##### Table of Contents



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   (  )
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934  Commission file number 1-8957 ALASKA AIRLINES, INC.  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    92-0009235
(I.R.S. Employer
Identification No.)
 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
(   ) No (X) APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuers classes
of common stock, as of the latest practicable date. The registrant has 500 common shares, par value $1.00, outstanding at June
30, 2004.




---



TABLE OF CONTENTS PART I. FINANCIAL INFORMATIONItem 1. Condensed Financial StatementsItem 2. Managements Discussion and Analysis of Financial Condition and
Results of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPART II. OTHER INFORMATIONItem 1. Legal ProceedingsItem 6. Exhibits and Reports on Form 8-KSignaturesEXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  Cautionary Note regarding Forward-Looking Statements In addition to historical information, this Quarterly Report on Form 10-Q
contains forward-looking statements that relate to future events of our future
financial performance and involve a number of risks and uncertainties. These
forward-looking statements are intended to be subject to the safe harbor
protection provided by Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934. In some cases, you can identify
forward-looking statements by terminology such as forecast, may, will,
could, should, expect, plan, believe, potential or other similar
words indicating future events or contingencies. Some of the things that could
cause our actual results to differ from our expectations are: the competitive
environment and other trends in our industry; economic conditions; our reliance
on automated systems; actual or threatened terrorist attacks, global
instability and potential U.S. military involvement; our ability to meet our
cost reduction goals; labor disputes; changes in our operating costs including
fuel and insurance; changes in laws and regulations; liability and other claims
asserted against us; failure to expand our business; interest rates and the
availability of financing; our ability to attract and retain qualified
personnel; changes in our business plans; our significant indebtedness;
downgrades of our credit ratings; and inflation. For a discussion of these and
other risk factors, review the information under the caption Business -
Business Risks in Item 1 of the Companys Annual Report on Form 10-K/A for the
year ended December 31, 2003. All of the forward-looking statements are
qualified in their entirety by reference to the risk factors discussed therein.
Our forward-looking statements are based on the information currently
available to us and speak only as of the date of this report. You should not
place undue reliance on our forward-looking statements because the matters they
describe are subject to known and unknown risks, uncertainties and other
unpredictable factors, many of which are beyond our control. We undertake no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise, after the date of
this report to conform them to actual results. Over time, our actual results,
performance or achievements will likely differ from the anticipated results,
performance or achievements that are expressed or implied by our
forward-looking statements, and such differences might be significant and
materially adverse. 2




---



##### Table of Contents



PART I. FINANCIAL STATEMENTS 
  CONDENSED BALANCE SHEETS (unaudited)
 ASSETS December 31,
    
    June 30,(In Millions)
    
    2003
    
    2004Current AssetsCash and cash equivalents
    
    $
    192.5
    
    
    $
    205.7Marketable securities
    
    
    619.4
    
    
    
    659.1Receivables from related companies
    
    
    120.5
    
    
    
    105.8Receivables - net
    
    
    83.0
    
    
    
    114.0Inventories and supplies - net
    
    
    20.7
    
    
    
    20.6Deferred income taxes
    
    
    80.9
    
    
    
    86.4Prepaid expenses and other current assets
    
    
    36.3
    
    
    
    68.8Total Current Assets
    
    
    1,153.3
    
    
    
    1,260.4Property and EquipmentFlight equipment
    
    
    2,188.2
    
    
    
    2,058.2Other property and equipment
    
    
    391.2
    
    
    
    396.1Deposits for future flight equipment
    
    
    32.8
    
    
    
    31.12,612.2
    
    
    
    2,485.4Less accumulated depreciation and amortization
    
    
    816.3
    
    
    
    737.5Total Property and Equipment - Net
    
    
    1,795.9
    
    
    
    1,747.9Intangible Assets
    
    
    45.6
    
    
    
    45.6Other Assets
    
    
    71.6
    
    
    
    90.9Total Assets
    
    $
    3,066.4
    
    
    $
    3,144.8
 See accompanying notes to condensed financial statements. 3




---



##### Table of Contents



CONDENSED BALANCE SHEETS (unaudited)
Alaska Airlines, Inc. LIABILITIES AND SHAREHOLDERS EQUITY December 31,
    
    June 30,(In Millions)
    
    2003
    
    2004Current LiabilitiesAccounts payable
    
    $
    108.8
    
    
    $
    123.1Payables to related companies
    
    
    2.7
    
    
    
    3.3Accrued aircraft rent
    
    
    67.8
    
    
    
    63.9Accrued wages, vacation and payroll taxes
    
    
    81.4
    
    
    
    79.5Other accrued liabilities
    
    
    269.1
    
    
    
    285.5Air traffic liability
    
    
    237.1
    
    
    
    340.9Current portion of long-term debt and
capital lease obligations
    
    
    206.7
    
    
    
    89.5Total Current Liabilities
    
    
    973.6
    
    
    
    985.7Long-Term Debt and Capital Lease Obligations
    
    
    756.8
    
    
    
    823.9Other Liabilities and CreditsDeferred income taxes
    
    
    181.4
    
    
    
    174.4Deferred revenue
    
    
    246.0
    
    
    
    275.2Other liabilities
    
    
    210.5
    
    
    
    221.0637.9
    
    
    
    670.6Commitments and ContingenciesShareholders EquityCommon
stock, $1 par value Authorized: 1,000 shares
Issued: 2003 and 2004 - 500 shares
    
    
    
    
    
    
    Capital in excess of par value
    
    
    448.4
    
    
    
    448.4Accumulated other comprehensive income (loss)
    
    
    (80.2
    )
    
    
    (76.6
    )Retained earnings
    
    
    329.9
    
    
    
    292.8698.1
    
    
    
    664.6Total Liabilities and Shareholders Equity
    
    $
    3,066.4
    
    
    $
    3,144.8
 See accompanying notes to condensed financial statements. 4




---



##### Table of Contents



CONDENSED STATEMENTS OF OPERATIONS (unaudited)
Alaska Airlines, Inc. Three Months Ended June 30(In Millions Except Per Share Amounts)
    
    2003
    
    2004Revised (See Note 11)Operating RevenuesPassenger
    
    $
    460.6
    
    
    $
    519.9Freight and mail
    
    
    21.0
    
    
    
    23.1Other - net
    
    
    29.0
    
    
    
    34.6Total Operating Revenues
    
    
    510.6
    
    
    
    577.6Operating ExpensesWages and benefits
    
    
    192.0
    
    
    
    203.7Contracted services
    
    
    19.7
    
    
    
    29.4Aircraft fuel
    
    
    72.0
    
    
    
    112.6Aircraft maintenance
    
    
    44.6
    
    
    
    40.7Aircraft rent
    
    
    31.2
    
    
    
    27.9Food and beverage service
    
    
    14.9
    
    
    
    13.0Other selling expenses and commissions
    
    
    35.5
    
    
    
    31.3Depreciation and amortization
    
    
    29.6
    
    
    
    30.4Loss on sale of assets
    
    
    0.2
    
    
    
    1.1Landing fees and other rentals
    
    
    31.2
    
    
    
    35.3Other
    
    
    34.3
    
    
    
    37.0Impairment of aircraft
    
    
    
    
    
    
    36.8Total Operating Expenses
    
    
    505.2
    
    
    
    599.2Operating Income (Loss)
    
    
    5.4
    
    
    
    (21.6
    )Nonoperating Income (Expense)Interest income
    
    
    4.5
    
    
    
    6.3Interest expense
    
    
    (11.4
    )
    
    
    (10.7
    )Interest capitalized
    
    
    0.4
    
    
    
    0.2U.S. government compensation
    
    
    52.8
    
    
    
    Other - net
    
    
    7.9
    
    
    
    23.054.2
    
    
    
    18.8Income (loss) before income tax
    
    
    59.6
    
    
    
    (2.8
    )Income tax expense (benefit)
    
    
    22.8
    
    
    
    (0.1
    )Net Income (Loss)
    
    $
    36.8
    
    
    $
    (2.7
    )
 See accompanying notes to condensed financial statements. 5




---



##### Table of Contents



CONDENSED STATEMENTS OF OPERATIONS (unaudited)
Alaska Airlines, Inc. Six Months Ended June 30(In Millions Except Per Share Amounts)
    
    2003
    
    2004Revised (See Note 11)Operating RevenuesPassenger
    
    $
    847.6
    
    
    $
    969.2Freight and mail
    
    
    38.4
    
    
    
    40.8Other - net
    
    
    51.6
    
    
    
    58.9Total Operating Revenues
    
    
    937.6
    
    
    
    1,068.9Operating ExpensesWages and benefits
    
    
    380.0
    
    
    
    404.5Contracted services
    
    
    40.4
    
    
    
    52.5Aircraft fuel
    
    
    148.9
    
    
    
    206.2Aircraft maintenance
    
    
    82.5
    
    
    
    84.2Aircraft rent
    
    
    61.7
    
    
    
    57.4Food and beverage service
    
    
    27.8
    
    
    
    24.2Other selling expenses and commissions
    
    
    65.6
    
    
    
    65.2Depreciation and amortization
    
    
    58.1
    
    
    
    63.2Loss on sale of assets
    
    
    0.5
    
    
    
    1.9Landing fees and other rentals
    
    
    59.9
    
    
    
    68.5Other
    
    
    68.4
    
    
    
    73.9Impairment of aircraft
    
    
    
    
    
    
    36.8Total Operating Expenses
    
    
    993.8
    
    
    
    1,138.5Operating Loss
    
    
    (56.2
    )
    
    
    (69.6
    )Nonoperating Income (Expense)Interest income
    
    
    5.7
    
    
    
    11.6Interest expense
    
    
    (22.7
    )
    
    
    (21.5
    )Interest capitalized
    
    
    1.1
    
    
    
    0.3U.S. government compensation
    
    
    52.8
    
    
    
    Other - net
    
    
    8.3
    
    
    
    23.245.2
    
    
    
    13.6Loss before income tax
    
    
    (11.0
    )
    
    
    (56.0
    )Income tax benefit
    
    
    (2.7
    )
    
    
    (18.9
    )Net Loss
    
    $
    (8.3
    )
    
    $
    (37.1
    )
 See accompanying notes to condensed financial statements. 6




---



##### Table of Contents



CONDENSED STATEMENT OF SHAREHOLDERS EQUITY (unaudited)
Alaska Airlines, Inc. AccumulatedCapital in
    
    OtherCommon
    
    Excess of
    
    Comprehensive
    
    Retained(In Millions)
    
    Stock
    
    Par Value
    
    Income (Loss)
    
    Earnings
    
    TotalBalances at December 31, 2003:
    
    $
    0.0
    
    
    $
    448.4
    
    
    $
    (80.2
    )
    
    $
    329.9
    
    
    $
    698.1Net loss for the six months
ended June 30, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (37.1
    )
    
    
    (37.1
    )Other comprehensive income (loss):Related to marketable securities:Change in fair value
    
    
    
    
    
    
    
    
    
    
    (3.8
    )Reclassification to earnings
    
    
    
    
    
    
    
    
    
    
    0.7Income tax effect
    
    
    
    
    
    
    
    
    
    
    1.2(1.9
    )
    
    
    
    
    
    
    (1.9
    )Related to fuel hedges:Change in fair value
    
    
    
    
    
    
    
    
    
    
    16.3Reclassification to earnings
    
    
    
    
    
    
    
    
    
    
    (7.5
    )Income tax effect
    
    
    
    
    
    
    
    
    
    
    (3.3
    )5.5
    
    
    
    
    
    
    
    5.5Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (33.5
    )Balances at June 30, 2004
    
    $
    0.0
    
    
    $
    448.4
    
    
    $
    (76.6
    )
    
    $
    292.8
    
    
    $
    664.6
 See accompanying notes to condensed financial statements. 7




---



##### Table of Contents



CONDENSED STATEMENTS OF CASH FLOWS (unaudited)
Alaska Airlines, Inc. Six Months Ended June 30 (In Millions)
    
    2003
    
    2004Cash flows from operating activities:Net loss
    
    $
    (8.3
    )
    
    $
    (37.1
    )Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:Impairment of aircraft
    
    
    
    
    
    
    36.8Depreciation and amortization
    
    
    58.1
    
    
    
    63.2Amortization of airframe and engine overhauls
    
    
    27.8
    
    
    
    31.3Changes in derivative fair values
    
    
    (0.4
    )
    
    
    (17.2
    )Loss on sale of assets
    
    
    0.5
    
    
    
    1.9Decrease in deferred income taxes
    
    
    (2.7
    )
    
    
    (12.5
    )Increase in accounts receivable - net
    
    
    (55.8
    )
    
    
    (16.3
    )(Increase) decrease in prepaid expenses and other current assets
    
    
    3.8
    
    
    
    (11.6
    )Increase in air traffic liability
    
    
    86.7
    
    
    
    103.8Increase in other current liabilities
    
    
    14.6
    
    
    
    25.5Increase in deferred revenue and other-net
    
    
    33.6
    
    
    
    24.4Net cash provided by operating activities
    
    
    157.9
    
    
    
    192.2Cash flows from investing activities:Proceeds from disposition of assets
    
    
    0.5
    
    
    
    3.9Purchases of marketable securities
    
    
    (593.8
    )
    
    
    (434.7
    )Sales and maturities of marketable securities
    
    
    354.9
    
    
    
    392.0Property and equipment additions:Aircraft purchase deposits
    
    
    (1.4
    )
    
    
    (5.2
    )Capitalized overhauls
    
    
    (34.6
    )
    
    
    (20.3
    )Aircraft
    
    
    (157.4
    )
    
    
    (36.9
    )Other flight equipment
    
    
    (10.5
    )
    
    
    (3.7
    )Other property
    
    
    (12.9
    )
    
    
    (21.3
    )Aircraft deposits returned
    
    
    1.2
    
    
    
    Restricted deposits and other
    
    
    (4.8
    )
    
    
    (2.6
    )Net cash used in investing activities
    
    
    (458.8
    )
    
    
    (128.8
    )Cash flows from financing activities:Proceeds from issuance of long-term debt
    
    
    128.6
    
    
    
    94.6Long-term debt and capital lease payments
    
    
    (42.2
    )
    
    
    (144.8
    )Capital contribution from Air Group
    
    
    60.0
    
    
    
    Net cash provided by (used in) financing activities
    
    
    146.4
    
    
    
    (50.2
    )Net change in cash and cash equivalents
    
    
    (154.5
    )
    
    
    13.2Cash and cash equivalents at beginning of period
    
    
    268.9
    
    
    
    192.5Cash and cash equivalents at end of period
    
    $
    114.4
    
    
    $
    205.7Supplemental disclosure of cash paid during the period for:Interest (net of amount capitalized)
    
    $
    22.9
    
    
    $
    21.4
 See accompanying notes to condensed financial statements. 8




---



##### Table of Contents



NOTES TO CONDENSED FINANCIAL STATEMENTS (unaudited)
Alaska Airlines, Inc. Note 1. Basis of Presentation and Significant Accounting Policies Organization and Basis of Presentation The accompanying unaudited condensed financial statements of Alaska Airlines,
Inc. (Alaska or the Company) should be read in conjunction with the financial
statements in the Companys Annual Report on Form 10-K/A for the year ended
December 31, 2003. In the opinion of management, all adjustments have been
made which are necessary to present fairly the Companys financial position as
of June 30, 2004, as well as the results of operations for the three and six
months ended June 30, 2003 and 2004. The adjustments made were of a normal
recurring nature. The Company is a wholly owned subsidiary of Alaska Air Group,
Inc. (Air Group) whose principle subsidiaries are Alaska and Horizon Air
Industries, Inc. (Horizon). The Companys financial statements have been prepared in conformity
with accounting principles generally accepted in the United States
of America (GAAP). In preparing these condensed financial
statements, the Company is required to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities, as well as the
reported amounts of revenues and expenses. Significant estimates
made include assumptions used to record liabilities, expenses and
revenues associated with the Companys Mileage Plan, lease return
provisions, the fair market value of surplus or impaired aircraft,
engines and parts, and the amounts of certain accrued liabilities.
Actual results may differ from the Companys estimates. Stock Options The Company has four 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. The Company
applies the intrinsic value method in accordance with the provisions of
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued
to Employees, and related Interpretations, in accounting for stock options.
Accordingly, no compensation cost has been recognized for these plans as the
exercise price of options equals the fair market value on the date of grant. The following table represents the effect of net income (loss) if the Company
had applied the fair value based method and recognition provisions of Statement
on Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation, to its stock-based employee compensation (in millions): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2003
    
    2004
    
    2003
    
    2004Net income (loss):As reported
    
    $
    36.8
    
    
    $
    (2.7
    )
    
    $
    (8.3
    )
    
    $
    (37.1
    )Deduct: Total stock-based employee
compensation expense determined
under fair value based methods for
all awards, net of related tax effects
    
    
    (1.2
    )
    
    
    (0.9
    )
    
    
    (2.6
    )
    
    
    (1.8
    )Pro forma net income (loss)
    
    $
    35.6
    
    
    $
    (3.6
    )
    
    $
    (10.9
    )
    
    $
    (38.9
    )
 9




---



##### Table of Contents



Note 2. Impairment of Aircraft and Related Spare Engines Impairment of 737-200C Aircraft In June 2004, the Companys Board approved a plan to accelerate the retirement
of its Boeing 737-200C fleet and remove those aircraft from service
(periodically by the end of 2007) earlier than initially planned. In July
2004, the Company announced its plan to replace these aircraft by modifying
five existing 737-400 aircraft and using other existing 737-400 aircraft for
the remaining passenger capacity. Four of the five modified airplanes will be
converted into combination passenger/cargo aircraft and one will be converted
to an all cargo aircraft. The Company expects to backfill the 737-400s with
one acquired Boeing 737-800s in 2005 and two in 2006, although the Company does
not have firm commitments for these aircraft at this time. As a result of this decision, the Company evaluated impairment as required by
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets
and concluded that the carrying value of the 737-200C fleet was no longer
recoverable when compared to the estimated remaining future cash flows.
Accordingly, during the second quarter of 2004, the Company recorded an
impairment charge totaling $36.8 million (pretax) to write down the fleet to
its estimated fair market value. The estimated fair value of the Companys aircraft was derived using
third-party appraisals and market data compiled by an independent pricing
authority, and adjusted for other factors that management deemed appropriate.
In conjunction with the fair value determination, the Company has reassessed
the useful lives and residual values of the fleet and related spare equipment
and will depreciate the remaining carrying values through 2007, when the last
aircraft will be retired. Note 3. Derivative Financial Instruments The Companys operations are inherently dependent upon the price and
availability of aircraft fuel, which accounted for 14% and 19% of second
quarter 2003 and 2004 operating expenses, respectively. To manage economic
risks associated with fluctuations in aircraft fuel prices, the Company enters
into swap agreements and call options for crude oil. These hedging contracts
have in the past been highly correlated to changes in aircraft fuel prices,
and therefore qualified as cash flow hedges under SFAS No. 133 whereby the
majority of the changes in fair value were deferred in Accumulated Other
Comprehensive Income on the Companys Balance Sheet until these hedge positions
were settled at which point they were recognized in earnings. The Companys current fuel hedge program includes the same underlying
commodities used historically, however, because of recent variations in the
spread between the prices of crude oil and
jet fuel, the Companys existing hedge contracts as of June 30, 2004, are no
longer highly correlated to changes in prices of aircraft fuel, as defined in
SFAS No. 133. The impacts on the Companys reported results are as follows: 10




---



##### Table of Contents




    
    All second quarter of 2004 changes in the fair value of fuel
hedge contracts that existed as of March 31, 2004 or hedge positions
entered into subsequent to March 31, 2004 are reported in other
non-operating income (expense).  
    
    Because the Company will be recording fair value changes in its
statement of operations as they occur (in non-operating income
(expense)), actual gains or losses realized upon settlement of the
hedge contracts entered into subsequent to March 31, 2004 will not be
reflected in fuel expense until high correlation returns and the
positions are redesignated.  
    
    Reported fuel expense will include effective gains associated
with hedge positions that settled during the current period on
contracts that existed at March 31, 2004 to the extent that
mark-to-market gains were already included in Accumulated Other
Comprehensive Income at March 31, 2004. The following table summarizes realized fuel hedging gains and changes in fair
value of hedging contracts outstanding as of June 30, 2004 and 2003 (in
millions): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2003
    
    2004
    
    2003
    
    2004Settled hedging gains included in
aircraft fuel
    
    $
    2.0
    
    
    $
    4.4
    
    
    $
    9.7
    
    
    $
    7.5Hedging gains included in
non-operating income (expense)*
    
    $
    3.8
    
    
    $
    3.2
    
    
    $
    4.5
    
    
    $
    3.2Fair market value adjustment
included in non-operating
income (expense)**
    
    $
    
    
    
    $
    19.6
    
    
    $
    
    
    
    $
    20.1
 * Includes the ineffective portion recorded currently in earnings using hedge
accounting. ** Includes changes in fair value since March 31, 2004 resulting from the loss
of hedge accounting. Fuel hedge positions entered into by Alaska are currently as follows: Approximate % ofExpected Fuel
    
    Gallons Hedged
    
    Approximate CrudeRequirements
    
    (in millions)
    
    Oil Price per BarrelJuly  December 2004
    
    
    45
    %
    
    
    81.1
    
    
    $
    29.88January  December 2005
    
    
    48
    %
    
    
    173.7
    
    
    $
    29.20January  December 2006
    
    
    15
    %
    
    
    55.8
    
    
    $
    31.24
 As of December 31, 2003 and June 30, 2004, the fair values of the Companys
fuel hedge positions were $15.7 million and $51.9 million, respectively, and
are presented in the balance sheets as follows (in millions): December 31, 2003
    
    June 30, 2004Prepaid and other current assets
    
    $
    10.3
    
    
    $
    30.8Other assets
    
    
    5.4
    
    
    
    21.1$
    15.7
    
    
    $
    51.9
 11




---



##### Table of Contents



Note 4. Other Assets At December 31, 2003 and June 30, 2004, other assets consisted of the following (in millions): December 31, 2003
    
    June 30, 2004Restricted deposits (primarily restricted investments)
    
    $
    53.2
    
    
    $
    56.5Derivative financial instruments (fuel hedges)
    
    
    5.4
    
    
    
    21.1Deferred costs and other
    
    
    13.0
    
    
    
    13.3$
    71.6
    
    
    $
    90.9
 Note 5. Frequent Flyer Program Alaskas Mileage Plan liabilities are included under the following balance sheet captions (in millions): December 31, 2003
    
    June 30, 2004Current Liabilities:Other accrued liabilities
    
    $
    112.9
    
    
    $
    126.3Other Liabilities and Credits (non-current):Deferred revenue
    
    
    204.5
    
    
    
    226.1Other liabilities
    
    
    18.6
    
    
    
    19.2Total
    
    $
    336.0
    
    
    $
    371.6
 Note 6. Related Company Transactions During 2000, Alaska transferred a flight simulator to Air Group Leasing (AAGL)
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. The Company periodically loans Horizon funds at varying interest rates. All
amounts are payable on demand. Interest income recognized related to the
Horizon loans totaled $0.8 million and $0.5 million for the quarters ended June
30, 2003 and 2004, respectively, and $1.3 million and $1.2 million for the six
months ended June 30, 2003 and 2004, respectively. At June 30, 2004,
receivables from related companies include $87.2 million from Horizon, $9.6
million from AAGL and $9.0 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 fully allocated cost for Horizon to provide the transportation
service, plus a 5%
mark-up. Incentive markets are analyzed quarterly and the monthly
reimbursement amount is adjusted to reflect the prior quarters actual
performance. Alaska made 12




---



##### Table of Contents



incentive payments to Horizon of $9.3 million and $2.5
million during the quarters ended June 30, 2003 and 2004, respectively, and
$14.8 million and $4.4 million during the six months ended June 30, 2003 and
2004, respectively. These amounts are reflected as other selling expenses and
commissions in the condensed statements of operations. Alaska also provides certain services to Horizon for which Alaska receives
payment from Horizon based on the cost of the services, including personnel
expenses related to development and maintenance of alaskaair.com, the
maintenance of telecommunications lines and related software, personnel and
systems expenses to process Horizons revenue transactions, and printing and
graphics services. Alaska also pays certain leasing and other facilities costs
on Horizons behalf that are reimbursed monthly by Horizon. Total amounts
received by Alaska from Horizon were $1.8 million and $2.5 million for the
quarters ended June 30, 2003 and 2004, respectively. For the six months ended
June 30, 2003 and 2004, total amounts received by Alaska from Horizon were $3.7
million and $4.8 million, respectively. In the normal course of business, Alaska and Horizon provide certain ground
handling services to the other company. For the quarters ended June 30, 2003
and 2004, charges for ground services provided by Alaska to Horizon totaled
$0.6 million and $0.4 million, respectively. For the six months ending June
30, 2003 and 2004, charges for ground services provided by Alaska to Horizon
totaled $1.2 million and $1.0 million, respectively. For the quarters ended
June 30, 2003 and 2004, charges for ground services provided by Horizon to
Alaska totaled $1.1 million and $1.3 million, respectively. For the six months
ended June 30, 2003 and 2004, charges for ground services provided by Horizon
to Alaska totaled $2.2 million and $2.6 million, respectively. Note 7. Employee Benefit Plans Pension Plans-Defined Benefit Net pension expense for the three and six months ended June 30 included the
following components (in millions): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2003
    
    2004
    
    2003
    
    2004Service cost
    
    $
    11.1
    
    
    $
    13.7
    
    
    $
    22.2
    
    
    $
    27.4Interest cost
    
    
    10.8
    
    
    
    12.0
    
    
    
    21.6
    
    
    
    24.0Expected return on assets
    
    
    (8.5
    )
    
    
    (10.7
    )
    
    
    (17.0
    )
    
    
    (21.4
    )Amortization of prior service cost
    
    
    1.3
    
    
    
    1.3
    
    
    
    2.6
    
    
    
    2.6Actuarial gain
    
    
    3.7
    
    
    
    3.7
    
    
    
    7.4
    
    
    
    7.4Net pension expense
    
    $
    18.4
    
    
    $
    20.0
    
    
    $
    36.8
    
    
    $
    40.0
 The Company made no contributions to its defined benefit pension plans during
the three and six months ended June 30, 2003. The Company made $16.5 million
and $32.9 million in contributions during the three and six months ended June
30, 2004, respectively, and expects to contribute an additional $16.5 million
to these plans during the remainder of 2004. 13




---



##### Table of Contents



Pension Plans-Noncontributory Net pension expense for the unfunded, noncontributory defined benefit plans for
certain elected officers of the Company for the three and six months ended June
30 included the following components (in millions): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2003
    
    2004
    
    2003
    
    2004Service cost
    
    $
    0.2
    
    
    $
    0.3
    
    
    $
    0.4
    
    
    $
    0.6Interest cost
    
    
    0.5
    
    
    
    0.5
    
    
    
    1.0
    
    
    
    1.0Actuarial gain
    
    
    0.1
    
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.4Net pension expense
    
    $
    0.8
    
    
    $
    1.0
    
    
    $
    1.6
    
    
    $
    2.0
 Other Postretirement Benefits Net periodic benefit cost for the postretirement medical plans for the three
and six months ended June 30 included the following components (in millions): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2003
    
    2004
    
    2003
    
    2004Service cost
    
    $
    0.9
    
    
    $
    1.2
    
    
    $
    1.8
    
    
    $
    2.4Interest cost
    
    
    1.1
    
    
    
    1.3
    
    
    
    2.2
    
    
    
    2.6Amortization of prior service cost
    
    
    
    
    
    
    (0.1
    )
    
    
    
    
    
    
    (0.2
    )Actuarial gain
    
    
    0.4
    
    
    
    0.7
    
    
    
    0.8
    
    
    
    1.4Net periodic benefit cost
    
    $
    2.4
    
    
    $
    3.1
    
    
    $
    4.8
    
    
    $
    6.2
 Note 8. Long-Term Debt and Capital Lease Obligations At December 31, 2003, and June 30, 2004, long-term debt and capital lease
obligations were as follows (in millions): December 31, 2003
    
    June 30, 2004Fixed rate notes payable due through 2015
    
    $
    382.6
    
    
    $
    372.1Variable rate notes payable due through 2018
    
    
    572.5
    
    
    
    540.9Long-term debt
    
    
    955.1
    
    
    
    913.0Capital lease obligations
    
    
    8.4
    
    
    
    0.4Less current portion
    
    
    (206.7
    )
    
    
    (89.5
    )$
    756.8
    
    
    $
    823.9
 During the first six months of 2004, Alaska issued $94.6 million of debt
secured by flight equipment, having interest rates that vary with LIBOR and
payment terms ranging from 12 to 16 years. Debt issuances during the period
were offset by normal long-term debt payments of $34.8 million and payments
made to the Companys credit facility of $110.0 million. Subsequent to quarter
end, the remainder of the Companys credit facility was paid off. 14




---



##### Table of Contents



Note 9. Contingencies The Company is a party to routine litigation incidental to its business and
with respect to which no material liability is expected. Management believes
the ultimate disposition of these matters is not likely to materially affect
the Companys financial position or results of operations. However, this
belief is based on managements current understanding of the relevant law and
facts; it is subject to various contingencies, including the potential costs
and risks associated with litigation and the actions of judges and juries. Note 10. U.S. Government Compensation On April 16, 2003, the Emergency Wartime Supplemental Appropriations Act (the
Act) was signed into legislation. The Act included $2.3 billion of one-time
cash payments to air carriers, allocated based on each carriers share of
security fees remitted and carrier fees paid to the Transportation Security
Administration (TSA) since its inception in February 2002. In May 2003, the
Company received its share of the one-time cash grant in the amount of $52.8
million. Note 11. Revision of Previously Issued Financial Statements In its previously reported 2003 Form 10-Qs, the Company recorded unrealized
gains and losses related to the ineffective portion of changes in fair value of
the Companys fuel hedge positions as nonoperating income (expense) and then
reclassified those gains and losses to fuel expense as those hedges were
settled. This practice was not consistent with its stated policy, which is to
record the ineffective portion in nonoperating income (expense). The Company
has revised its 2003 reported condensed financial statements to adjust its
historical presentation of such items. Such revisions have resulted in
reclassification between operating income (loss) and nonoperating income
(expense) in the statements of operations. The revisions have no impact on
previously reported pretax income (loss), net income (loss), the balance
sheets, the statements of shareholders equity or the statements of cash flows
for any periods. The effect of the revisions for 2003 is as follows (in millions): Three Months Ended
    
    Six Months EndedJune 30, 2003
    
    June 30, 2003Total Aircraft Fuel:As Previously Reported
    
    $
    69.1
    
    
    $
    146.0As Revised
    
    $
    72.0
    
    
    $
    148.9Total Operating Expenses:As Previously Reported
    
    $
    502.3
    
    
    $
    990.9As Revised
    
    $
    505.2
    
    
    $
    993.8Total Operating Income (Loss):As Previously Reported
    
    $
    8.3
    
    
    $
    (53.3
    )As Revised
    
    $
    5.4
    
    
    $
    (56.2
    )Nonoperating income:As Previously Reported
    
    $
    51.3
    
    
    $
    42.3As Revised
    
    $
    54.2
    
    
    $
    45.2
 15




---



##### Table of Contents



Alaska Airlines Financial and Statistical Data (Unaudited) Three Months Ended June 30
    
    Six Months Ended June 30%
    
    
    
    
    
    
    
    
    
    %Financial Data (in millions):
    
    2003*
    
    2004
    
    Change
    
    2003*
    
    2004
    
    ChangeOperating Revenues:Passenger
    
    $
    460.6
    
    
    $
    519.9
    
    
    
    12.9
    %
    
    $
    847.6
    
    
    $
    969.2
    
    
    
    14.3
    %Freight and mail
    
    
    21.0
    
    
    
    23.1
    
    
    
    10.0
    %
    
    
    38.4
    
    
    
    40.8
    
    
    
    6.3
    %Other - net
    
    
    29.0
    
    
    
    34.6
    
    
    
    19.3
    %
    
    
    51.6
    
    
    
    58.9
    
    
    
    14.1
    %Total Operating Revenues
    
    
    510.6
    
    
    
    577.6
    
    
    
    13.1
    %
    
    
    937.6
    
    
    
    1,068.9
    
    
    
    14.0
    %Operating Expenses:Wages and benefits
    
    
    192.0
    
    
    
    203.7
    
    
    
    6.1
    %
    
    
    380.0
    
    
    
    404.5
    
    
    
    6.4
    %Contracted services
    
    
    19.7
    
    
    
    29.4
    
    
    
    49.2
    %
    
    
    40.4
    
    
    
    52.5
    
    
    
    30.0
    %Aircraft fuel
    
    
    72.0
    
    
    
    112.6
    
    
    
    56.4
    %
    
    
    148.9
    
    
    
    206.2
    
    
    
    38.5
    %Aircraft maintenance
    
    
    44.6
    
    
    
    40.7
    
    
    
    -8.7
    %
    
    
    82.5
    
    
    
    84.2
    
    
    
    2.1
    %Aircraft rent
    
    
    31.2
    
    
    
    27.9
    
    
    
    -10.6
    %
    
    
    61.7
    
    
    
    57.4
    
    
    
    -7.0
    %Food and beverage service
    
    
    14.9
    
    
    
    13.0
    
    
    
    -12.8
    %
    
    
    27.8
    
    
    
    24.2
    
    
    
    -12.9
    %Other selling expenses and commissions
    
    
    35.5
    
    
    
    31.3
    
    
    
    -11.8
    %
    
    
    65.6
    
    
    
    65.2
    
    
    
    -0.6
    %Depreciation and amortization
    
    
    29.6
    
    
    
    30.4
    
    
    
    2.7
    %
    
    
    58.1
    
    
    
    63.2
    
    
    
    8.8
    %Loss on sale of assets
    
    
    0.2
    
    
    
    1.1
    
    
    NM
    
    
    0.5
    
    
    
    1.9
    
    
    NMLanding fees and other rentals
    
    
    31.2
    
    
    
    35.3
    
    
    
    13.1
    %
    
    
    59.9
    
    
    
    68.5
    
    
    
    14.4
    %Other
    
    
    34.3
    
    
    
    37.0
    
    
    
    7.9
    %
    
    
    68.4
    
    
    
    73.9
    
    
    
    8.0
    %Impairment of aircraft
    
    
    
    
    
    
    36.8
    
    
    
    100.0
    %
    
    
    
    
    
    
    36.8
    
    
    
    100.0
    %Total Operating Expenses
    
    
    505.2
    
    
    
    599.2
    
    
    
    18.6
    %
    
    
    993.8
    
    
    
    1,138.5
    
    
    
    14.6
    %Operating Income (Loss)
    
    
    5.4
    
    
    
    (21.6
    )
    
    NM
    
    
    (56.2
    )
    
    
    (69.6
    )
    
    NMInterest income
    
    
    4.5
    
    
    
    6.3
    
    
    
    
    
    
    
    5.7
    
    
    
    11.6Interest expense
    
    
    (11.4
    )
    
    
    (10.7
    )
    
    
    
    
    
    
    (22.7
    )
    
    
    (21.5
    )Interest capitalized
    
    
    0.4
    
    
    
    0.2
    
    
    
    
    
    
    
    1.1
    
    
    
    0.3U.S. government compensation
    
    
    52.8
    
    
    
    
    
    
    
    
    
    
    
    52.8
    
    
    
    Other - net
    
    
    7.9
    
    
    
    23.0
    
    
    
    
    
    
    
    8.3
    
    
    
    23.254.2
    
    
    
    18.8
    
    
    
    
    
    
    
    45.2
    
    
    
    13.6Income (Loss) Before Income Tax
    
    $
    59.6
    
    
    $
    (2.8
    )
    
    NM
    
    $
    (11.0
    )
    
    $
    (56.0
    )
    
    NMOperating Statistics:Revenue passengers (000)
    
    
    3,797
    
    
    
    4,116
    
    
    
    8.4
    %
    
    
    7,055
    
    
    
    7,707
    
    
    
    9.2
    %RPMs (000,000)
    
    
    3,678
    
    
    
    4,104
    
    
    
    11.6
    %
    
    
    6,821
    
    
    
    7,684
    
    
    
    12.7
    %ASMs (000,000)
    
    
    5,209
    
    
    
    5,635
    
    
    
    8.2
    %
    
    
    9,918
    
    
    
    10,813
    
    
    
    9.0
    %Passenger load factor
    
    
    70.6
    %
    
    
    72.8
    %
    
    2.2
    pts
    
    
    68.8
    %
    
    
    71.1
    %
    
    2.3
    ptsBreakeven load factor, excluding impairment charge
    
    
    70.2
    %
    
    
    68.5
    %
    
    -1.7
    pts
    
    
    74.9
    %
    
    
    73.3
    %
    
    -1.6
    ptsYield per passenger mile
    
    
    12.52
    ¢
    
    
    12.67
    ¢
    
    
    1.2
    %
    
    
    12.43
    ¢
    
    
    12.61
    ¢
    
    
    1.4
    %Operating revenue per ASM
    
    
    9.80
    ¢
    
    
    10.25
    ¢
    
    
    4.6
    %
    
    
    9.45
    ¢
    
    
    9.89
    ¢
    
    
    4.7
    %Operating expenses per ASM (a)
    
    
    9.70
    ¢
    
    
    10.63
    ¢
    
    
    9.6
    %
    
    
    10.02
    ¢
    
    
    10.53
    ¢
    
    
    5.1
    %Operating expenses per ASM excluding fuel and impairment charge (a)
    
    
    8.32
    ¢
    
    
    7.98
    ¢
    
    
    -4.1
    %
    
    
    8.52
    ¢
    
    
    8.28
    ¢
    
    
    -2.8
    %Fuel cost per gallon (a)
    
    
    85.4
    ¢
    
    
    126.7
    ¢
    
    
    48.4
    %
    
    
    92.0
    ¢
    
    
    120.0
    ¢
    
    
    30.4
    %Fuel cost per gallon excluding all hedging activities (a)
    
    
    87.8
    ¢
    
    
    131.6
    ¢
    
    
    49.9
    %
    
    
    98.0
    ¢
    
    
    124.4
    ¢
    
    
    26.9
    %Economic fuel cost per gallon (a)
    
    
    82.0
    ¢
    
    
    123.1
    ¢
    
    
    50.1
    %
    
    
    90.2
    ¢
    
    
    118.2
    ¢
    
    
    31.0
    %Fuel gallons (000,000)
    
    
    84.3
    
    
    
    88.9
    
    
    
    5.5
    %
    
    
    161.9
    
    
    
    171.8
    
    
    
    6.1
    %Average number of employees
    
    
    10,136
    
    
    
    10,255
    
    
    
    1.2
    %
    
    
    10,062
    
    
    
    10,120
    
    
    
    0.6
    %Aircraft utilization (blk hrs/day)
    
    
    10.5
    
    
    
    11.1
    
    
    
    5.7
    %
    
    
    10.4
    
    
    
    10.7
    
    
    
    2.9
    %Operating fleet at period-end
    
    
    110
    
    
    
    108
    
    
    
    -1.8
    %
    
    
    110
    
    
    
    108
    
    
    
    -1.8
    %
  NM = Not Meaningful(a) See Note A on Page 17.* As revised. See Note 11 to the condensed financial statements. 16




---



##### Table of Contents



Note A: Pursuant to Item 10 of Regulation S-K, we are providing disclosure of the reconciliation of reported non-GAAP financial measures to their most directly comparable financial measures reported on a GAAP
basis. The non-GAAP financial measures provide management the ability to measure and monitor our performance both with and without the cost of aircraft fuel (including the impact of our fuel hedging
program where appropriate), the impairment charge related to our 737-200 aircraft, government compensation and mark-to-market hedging gains recorded during the second quarter of 2004. Because the cost
and availability of aircraft fuel are subject to many economic and political factors beyond our control, it is our view that the measurement and monitoring of performance without fuel is important. In
addition, we believe the disclosure of financial performance without impairment charges, government compensation and mark-to-market hedging gains is useful to investors in evaluating our ongoing
operational performance. Finally, these non-GAAP financial measures are also comparable to financial measures reported
to the Department of Transportation by other major network airlines. The following tables reconcile our non-GAAP financial measures to the most directly comparable GAAP financial measures for Alaska Airlines, Inc.: Alaska Airlines, Inc.: Three Months Ended June 30,
    
    Six Months Ended June 30,($ in millions)
    
    2003*
    
    2004
    
    2003*
    
    2004Unit cost reconciliations:Operating expenses
    
    $
    505.2
    
    
    $
    599.2
    
    
    $
    993.8
    
    
    $
    1,138.5ASMs (000,000)
    
    
    5,209
    
    
    
    5,635
    
    
    
    9,918
    
    
    
    10,813Operating expenses per ASM
    
    
    9.70
    ¢
    
    
    10.63
    ¢
    
    
    10.02
    ¢
    
    
    10.53
    ¢Operating expenses
    
    $
    505.2
    
    
    $
    599.2
    
    
    $
    993.8
    
    
    $
    1,138.5Less: aircraft fuel
    
    
    (72.0
    )
    
    
    (112.6
    )
    
    
    (148.9
    )
    
    
    (206.2
    )Less: impairment of aircraft
    
    
    
    
    
    
    (36.8
    )
    
    
    
    
    
    
    (36.8
    )Operating expense excluding fuel and impairment charge
    
    $
    433.2
    
    
    $
    449.8
    
    
    $
    844.9
    
    
    $
    895.5ASMs (000,000)
    
    
    5,209
    
    
    
    5,635
    
    
    
    9,918
    
    
    
    10,813Operating expense per ASM excluding fuel and impairment charge
    
    
    8.32
    ¢
    
    
    7.98
    ¢
    
    
    8.52
    ¢
    
    
    8.28
    ¢Aircraft fuel reconciliations:Aircraft fuel
    
    $
    72.0
    
    
    $
    112.6
    
    
    $
    148.9
    
    
    $
    206.2Fuel gallons (000,000)
    
    
    84.3
    
    
    
    88.9
    
    
    
    161.9
    
    
    
    171.8Fuel cost per gallon (GAAP basis)
    
    
    85.4
    ¢
    
    
    126.7
    ¢
    
    
    92.0
    ¢
    
    
    120.0
    ¢Aircraft fuel
    
    $
    72.0
    
    
    $
    112.6
    
    
    $
    148.9
    
    
    $
    206.2Add: hedging gains included in aircraft fuel
    
    
    2.0
    
    
    
    4.4
    
    
    
    9.7
    
    
    
    7.5Aircraft fuel excluding all hedging gains
    
    $
    74.0
    
    
    $
    117.0
    
    
    $
    158.6
    
    
    $
    213.7Fuel gallons (000,000)
    
    
    84.3
    
    
    
    88.9
    
    
    
    161.9
    
    
    
    171.8Fuel cost per gallon excluding all hedging activities
    
    
    87.8
    ¢
    
    
    131.6
    ¢
    
    
    98.0
    ¢
    
    
    124.4
    ¢Aircraft fuel
    
    $
    72.0
    
    
    $
    112.6
    
    
    $
    148.9
    
    
    $
    206.2Less: Gains on settled hedges included in nonoperating
income (expense)
    
    
    (2.9
    )
    
    
    (3.2
    )
    
    
    (2.9
    )
    
    
    (3.2
    )Adjusted fuel
    
    
    69.1
    
    
    
    109.4
    
    
    
    146.0
    
    
    
    203.0Fuel gallons (000,000)
    
    
    84.3
    
    
    
    88.9
    
    
    
    161.9
    
    
    
    171.8Economic fuel cost per gallon
    
    
    82.0
    ¢
    
    
    123.1
    ¢
    
    
    90.2
    ¢
    
    
    118.2
    ¢Reconciliation to GAAP pretax income (loss):Pretax income (loss) excluding impairment charge, government
comp and mark-to-market hedging gains
    
    $
    6.8
    
    
    $
    14.4
    
    
    ($
    63.8
    )
    
    ($
    39.3
    )Less: impairment of aircraft and related spare parts
    
    
    
    
    
    
    (36.8
    )
    
    
    
    
    
    
    (36.8
    )Add: government compensation
    
    
    52.8
    
    
    
    
    
    
    
    52.8
    
    
    
    Add: mark-to-market hedging gains included
in nonoperating income (expense)
    
    
    
    
    
    
    19.6
    
    
    
    
    
    
    
    20.1Pretax income (loss) reported GAAP amounts
    
    $
    59.6
    
    
    ($
    2.8
    )
    
    ($
    11.0
    )
    
    ($
    56.0
    )
 * As revised. See Note 11 to the condensed financial statements. 17




---



##### Table of Contents



Alaska Airlines, Inc. Net Income (Loss) Reconciliation: The following table summarizes Alaska Airlines, Inc.s net income (loss) during 2003 and 2004 excluding impairment
charges, the second quarter of 2004 hedging mark-to-market gain of $22.3 million ($14.8 million, net of tax), government
compensation and as reported in accordance with GAAP (in millions except per share amounts): Three Months Ended June 30,2003
    
    2004Dollars
    
    DollarsNet income excluding
government compensation, hedging gains and impairment charge
    
    $
    4.2
    
    
    $
    8.7Government compensation, net of tax
    
    
    32.6
    
    
    
    Mark-to-market hedging gains, net of tax
    
    
    
    
    
    
    13.0Impairment charge, net of tax
    
    
    
    
    
    
    (24.4
    )Reported GAAP amounts
    
    $
    36.8
    
    
    ($
    2.7
    )
 Six Months Ended June 30,2003
    
    2004Dollars
    
    DollarsNet loss and diluted EPS excluding
government compensation, hedging gains and impairment charge
    
    ($
    40.9
    )
    
    ($
    26.0
    )Government compensation, net of tax
    
    
    32.6
    
    
    
    Mark-to-market hedging gains, net of tax
    
    
    
    
    
    
    13.3Impairment charge, net of tax
    
    
    
    
    
    
    (24.4
    )Reported GAAP amounts
    
    ($
    8.3
    )
    
    ($
    37.1
    )
 18




---



##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations The following discussion should be read in conjunction with our condensed
financial statements and the related notes contained elsewhere in this
quarterly report on Form 10-Q. All statements in the following discussion that
are not reports of historical information or descriptions of current accounting
policy are forward-looking statements. Please consider our forward-looking
statements in light of the risks referred to in this reports introductory
cautionary note. Alaskas filings with the Securities and Exchange Commission, including its
annual report on Form 10-K/A, quarterly reports on Form 10-Q, current reports
on Form 8-K and amendments to those reports are accessible free of charge at
www.alaskaair.com. The information contained on our website is not a part of
this quarterly report on Form 10-Q. As used in this Form 10-Q, the terms
Alaska, our, we and the Company refer to Alaska Airlines, Inc., unless
the context indicates otherwise. Second Quarter in Review and Current Events We recorded a second quarter 2004 net loss of $2.7 million compared to net
income of $36.8 million the second quarter of 2003. Second quarter results
include impairment charges of $36.8 million ($24.4 million, net of tax)
associated with a decision to accelerate the retirement of the Companys Boeing
737-200C fleet. Second quarter results also include $19.6 million ($13.0
million net of tax) in mark-to-market hedging gains reflecting an increase in
the fair value of the Companys current hedge portfolio since March 31, 2004.
Reduced correlation of our hedged items resulted in the loss of hedge
accounting during the quarter. Without these items in 2004 and excluding the
government compensation received in 2003 , which is discussed in Note 10 to the
condensed financial statements, net income would have been $8.7 million during
2004, compared to $4.2 million in 2003. Financial and statistical data
comparisons for Alaska are shown on page 16. A discussion of the three-month
data follows. On pages 17 and 18, we have included a reconciliation of
reported non-GAAP financial measures to the most directly comparable GAAP
financial measures. Impairment of 737-200C Aircraft In June 2004, the Companys Board approved a plan to accelerate the retirement
of its Boeing 737-200C fleet and remove those aircraft from service
(periodically by the end of 2007) earlier than initially planned. In July
2004, the Company announced its plan to replace these aircraft by modifying
five existing 737-400 aircraft and using other existing 737-400 aircraft for
the remaining passenger capacity. Four of the five modified airplanes will be
converted into combination passenger/cargo aircraft and one will be converted
to an all cargo aircraft. The Company expects to backfill the 737-400s with
one acquired Boeing 737-800 in 2005 and two in 2006, although the Company does
not have firm commitments for these aircraft at this time. As a result of this decision, the Company evaluated impairment as required by
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets
and concluded that the carrying value of the 737-200C fleet was no longer
recoverable when compared to the estimated remaining future cash flows.
Accordingly, during the second quarter of 2004, the Company recorded an
impairment charge totaling $36.8 million (pretax) to write down the fleet to
its estimated fair market value. In addition, we revised our estimates of the
useful lives and residual values of the fleet and 19




---



##### Table of Contents



related spare equipment and
will depreciate the remaining carrying values through 2007, when the last
aircraft will be retired. Mark-to-Market Fuel Hedging Gains Beginning in the second quarter of 2004, we lost the ability to defer, as a
component of comprehensive income, recognition of any unrealized gain or loss
on our fuel hedge contracts until the hedged fuel is consumed. We lost this
because the correlation between crude oil, the commodity we use to hedge, and
West Coast jet fuel fell below required thresholds. For more discussion, see
Note 3 to our condensed financial statements. The implications of this going forward are twofold: First, we will have more
volatile earnings as we mark our entire hedge portfolio to market each
quarter-end and report the gain or loss in other non-operating income or
expense, and second, to an increasing extent, the impact of our fuel hedge
program will not be reflected in fuel expense. We had unrealized gains on our
balance sheet of $23.3 million at March 31, 2004 when we last qualified for
hedge accounting. These unrealized gains will be recognized in
fuel expense as the hedged fuel is consumed. Subsequent gains or losses in our
current hedge positions will be recorded in other non-operating income or
expense until high correlation returns and the positions are redesignated. We have provided information on mark-to- market gains or losses, as well as
calculations of our economic fuel cost per gallon on pages 18 and 19. We continue to believe that our fuel hedge program is an important part of our
strategy to reduce our exposure to volatile fuel prices. Other Events For 2004, we expect a capacity increase of 6.5%. The expected capacity
increase is due largely to the annualization of the additional aircraft added
in 2003 combined with increases in utilization. Results of Operations Comparison of Three Months Ended June 30, 2004 to Three Months Ended June 30,
2003 During the second quarter of 2004, we recorded operating and pre-tax losses of
$21.6 million and $2.8 million, respectively, versus operating and pre-tax
income of $5.4 million and $59.6 million, respectively, in the second quarter
of 2003. Alaska Airlines Revenues Operating revenues increased $67.0 million, or 13.1%, during 2004 as compared
to 2003. For the quarter, available seat miles (ASMs or capacity) increased
8.2% and revenue passenger miles (RPMs or traffic) increased 11.6%. More than
two-thirds of our 2004 ASM growth came from expansion in our Trans Continental
markets and Denver. The remaining increases in capacity primarily reflect
increases in service to the Pacific Northwest, Nevada, Mexico and Southern
California, partially offset by decreases in service to Northern Alaska,
Canada, Arizona and the Bay Area. Traffic increases primarily reflect
increases in traffic in the Trans Continental, Denver, Pacific Northwest,
Nevada and
Anchorage/Fairbanks-Lower 48 markets, partially offset by decreases in traffic
in Northern Alaska and Arizona. 20




---



##### Table of Contents



Yield per passenger mile increased 1.2% and passenger load factor increased 2.2
points during the second quarter of 2004 as compared to the same period in
2003. Increases in traffic and yield resulted in a 12.9% increase in passenger
revenues in 2004. Freight and mail revenues increased slightly by $2.1 million, or 10.0%,
compared to the same period in 2003 because of a new mail contract we have in
the State of Alaska. Other-net revenues increased $5.6 million, or 19.3%, due largely to revenues
received from an agreement with PenAir to provide flight services to Dutch
Harbor that began in January of 2004, offset by lower Mileage Plan revenues. Alaska Airlines Expenses For the quarter, total operating expenses increased $94.0 million, or 18.6%, as
compared to the same period in 2003. Operating expenses per ASM increased
9.6% in 2004 as compared to 2003. These increases are due largely to the 8.2%
increase in capacity combined with a significant increase in fuel costs, higher
wages and maintenance costs combined with an impairment charge for the Boeing
737-200 fleet of $36.8 million. Operating expense per ASM excluding fuel and
the impairment charge decreased 4.1% as compared to the same period in 2003.
Explanations of significant period-over-period changes in the components of
operating expenses are as follows:  
    
    Wages and benefits increased $11.7 million, or 6.1%, during the
second quarter. Approximately $4.3 million of this increase reflects
higher benefit costs, resulting from increases in pension, medical and
health insurance costs. The remaining $7.4 million increase primarily
reflects scale and step increases.In May 2004, under terms of our union contract, our pilots received a 4%
wage rate increase, which represented approximately 31.4% of the total
increase in wages and benefits.  
    
    Contracted services increased $9.7 million, or 49.2%, due largely
to expenses associated with an agreement with PenAir to provide flight
services to Dutch Harbor that began in January of 2004 and costs
associated with a temporary charter contract we have for our new mail
contract in Alaska.  
    
    Aircraft fuel increased $40.6 million, or 56.4%, due to a 48.4%
increase in the fuel cost per gallon and a 5.5% increase in fuel
gallons consumed. Fuel prices remain at very high levels and continue
to be volatile. At June 30, 2004, we have fuel hedge contracts in
place to hedge 45%, 48% and 15% of our expected fuel consumption for
the remainder of 2004 and for 2005 and 2006, respectively, at prices
ranging from $29 to $33 per crude oil barrel. 21




---



##### Table of Contents



The following table summarizes fuel cost per gallon realized by the
company (the economic cost per gallon), on a GAAP basis (including
hedging gains recorded in aircraft fuel and non- operating income
(expense)) and fuel cost per gallon excluding all hedging activities: Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2003
    
    2004
    
    2003
    
    2004Aircraft fuel
    
    $
    72.0
    
    
    $
    112.6
    
    
    $
    148.9
    
    
    $
    206.2Fuel gallons (000,000)
    
    
    84.3
    
    
    
    88.9
    
    
    
    161.9
    
    
    
    171.8Fuel cost per gallons (GAAP basis)
    
    
    85.4
    ¢
    
    
    126.7
    ¢
    
    
    92.0
    ¢
    
    
    120.0
    ¢Aircraft fuel
    
    $
    72.0
    
    
    $
    112.6
    
    
    $
    148.9
    
    
    $
    206.2Add: hedging gains included in
aircraft fuel
    
    
    2.0
    
    
    
    4.4
    
    
    
    9.7
    
    
    
    7.5Aircraft fuel excluding all hedging gains
    
    $
    74.0
    
    
    $
    117.0
    
    
    $
    158.6
    
    
    $
    213.7Fuel gallons (000,000)
    
    
    84.3
    
    
    
    88.9
    
    
    
    161.9
    
    
    
    171.8Fuel cost per gallon excluding all
hedging activities (cents)
    
    
    87.8
    ¢
    
    
    131.6
    ¢
    
    
    98.0
    ¢
    
    
    124.4
   ¢Aircraft fuel
    
    $
    72.0
    
    
    $
    112.6
    
    
    $
    148.9
    
    
    $
    206.2Less gains on settled hedges included
in non-operating income (expense)
    
    
    (2.9
    )
    
    
    (3.2
    )
    
    
    (2.9
    )
    
    
    (3.2
    )Adjusted fuel
    
    $
    69.1
    
    
    $
    109.4
    
    
    $
    146.0
    
    
    $
    203.0Fuel gallons (000,000)
    
    
    84.3
    
    
    
    88.9
    
    
    
    161.9
    
    
    
    171.8Economic fuel cost per gallon
    
    
    82.0
    ¢
    
    
    123.1
    ¢
    
    
    90.2
    ¢
    
    
    118.2
    ¢
  
    
    Aircraft maintenance decreased $3.9 million, or 8.7%, due largely
to fewer engine removals during the quarter and a change in the mix of
heavy maintenance versus routine maintenance.  
    
    Aircraft rent decreased $3.3 million, or 10.6%, due to lower
rates on extended leases and MD-80 returns, offset by three new
737-700 aircraft since the end of the second quarter of 2003.  
    
    Other selling expenses and commissions decreased $4.2 million, or
11.8%. This decrease is due largely to a decrease in incentive
payments made to Horizon. Incentive payments to Horizon are
eliminated in consolidation at the Air Group level.  
    
    Landing fees and other rentals increased $4.1 million, or 13.1%.
The higher rates primarily reflect higher joint-use rental fees at
Seattle, Los Angeles and Oakland, combined with modest volume growth.
We expect landing fees and other rentals to continue to increase as a
result of airport facility expansions and increased costs for security
due to unfunded government mandates.  
    
    Other expense increased $2.7 million, or 7.9%, primarily
reflecting a $0.7 million increase in professional services and an
increase in property taxes of $1.0 million. 22




---



##### Table of Contents



Nonoperating Income (Expense) Net nonoperating income was $18.8 million in 2004 compared to $54.2 million in
2003. The 2003 results include $52.8 million received in connection with the
government reimbursement of security fees remitted and carrier fees paid under
the Emergency Wartime Supplemental Appropriations Act (the Act). Other-net includes $2.9 million and $3.2 million in gains resulting from hedge
ineffectiveness on settled fuel hedging contracts in 2003 and 2004,
respectively. In addition, other-net includes mark-to-market hedging gains of
$19.6 million in 2004, as previously discussed. Comparison of Six Months Ended June 30, 2004 to Six Months Ended June 30, 2003 During the six months ended June 30, 2004, we recorded a net loss of $37.1
million compared to $8.3 million during the same period of 2003. Our 2003 net
loss includes $52.8 million received in connection with government assistance
received under the Act. Our 2004 results include impairment charges of $36.8
million ($24.4 million, net of tax) associated with a decision to accelerate
the retirement of the companys Boeing 737-200C fleet. The 2004 results also
include $20.1 million ($13.3 million, net of tax) in mark-to-market hedging
gains reflecting an increase in the fair value of the Companys current hedge
portfolio since March 31, 2004, which resulted from the loss of hedge
accounting during the quarter. Without these items in 2004 and excluding the
government compensation received in 2003, net loss would have been $26.0
million during 2004, compared to $40.9 million in 2003. Financial and
statistical data comparisons for Alaska are shown on page 16. A discussion of
the six-month data follows. On pages 17 and 18, 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 $131.3 million, or 14.0%, during 2004 as compared
to 2003. For the first six months of 2004, ASMs increased 9.0% and RPMs
increased 12.7%. Yield per passenger mile increased 1.4% and passenger load factor increased 2.3
points during the first six months of 2004 as compared to the same period in
2003. Increases in traffic and yield resulted in a 14.3% increase in passenger
revenues in 2004. Freight and mail revenues increased slightly by $2.4 million, or 6.3%, compared
to the same period in 2003 because of a new mail contract we have in the State
of Alaska. Other-net revenues increased $7.3 million, or 14.1%, due largely to revenues
received from an agreement with PenAir to provide flight services to Dutch
Harbor that began in January of 2004, offset by lower Mileage Plan revenues. Alaska Airlines Expenses For the six months ended June 30, 2004, total operating expenses increased
$144.7 million, or 14.6%, as compared to the same period in 2003. Operating
expenses per ASM increased 5.1% in 2004 as compared to 2003. These increases
are due largely to the 9.0% increase in capacity combined with a significant
increase in fuel costs, higher wages and maintenance costs and an impairment
charge related to our Boeing 737-200 fleet. Operating expense per ASM
excluding fuel and the impairment 23




---



##### Table of Contents



charge decreased 2.8% as compared to the same period in 2003. Explanations of
significant period-over-period changes in the components of operating expenses
are as follows:  
    
    Wages and benefits increased $24.5 million, or 6.4%, during the
first half of 2004. Approximately $10.9 million of this increase
reflects higher benefit costs, resulting from increases in pension,
medical and health insurance costs. The remaining $13.6 million
increase primarily reflects scale and step increases. In May of 2004, under terms of our union contract, our pilots received a
4% wage rate increase, which represented approximately 28.4% of the total
increase in wages and benefits.  
    
    Contracted services increased $12.1 million, or 30.0%, due
largely to expenses associated with an agreement with PenAir to
provide flight services to Dutch Harbor that began in January of 2004
and costs associated with a temporary charter contract we have for our
new mail contract in Alaska.  
    
    Aircraft fuel increased $57.3 million, or 38.5%, due to a 30.4%
increase in the fuel cost per gallon and a 6.1% increase in fuel
gallons consumed. Air Groups fuel hedging program resulted in Alaska
recognizing a $7.5 million reduction in aircraft fuel expense for
hedging gains realized on hedge positions settled during the first
half of 2004.  
    
    Aircraft maintenance increased $1.7 million, or 2.1%, due largely
to fewer engine removals during the first six months and a change in
the mix of heavy maintenance versus routine maintenance.  
    
    Aircraft rent decreased $4.3 million, or 7.0%, due to lower rates
on extended leases and MD-80 returns, offset by three new 737-700
aircraft since the end of the second quarter of 2003.  
    
    Depreciation and amortization increased $5.1 million, or 8.8%,
reflecting accelerated depreciation on the planned retirement of three
Boeing 737-200Cs and an increase in depreciation resulting from two
aircraft purchased in the last twelve months.  
    
    Landing fees and other rentals increased $8.6 million, or 14.4%.
The higher rates primarily reflect higher joint-use rental fees at
Seattle, Los Angeles and Oakland, combined with modest volume growth.
We expect landing fees and other rentals to continue to increase as a
result of airport facility expansions and increased costs for security
due to unfunded government mandates.  
    
    Other expense increased $5.5 million, or 8.0%, primarily
reflecting a $3.3 million increase in professional services and a $2.7
million increase in property taxes. Nonoperating Income (Expense) Net nonoperating income was $13.6 million in 2004 compared to $45.2 million in
2003. Interest income increased $5.9 million due to a larger marketable
securities portfolio in 2004 combined with a negative adjustment of premium and
discount amortization on our marketable securities portfolio in 2003. 24




---



##### Table of Contents



The 2003 results include $52.8 million received in connection with the
government reimbursement of security fees remitted and carrier fees paid under
the Emergency Wartime Supplemental Appropriations Act. Other-net includes $2.9 million and $3.2 million in gains resulting from hedge
ineffectiveness on settled fuel hedging contracts in 2003 and 2004,
respectively. In addition, other-net includes mark-to-market hedging gains of
$20.1 million in 2004, as previously discussed. There were no mark-to-market
hedging gains in 2003. 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 33.4% tax benefit rate for 2004, we used our
estimate of the effective tax rate and considered a variety of factors,
including the U.S. federal rate of 35%, estimates of nondeductible expenses and
state income taxes, and year-to-date pretax results. We evaluate this rate
each quarter and make adjustments when necessary. Critical Accounting Policies For information on our critical accounting policies, see Item 7 of our Annual
Report on Form 10-K/A for the year ended December 31, 2003. Liquidity and Capital Resources The table below presents the major indicators of financial condition and
liquidity. December 31, 2003
    
    June 30, 2004
    
    Change(In millions, except debt-to-capital amounts)Cash and marketable securities
    
    $
    811.9
    
    
    $
    864.8
    
    
    $
    52.9Working capital
    
    
    179.7
    
    
    
    274.7
    
    
    
    95.0Long-term debt and Long-term
capital lease obligations
    
    
    756.8
    
    
    
    823.9
    
    
    
    67.1Shareholders equity
    
    
    698.1
    
    
    
    664.6
    
    
    
    (33.5
    )Long-term debt-to-capital
    
    
    52%:48
    %
    
    
    55%:45
    %
    
    NALong-term debt-to-capital assuming
aircraft operating leases are capitalized
at seven times annualized rent
    
    
    70%:30
    %
    
    
    71%:29
    %
    
    NA
 During the six months ended June 30, 2004, our cash and marketable securities
increased $52.9 million to $864.8 million at June 30, 2004. This increase
reflects cash provided by operating activities of $192.2 million, partially
offset by cash used in financing activities of $50.2 million and cash used for
the purchase of property and equipment of $83.5 million. 25




---



##### Table of Contents



Cash Provided by Operating Activities During the first six months of 2004, net cash provided by operating activities
was $192.2 million, versus $157.9 million during the first six months of 2003. Cash Used in Investing Activities Cash used in investing activities was $128.8 million during the first six
months of 2004, compared to $458.8 million in 2003. We had net purchases of
$42.7 million of marketable securities and $83.5 million for property and
equipment. During the first six months of 2004, our aircraft related capital
expenditures decreased $136.6 million as compared to 2003, primarily reflecting
a reduction in spending for new aircraft and capitalized overhauls. Cash Provided by (Used in) Financing Activities Net cash used in financing activities was $50.2 million during the first six
months of 2004 compared to net cash provided by financing activities of $146.4
million during the same period in 2003. Debt issuances during the first half
of 2004 of $94.6 million were secured by flight equipment. These debt
issuances have interest rates that vary with the London Interbank Offered Rate
(LIBOR) and payment terms ranging from 12 to 16 years. Debt issuances during
the period were offset by normal long-term debt payments of $34.8 million and
payments made to our credit facility of $110.0 million. Subsequent to quarter
end, the remainder of our credit facility was paid off. We plan to meet our capital and operating commitments through internally
generated funds from operations and cash and marketable securities on hand at
June 30, 2004 totaling $864.8 million. Contractual Obligations, Commitments and Off-Balance Sheet Arrangements At June 30, 2004, we had firm orders for 2 aircraft requiring aggregate
payments of approximately $60.5 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
first quarter of 2004, Alaska converted two 737-900 aircraft it had on firm
order with Boeing for two 737-800s. The planes are due for delivery in February
and July of 2005. The following table summarizes aircraft commitments and payments by year: Delivery Period - Firm OrdersJuly 1-December 31,
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    BeyondAircraft
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    2008
    
    TotalBoeing 737-800
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2Total
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2Payments (Millions)
    
    $
    10.2
    
    
    $
    50.3
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    60.5
 The table above does not include our planned acquisitions of one additional Boeing
737-800 in 2005 and two Boeing 737-800s in 2006 to replace the Boeing
737-400s being converted, since we do not have firm orders at this time. 26




---



##### Table of Contents



The following table provides a summary of our principal payments under current
and long-term debt obligations, capital lease obligations, operating lease
commitments and aircraft purchase commitments as of June 30, 2004. This table
excludes other obligations that we may have, such as pension obligations and
routine purchase obligations entered into in the normal course of business. July 1-December 31,
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Beyond(in millions)
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    2008
    TotalCurrent and long-term debt
and capital lease obligations
    
    $
    64.1
    
    
    $
    51.1
    
    
    $
    54.7
    
    
    $
    57.8
    
    
    $
    210.7
    
    
    $
    475.0
    
    
    $
    913.4Operating lease commitments
    
    
    83.3
    
    
    
    176.2
    
    
    
    135.5
    
    
    
    114.2
    
    
    
    109.6
    
    
    
    591.8
    
    
    
    1,210.6Aircraft purchase commitments
    
    
    10.2
    
    
    
    50.3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    60.5Total
    
    $
    157.6
    
    
    $
    277.6
    
    
    $
    190.2
    
    
    $
    172.0
    
    
    $
    320.3
    
    
    $
    1,066.8
    
    
    $
    2,184.5
 
 ITEM 3. Quantitative and Qualitative Disclosure about Market Risk There have been no material changes in market risk from the information
provided in Item 7A Quantitative and Qualitative Disclosure About Market Risk
in our 2003 10-K/A except as follows: Fuel Hedging We purchase jet fuel at prevailing market prices, and seek to manage the risk
of price fluctuations through execution of a documented hedging strategy. We
utilize derivative financial instruments as hedges to decrease our exposure to
the volatility of jet fuel prices. We believe there is risk in not hedging
against the possibility of fuel price increases. At June 30, 2004, we had fuel
hedge contracts in place to hedge 81.1 million gallons of our expected jet fuel
usage during the remainder of 2004, 173.7 million gallons in 2005 and 55.8
million gallons in 2006. This represents 45%, 48% and 15% of our anticipated
fuel consumption in 2004, 2005 and 2006, respectively. Prices of these
agreements range from $29 to $32 per crude oil barrel. We estimate that a 10%
increase or decrease in crude oil prices as of June 30, 2004 would impact
hedging positions by approximately $6.2 million. As of December 31, 2003 and June 30, 2004, the fair values of our fuel hedge
positions were $15.7 million and $51.9 million, respectively. $10.3 million of
the 2003 fair value amounts and $30.8 million of the 2004 fair value amounts
were included in prepaid and other current asset in the balance sheets. The
remaining $5.4 million 2003 fair value and $21.1 million 2004 fair value is
reflected in other assets in the balance sheets. 27




---



##### Table of Contents



The following table summarizes realized fuel hedging gains and changes in fair
value of hedging contracts outstanding as of June 30, 2004 and 2003 (in
millions): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2003
    
    2004
    
    2003
    
    2004Settled hedging gains included in
aircraft fuel
    
    $
    2.0
    
    
    $
    4.4
    
    
    $
    9.7
    
    
    $
    7.5Hedging gains included in
non-operating income (expense)*
    
    $
    3.8
    
    
    $
    3.2
    
    
    $
    4.5
    
    
    $
    3.2Fair market value adjustment
included in non-operating
income (expense)**
    
    $
    
    
    
    $
    19.6
    
    
    $
    
    
    
    $
    20.1
  *
    
    Includes the ineffective portion recorded currently in earnings using hedge
accounting.**
    
    Includes changes in fair value since March 31, 2004 resulting from the loss
of hedge accounting. Financial Market Risk During the first half of 2004, we issued $94.6 million of debt secured by
flight equipment, having interest rates that vary with LIBOR and payment terms
ranging from 12 to 16 years. 
 ITEM 4.CONTROLS AND PROCEDURES As of June 30, 2004, an evaluation was performed under the supervision and with
the participation of our management, including our chief executive officer and
chief financial officer (collectively, our certifying officers), of the
effectiveness of the design and operation of our disclosure controls and
procedures. These disclosure controls and procedures are designed to ensure
that the information required to be disclosed by us in our periodic reports
filed with the Securities and Exchange Commission (the SEC) is recorded,
processed, summarized and reported within the time periods specified by the
SECs rules and forms, and that the information is communicated to our
certifying officers on a timely basis. Our certifying officers concluded, based on their evaluation, that disclosure
controls and procedures were effective. We made no changes in our internal controls over financial reporting during the
fiscal quarter ended June 30, 2004, that our certifying officers concluded
materially affected, or are reasonably likely to materially effect, our
internal control over financial reporting. We intend to regularly review and evaluate the design and effectiveness of our
disclosure controls and procedures and internal controls over financial
reporting on an ongoing basis and to improve
these controls and procedures over time and to correct any deficiencies that we
may discover in the future. While we believe the present design of our
disclosure controls and procedures and internal controls over financial
reporting are effective, future events affecting our business may cause us to
modify our these controls and procedures in the future. 28




---



##### Table of Contents



PART II. OTHER INFORMATION 
 ITEM 1. Legal Proceedings We are a party to ordinary routine litigation incidental to our business and
with respect to which no material liability is expected. Management believes
the ultimate disposition of these matters is not likely to materially affect
our financial position or results of operations. This forward-looking
statement is based on managements current understanding of the relevant law
and facts; it is subject to various contingencies, including the potential
costs and risks associated with litigation and the actions of judges and
juries. 
 ITEM 6. Exhibits and Reports on Form 8-K See Exhibit Index on page 31. No reports on form 8-K were filed this quarter. 29




---



##### Table of Contents



Signatures Pursuant to the requirements of the Securities Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized. ALASKA
AIRLINES, INC.   Date: August 6, 2004 By:
    
    /s/ Brandon S. PedersenBrandon S. PedersenStaff Vice President/Finance and ControllerBy:
    
    /s/ Bradley D. TildenBradley D. TildenExecutive Vice President/Finance and Chief Financial Officer
 30




---



##### Table of Contents



EXHIBIT INDEX Pursuant to Item 601(a)(2) of Regulation S-K, this Exhibit Index immediately
precedes the exhibits. The following exhibits are numbered in accordance with Item 601 of Regulation
S-K. Exhibit No.
    
    Description31.1
    
    
    (1
    )
    
    Section 302 Certification of Chief Executive Officer
Pursuant to 15 U.S.C. Section 724131.2
    
    
    (1
    )
    
    Section 302 Certification of Chief Financial Officer
Pursuant to 15 U.S.C. Section 724132.1
    
    
    (1
    )
    
    Section 906 Certification of Chief Executive Officer
Pursuant to 18 U.S.C. Section 135032.2
    
    
    (1
    )
    
    Section 906 Certification of Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350
  (1)
    
    Filed herewith. 31