 2003, we recognized $5.4
million and $18.6 million in realized hedging gains, respectively. These
amounts are reflected in aircraft fuel in our statement of operations.

During the three months ended September 30, 2003 and 2003, we recorded
$1.6 million and $2.5 million, respectively, in losses related to the
ineffectiveness of our hedges. During the nine months ended September
30, 2002 and September 30, 2003, we recorded $5.2 million in gains and
$0.8 million in losses, respectively, related to the ineffectiveness
of our hedges. These amounts are recorded as non-operating income
(expense) in other-net in our statement of operations.

In the first nine months of 2003, we recorded a net loss of $3.3
million, net of tax, in other comprehensive income (loss) in our
balance sheet. This amount includes the change in effectiveness as
related to the change in fair market value for future derivative hedge
instruments and the removal of the effective portion of derivative
hedge instruments that matured during the first nine months.




ITEM 4. Controls and Procedures

As of September 30, 2003, 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 taking into consideration the size and
nature of our business and operations.

We made no changes in our internal controls over financial reporting during the
fiscal quarter ended September 30, 2003, that our certifying officers concluded
materially affected, or is reasonably likely to materially effect, our internal
control over financial reporting.

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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.




ITEM 6. Exhibits and Reports on Form 8-K

(a)  Exhibit 31.1- Section 302 Certification of Chief Executive Officer Pursuant
to 18 U.S.C. Section 1350

(b)  Exhibit 31.2- Section 302 Certification of Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350

(c)  Exhibit 32.1- Section 906 Certification of Chief Executive Officer Pursuant
to 18 U.S.C. Section 1350

(d)  Exhibit 32.2- Section 906 Certification of Chief Financial Officer Pursuant
to 18 U.S.C. Section 1350

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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
|Registrant          

Date: November 13, 2003

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

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EXHIBIT INDEX

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

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

|            |  |                                                                                        
|----------- |  | ---------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                            
|            |  |                                                                                        
|31.1        |  | Section 302 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350
|            |  |                                                                                        
|31.2        |  | Section 302 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350
|            |  |                                                                                        
|31.1        |  | Section 906 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350
|            |  |                                                                                        
|32.2        |  | Section 906 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350