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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

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FORM 10-K

(Mark One)

|/X/ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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For the fiscal year ended December 31, 2001

OR

|/  / | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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For the transition period from  to

Commission File Number 0-19978

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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) 431-7079

Securities
registered pursuant to Section 12(g) of the Act:

Title of ClassCommon Stock, $1.00 Par Value

As
of December 31, 2001, common shares outstanding totaled 500.

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 / /

The
registrant meets the conditions set forth in General Instructions I of Form 10-K and is therefore filing this Form 10-K with the reduced
disclosure format. Items 4, 6, 10, 11, 12 and 13 have been omitted in accordance with such Instruction I.

The
registrants parent, Alaska Air Group, Inc. (File No. 1-8957), files reports with the Commission pursuant to the Securities Exchange Act of 1934, as
amended.

Exhibit
Index begins on page 34.

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PART I

ITEM 1. BUSINESS
GENERAL INFORMATION
Alaska Airlines,  Inc. (Alaska or the Company) is a wholly owned subsidiary of
Alaska Air Group,  Inc. Alaska Air Group,  Inc. is a holding company that also
owns Horizon Air Industries, Inc. (Horizon). Alaska is a major airline that was
organized in 1932 and incorporated in the state of Alaska in 1937. Alaska became
a wholly owned subsidiary of Alaska Air Group,  Inc. in 1985 pursuant to a
reorganization of Alaska into a holding company structure. Alaska Air Group, 
Inc. is a registrant pursuant to Section 12(b) of the Securities and Exchange
Act of 1934 (Commission File No. 1-8957). Alaskas executive offices are located
at 19300 Pacific Highway South, Seattle, Washington 98188. In 2001, Alaska
accounted for 82% of Alaska Air Group,  Inc.s total operating
revenues.

Horizon, a Washington corporation, began service in 1981 and was acquired by
Alaska Air Group, Inc. in 1986. Horizon is a regional airline, that operates in
the Pacific Northwest, Northern California and Western Canada.

Operations

Alaska Airlines is an Alaska corporation that was organized in 1932 and
incorporated in 1937. Alaska principally serves 36 cities in six western states
(Alaska, Washington, Oregon, California, Nevada, and Arizona), Vancouver, Canada
and six cities in Mexico. Alaska also provides non-stop service between
Anchorage and Chicago and between Seattle and Washington D.C. In each year since
1973, Alaska has carried more passengers between Alaska and the U.S. mainland
than any other airline. In 2001, Alaska carried 13.7 million revenue passengers.
Passenger traffic within Alaska and between Alaska and the U.S. mainland
accounted for 24% of Alaskas 2001 revenue passenger miles, West Coast traffic
(including Vancouver, Canada) accounted for 66% and the Mexico markets 10%.
Based on passenger enplanements, Alaskas leading airports are Seattle,
Portland, Los Angeles, and Anchorage. Based on revenues, its leading nonstop
routes are SeattleAnchorage, SeattleLos Angeles, and SeattleSan Diego. At
December 31, 2001, Alaskas operating fleet consisted of 101 jet aircraft.

Alaska distinguishes itself from competitors by providing a higher level of
customer service. The airlines excellent service in the form of advance seat
assignments, expedited checkin, a firstclass section, attention to customer
needs, highquality food and beverage service, wellmaintained aircraft, and
other amenities has been recognized by independent studies and surveys of air
travelers.

Alliances with Other Airlines

Alaska and Horizon have marketing alliances with other airlines that provide
reciprocal frequent flyer mileage accrual and redemption privileges and
codesharing on certain flights as set forth below. Alliances enhance Alaskas
and Horizons revenues by (a) providing our customers more value by offering
them more travel destinations and better mileage accrual/redemption
opportunities, (b) gaining us access to more connecting traffic from other
airlines, and (c) providing members of our alliance partners frequent flyer
programs an opportunity to travel on Alaska and Horizon while earning mileage
credit in the alliance partners programs.

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|Major U.S. or
International Airlines |  | Frequent
Flyer
Agreement |   | Codesharing
Alaska Flight #
on Flights Operated
by Other Airline |  | Codesharing
Other Airline Flight #
On Flights Operated
by Alaska/Horizon
|------------------------------------ |  | ------------------------ | - | ----------------------------------------------------------------- |  | -------------------------------------------------------------------------
|American Airlines                    |  | Yes                      |   | Yes                                                               |  | No                                                                       
|British Airways                      |  | Yes                      |   | No                                                                |  | No                                                                       
|Continental Airlines                 |  | Yes                      |   | Yes                                                               |  | Yes                                                                      
|Hawaiian Airlines                    |  | Yes                      |   | Yes                                                               |  | Yes                                                                      
|KLM                                  |  | Yes                      |   | No                                                                |  | Yes                                                                      
|Lan Chile                            |  | Yes                      |   | No                                                                |  | Yes                                                                      
|Northwest Airlines                   |  | Yes                      |   | Yes                                                               |  | Yes                                                                      
|Qantas                               |  | Yes                      |   | No                                                                |  | Yes                                                                      
|Commuter Airlines                    |  |                          |   |                                                                   |  |                                                                          
|American Eagle                       |  | Yes                      | * | Yes                                                               |  | No                                                                       
|Era Aviation                         |  | Yes                      | * | Yes                                                               |  | No                                                                       
|PenAir                               |  | Yes                      | * | Yes                                                               |  | No                                                                       

* This airline does not have its own frequent  flyer  program.  However,  Alaskas  Mileage Plan members can accrue
and redeem miles on this airlines route system.

Recent Developments

On September 11, 2001, the United States was attacked by terrorists using four
hijacked jets of two U.S. airlines. The Federal Aviation Administration (FAA)
shut down all commercial airline flight operations for September 11 and 12. The
Company resumed flight operations at reduced levels on September 13. These
events, combined with slowing economic conditions, had a significant negative
impact on demand for airline travel. Throughout the industry, airlines cut
capacity and instituted a variety of costsaving measures.

The attacks had a significant impact on the operating results of the Company. In
the 4th quarter of 2001, Alaska reduced its flight schedule by approximately
13%. However, the Company was not able to proportionally reduce operating costs
due to the fixed costs the Company continued to incur, such as aircraft rent and
contract guaranteed wages. Also, as a result of the terrorist attacks, credit
rating agencies downgraded the longterm credit ratings of most U.S. airlines
and their related entities, including Alaska Air Group, Inc.

On September 22, 2001, the U.S. Government passed the Air Transportation Safety
and System Stabilization Act (the Act) to provide $5 billion of cash
compensation and $10 billion of loan guarantees to U.S. airlines. The purpose of
the Act was to compensate the airlines for direct and incremental losses for the
period September 11 through December 31, 2001 as a result of the September 11
terrorist attacks. As of December 31, 2001, Alaska had received $71.6 million of
the $5 billion cash compensation.

Security
On November 19, 2001 the U.S. Government enacted the Aviation and Transportation
Security Act (the Security Act). The Security Act provides for the establishment
of the Transportation Security Administration (the TSA) within the United States
Department of Transportation (DOT), which will be responsible for aviation
security. The TSA is to assume security functions for the FAA and passenger
screening functions currently performed or contracted by the airlines by
February 17, 2002. By November 19, 2002,

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the TSA will be responsible for all passenger, baggage, and cargo screening
functions and security, utilizing Federal employees. Also under the Security
Act, effective in February 2002, a $2.50 per enplanement security fee (maximum
$5.00 per oneway trip) was imposed on passengers. The TSA may also impose a fee
upon air carriers to pay the difference between security costs and the amount
collected from the fee, limited to what the carrier paid in 2000 for security.

BUSINESS RISKS
The Companys operations and financial results are subject to various
uncertainties, such as intense competition, volatile fuel prices, a largely
unionized labor force, the need to finance large capital expenditures,
government regulation, potential aircraft incidents and general economic
conditions. This report may contain forwardlooking statements that are based on
the best information currently available to management. The 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 forwardlooking statements are indicated by phrases
such as the Company believes, we anticipate or any other language indicating
a prediction of future events. Whether these statements are ultimately accurate
depends on a number of outside factors that the Company cannot predict or
control. The Company disclaims any obligation to update or revise any
forwardlooking statement. The following discussion of business risks sets forth
the principal foreseeable risks and uncertainties that may materially affect
these predictions.

Competition
Competition in the air transportation industry is intense. Any domestic air
carrier deemed fit by the DOT is allowed to operate scheduled passenger service
in the United States. Alaska carries approximately 2.2% of all U.S. domestic
passenger traffic. Alaska competes with one or more domestic or foreign airlines
on most of its routes. Some of these competitors are substantially larger than
Alaska, have greater financial resources, and have more extensive route systems.

Most major U.S. carriers have developed, independently or in partnership with
others, large computerized reservation systems (CRS). Airlines, including Alaska
and Horizon, are charged industryset fees to have their flight schedules
included in the various CRS displays used by travel agents and airlines. These
systems are currently the predominant means of distributing airline tickets. In
order to reduce anticompetitive practices, the DOT regulates the display of all
airline schedules and fares. Air carriers are increasingly distributing their
services on the Internet through various airline joint venture or independent
websites. The Company currently participates in a number of these distribution
channels, but it cannot predict the terms on which it may be able to continue to
participate in these or other sites, or their effect on the Companys ability to
compete with other airlines.

Fuel

Fuel costs were 14.8% of the Companys total operating expenses in 2001. Fuel
prices, which can be volatile and are largely outside of the Companys control,
can have a significant impact on the Companys operating results. Currently, a
onecent change in the fuel price per gallon affects annual fuel costs by
approximately $3.1 million. The Company believes that operating fuelefficient
aircraft is an effective hedge against high fuel prices. The Company also
purchases fuel

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hedge contracts to reduce its exposure to fluctuations in the
price of jet fuel. See Item 7, Managements Discussion and Analysis
of Financial Condition and Results of Operations for a discussion of the
Companys fuel hedging activities.

Unionized Labor Force

Labor costs were 36% of the Companys total operating expenses in 2001. Wage
rates can have a significant impact on the Companys operating results. At
December 31, 2001, labor unions represented 84% of Alaskas employees. The air
transportation industry is regulated under the Railway Labor Act, which vests in
the National Mediation Board certain regulatory powers with respect to disputes
between airlines and labor unions. The Company cannot predict the outcome of
union contract negotiations or whether the terms of its labor contracts will
hinder its ability to compete effectively. Nor can the Company control the
variety of actions (e.g. work stoppage or slowdown) unions might take to try to
influence those negotiations.

Leverage and Future Capital Requirements
The Company, like many airlines, is relatively highly leveraged, which increases
the volatility of its earnings. Due to its high fixed costs, including aircraft
lease commitments, a decrease in revenues results in a disproportionately
greater decrease in earnings. In addition, the Company has an ongoing need to
finance new aircraft deliveries, and there is no assurance that such financing
will be available in sufficient amounts or on acceptable terms. See Item 7,
Managements Discussion and Analysis of Financial Condition and
Results of Operations for further discussion of liquidity and capital
resources.

Government Regulation; International Routes
Like other airlines, the Company is subject to regulation by the FAA and the
DOT. The FAA, under its mandate to ensure aviation safety, can ground aircraft,
suspend or revoke the authority of an air carrier or its licensed personnel for
failure to comply with Federal Aviation Regulations, and levy civil penalties.
The Company also depends on the efficient operation of the air traffic control
system to ensure reliability of its own operations. The DOT has the authority to
regulate certain airline economic functions including financial and statistical
reporting, consumer protection, computerized reservations systems, essential air
transportation, and international route authority. The Company is subject to
bilateral agreements between the United States and the foreign countries to
which the Company provides service. There can be no assurance that existing
bilateral agreements between the United States and the foreign governments will
continue or that the Companys designation to operate such routes will continue.
The Company is also subject to domestic and international environmental
regulations, including rules on noise and emissions, that may affect the cost or
scope of its services.

Economic Conditions

The demand for both business and leisure air transportation is affected by
regional and national economic conditions. An economic downturn, or changes in
consumer preferences, perceptions or spending patterns, could affect the
Companys ability to sustain its traffic volumes and yields.

Risk of Loss and Liability

The Company is exposed to potential catastrophic losses in the event of aircraft
accidents or terrorist incidents. Although the Company was not directly involved
in the September 11, 2001 terrorist attacks, it experienced significantly
increased costs and reduced revenues as a result.

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These incremental costs and lost revenues arose from the FAAs temporary
grounding of the U.S. airline industrys fleet, changing patterns of air
travel by the public, increased security, insurance and other costs, higher
ticket refunds, reduced load factors and reduced yields. Further terrorist
attacks involving commercial aircraft could result in another grounding of the
Companys fleet, and would likely result in additional costs and reduced
revenues. Consistent with industry standards, the Company maintains rigorous
safety, training and maintenance programs, as well as insurance against such
losses. However, the cost to maintain adequate insurance to cover passenger and
thirdparty liability in the future is unknown. Moreover, any aircraft accident,
even if fully insured, could cause a negative public perception of the Company
with adverse financial consequences. Additionally, unusually adverse weather can
significantly reduce flight operations, resulting in lost revenues and added
expenses.

OTHER INFORMATION
Employees
Alaska had 11,025 active fulltime and parttime employees at December 31, 2001.
Alaskas union contracts at December 31, 2001 were as follows:

|Union                                                         |  | Employee Group                         |  | Number of
Employees |  | Contract Status   
|------------------------------------------------------------- |  | -------------------------------------- |  | ------------------- |  | ------------------
|Air Line Pilots Association International                     |  | Pilots                                 |  | 1,430               |  | Amendable 4/30/05 
|Association of Flight Attendants                              |  | Flight attendants                      |  | 2,044               |  | Amendable 10/19/03
|International Association of Machinists and Aerospace Workers |  | Rampservice and stock clerks           |  | 1,148               |  | Amendable 1/10/04 
|                                                              |  | Clerical, office and passenger service |  | 3,237               |  | Amendable 10/29/02
|Aircraft Mechanics Fraternal Association                      |  | Mechanics, inspectors and cleaners     |  | 1,284               |  | Amendable 12/25/02
|Mexico Workers Association of Air Transport                   |  | Mexico airport personnel               |  | 88                  |  | Amendable 4/1/02  
|Transport Workers Union of America                            |  | Dispatchers                            |  | 27                  |  | Amendable 8/9/02  

Frequent Flyer Program

All major airlines have developed frequent flyer programs as a way of increasing
passenger loyalty. Alaskas Mileage Plan allows members to earn mileage by
flying on Alaska, Horizon and other participating airlines, and by using the
services of nonairline partners, which include a credit card partner, telephone
companies, hotels, and car rental agencies. Alaska is paid by nonairline
partners for the miles it credits to member accounts. With advance notice,
Alaska has the ability to change the Mileage Plan terms, conditions, partners,
mileage credits, and award levels.

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Mileage can be redeemed for free or discounted travel and for other travel
industry awards. Upon accumulating the necessary mileage, members notify Alaska
of their award selection. Over 75% of the free flight awards on Alaska and
Horizon are subject to blackout dates and capacitycontrolled seating. Alaskas
miles do not expire. As of yearend 2000 and 2001, Alaska estimated that
1,582,000 and 1,740,000 roundtrip flight awards were eligible for redemption by
Mileage Plan members who have mileage credits exceeding the 20,000mile free
roundtrip domestic ticket award threshold. Of those eligible awards, Alaska
estimated that 1,469,000 and 1,618,000, respectively, would ultimately be
redeemed. For the years 1999, 2000 and 2001, approximately 226,000, 281,000, and
310,000 roundtrip flight awards were redeemed and flown on Alaska and Horizon.
Those awards represent approximately 3.7% for 1999, 4.8% for 2000, and 5.2% for
2001, of the total passenger miles flown for each period. For the years 1999,
2000 and 2001, approximately 99,000, 137,000, and 154,000 roundtrip flight
awards were redeemed and flown on airline partners.

For miles earned by flying on Alaska and travel partners, the estimated
incremental cost of providing free travel awards is recognized as a selling
expense and accrued as a liability as miles are accumulated. The incremental
cost does not include a contribution to overhead, aircraft cost, or profit.
Alaska also sells mileage credits to nonairline partners, such as hotels, car
rental agencies, and a credit card company. Alaska defers a majority of the
sales proceeds, and recognizes these proceeds as revenue when the award
transportation is provided. The deferred proceeds are recognized as passenger
revenue for awards issued on Alaska and as other revenuenet for awards issued
on other airlines. At December 31, 2000 and 2001, the deferred revenue and the
total liability for miles outstanding and for estimated payments to partner
airlines was $198.5 million and $248.3 million, respectively.

ITEM 2. PROPERTIES
Aircraft

The following table describes the aircraft operated and their average age at
December 31, 2001.

|Aircraft Type   |  | Passenger
Capacity |  | Owned |  | Leased |  | Total |  | Average Age
in Years
|--------------- |  | ------------------ |  | ----- |  | ------ |  | ----- |  | --------------------
|Alaska Airlines |  |                    |  |       |  |        |  |       |  |                     
|Boeing 737200C |  | 111                |  | 8     |  | 1      |  | 9     |  | 20.9                
|Boeing 737400  |  | 138                |  | 8     |  | 31     |  | 39    |  | 6.6                 
|Boeing 737700  |  | 120                |  | 16    |  |       |  | 16    |  | 1.6                 
|Boeing 737900  |  | 172                |  | 5     |  |       |  | 5     |  | 0.6                 
|Boeing MD80    |  | 140                |  | 15    |  | 17     |  | 32    |  | 11.2                
|                |  |                    |  |       |  |        |  |       |  |                     
|                |  |                    |  | 52    |  | 49     |  | 101   |  | 8.2                 
|                |  |                    |  |       |  |        |  |       |  |                     

Twentyeight of the 52 aircraft owned by Alaska as of December 31, 2001 are
subject to liens securing longterm debt. Alaskas leased 737200C, 737400, and
MD80 aircraft have lease expiration dates in 2002, between 2003 and 2016, and
between 2002 and 2013, respectively. Alaska has the option to extend most of the
leases for additional periods, or the right to purchase the aircraft at the end
of the lease term, usually at the then fair market value of the aircraft. For
information regarding obligations under capital leases and longterm operating
leases, see Note 6 to Financial Statements.

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At December 31, 2001, all of Alaskas aircraft met the Stage 3 noise
requirements under the Airport Noise and Capacity Act of 1990. However, special
noise ordinances restrict the timing of flights operated by Alaska and other
airlines at Burbank, Orange County, San Diego, and San Jose. In addition, Orange
County and Reagan National airports restrict the type of aircraft and number of
flights.

Ground Facilities and Services

Alaska leases ticket counter, gates, cargo and baggage, office space, and other
support areas at the majority of the airports it serves. Alaska also owns
terminal buildings at various Alaska cities. Alaska has centralized operations in
several buildings located at or near SeattleTacoma International Airport
(SeaTac) in Seattle, Washington. The owned buildings, including land unless
located on leased airport property, include: a threebay hangar facility with
maintenance shops; a flight operations and training center; an air cargo
facility; a reservations and office facility; several office buildings; its
corporate headquarters; and two storage warehouses. Alaska also leases a twobay
hangar/office facility at SeaTac. Alaskas other major facilities include: a
regional headquarters building, an air cargo facility, and a leased
hangar/office facility in Anchorage; a Phoenix reservations center; and a leased
twobay maintenance facility in Oakland.

ITEM 3.   LEGAL PROCEEDINGS
Oakland Maintenance Investigation

In December 1998 the U.S. attorney for the Northern District of California
initiated a grand jury investigation concerning certain 1998 maintenance
activities at Alaskas Oakland maintenance base. The investigation also included
the aircraft involved in the loss of Flight 261 in January 2000. The FAA
separately proposed a civil penalty, which Alaska and the FAA have settled for
an agreed amount. In December 2001 the U.S. attorney notified Alaska that the
evidence it had gathered did not warrant the filing of criminal charges. Alaska
expects no further material activity in this matter.

Flight 261 Litigation

Alaska is a defendant in a number of lawsuits relating to the loss of Flight 261
on January 31, 2000. Representatives of all 88 passengers and crew on board have
filed cases against Alaska, the Boeing Company, and others. The suits seek
unspecified compensatory and punitive damages. In May 2001, the judge presiding
over the majority of the cases ruled that punitive damages are not available
against Alaska. Alaska has settled a number of these cases and continues in its
efforts to settle the remaining ones. Consistent with industry standards, the
Company maintains insurance against aircraft accidents.

Management believes the ultimate disposition of the above matters is not likely
to materially affect the Companys financial position or results of operations.
This forwardlooking statement is based on managements current understanding of
the relevant law and facts; it is subject to various contingencies, including
the potential costs and risks associated with litigation and the actions of
judges and juries.

The Company is also a party to other ordinary routine litigation incidental to
its business and with respect to which no material liability is expected.

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PART II

ITEM 5.  MARKET PRICE FOR THE REGISTRANTS
COMMON STOCK AND RELATED STOCKHOLDER MATTERS

All of Alaskas outstanding common stock is held by Alaska Air Group, Inc. and
such stock is not traded in any market. No cash dividend has been paid since
1989 and Alaska does not expect to pay regular dividends to Alaska Air Group.

ITEM 7.  MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Industry Conditions

The airline industry is cyclical. Generally speaking, economic conditions were
strong during 1999 and 2000, but weakened during 2001. Because the industry has
high fixed costs in relation to revenues, a small change in load factors or fare
levels has a large impact on profits. For most airlines, labor and fuel account
for almost half of operating expenses. The relatively strong economy in 1999 and
2000 has put upward pressure on labor costs. Fuel prices have been volatile in
the last three years. For Alaska Airlines, fuel cost per gallon increased 23% in
1999, increased 54% in 2000 and decreased 15% in 2001.

On September 11, 2001, the United States was attacked by terrorists using
hijacked jets of two U.S. airlines. The FAA shut down all commercial airline
flight operations for September 11 and 12. Airlines resumed flight operations at
reduced levels on September 13. These events, combined with slowing economic
conditions, had a significant negative impact on demand for airline travel.
Throughout the industry, airlines cut capacity and instituted a variety of
costsaving measures. Also as a result of the terrorist attacks, credit rating
agencies downgraded the longterm credit ratings of most U.S. airlines and their
related entities, including Alaska Air Group, Inc. On September 22, 2001, the
U.S. Government passed the Air Transportation Safety and System Stabilization
Act (the Act) to provide $5 billion of cash compensation and $10 billion of loan
guarantees to U.S. airlines. The purpose of the Act was to compensate the
airlines for direct and incremental losses for the period September 11 through
December 31, 2001 as a result of the September 11 terrorist attacks. As of
December 31, 2001, Alaska had received $71.6 million of the $5 billion cash
compensation.

RESULTS OF OPERATIONS
2001 Compared with 2000

The net loss for 2001 was $10.1 million, compared with a loss before accounting
change of $7.4 million in 2000. The operating loss was $69.8 million in 2001,
compared with an operating loss of $13.6 million in 2000. The larger operating
loss was primarily due to the weakening economy, partially offset by a decrease
in fuel costs, and also due to the negative impact of the terrorist attacks, for
which the Company has been partially compensated by the U.S. government. Airline
financial and statistical data is shown following the financial statements. A
discussion of this data follows.

Revenues

Capacity increased 6.7% during the first nine months of 2001 due to normal
growth, but decreased 5.9% in the fourth quarter due to the impact of the
terrorist attacks. Alaska operated approximately 87% of its previously planned
schedule in the fourth quarter. For the full year

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2001, capacity was up 3.5% but traffic grew by only 2.2%, resulting in a 0.8
point decrease in passenger load factor. In our largest market, Southern
California, capacity was slightly lower in 2001 compared to 2000, resulting in
flat traffic and a slight increase in load factor (0.2 points). Capacity and
traffic gains experienced in the second quarter in this market were offset by
decreases in the fourth quarter. In our second largest market,
Anchorage/Fairbanks to the U.S. mainland, capacity increased in the uppersingle
digits, but traffic increases were not as high, resulting in a decrease in load
factor of 2.3 points for the year. Our newest market, Seattle to Washington
D.C., which operated primarily in the fourth quarter, had an average load factor
for the fourth quarter that was better than the system average.

Passenger yields were up 3.9% in the first quarter due to fuelrelated fare
increases implemented in late 2000. In the second and third quarters, yield was
down 1.8% and 5.2%, respectively, due to a decline in business passengers and
fare sales. Yields were down 7.3% in the fourth quarter due to a combination of
fewer business passengers, a drop off in demand due to the events of September
11, and fares sales offered to stimulate demand. For the full year 2001, yields
were down 2.7%. The higher traffic combined with the lower yield resulted in a
0.6% decrease in passenger revenue.

Freight and mail revenues, which were also adversely impacted by the September
11 terrorist attacks, increased 2.4%. Prior to September 11, freight revenues
were flat compared to 2000, but mail revenues had increased compared to 2000 due
to higher yields. Volumes of mail shipped were lower than in 2000, but the rate
increases instituted in early 2001 resulted in higher revenues. After September
11, two security measures impacted our freight and mail business: first, the
limitation on carrying mail greater than 16 ounces on flights with 60 or more
passengers limited our ability to carry mail from Alaska to the U.S. mainland.
Second, we may only carry freight from known shippers, which negatively impacted
our freight volumes. The effects of these two measures will have a slightly
negative impact on revenues in the future.

Othernet revenues increased 17.7%, largely due to increased revenue from the
sale of miles in Alaskas frequent flyer program.

Expenses

Excluding fuel and a special charge in 2000, operating expenses grew by $125.4
million, or 8.8%, as a result of a 3.5% increase in ASMs and a 5.1% increase in
cost per ASM. The increase in cost per ASM excluding fuel and special charge was
3.5% for the first nine months of 2001 but jumped to 10.8% in the fourth
quarter, primarily due to the impact of the terrorist attacks and labor costs.
Explanations of significant yearoveryear changes in the components of
operating expenses are as follows:

- Wages and  benefits  increased  12.1% due to a 5.2%  increase in the number of employees  combined  with a
           6.5%  increase  in  average  wages and  benefits  per  employee.  Employees  were added in most areas to
           support the net  addition of six  aircraft  to the  operating  fleet.  The 2000  results  include a $1.8
           million  charge  for  a  flight   attendant  early   retirement   program.   The  2001  results  include
           approximately  $13.4 million of added  expense for a pilot pay increase  that was  effective  June 2001.
           Excluding  these  items,  average  wages and  benefits per  employee  increased  4.7%,  which was due to
           longevity  increases  for union  employees,  annual merit raises for  management  employees,  and higher
           pension and health insurance costs for all employees.

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- Contracted services increased 7.7%, primarily due to higher rates for
           ground handling services and a slightly higher volume of services due
           to capacity growth. Increased airport security screening costs
           subsequent to September 11 also contributed to the increase.
- Fuel expense decreased 13.8% due to a 14.6% decrease in the cost per
           gallon of fuel, offset by a 0.9% increase in gallons consumed. The
           fuel consumption rate decreased 2.8% due to the use of more
           fuelefficient B737700 and B737900 aircraft. The lower fuel prices
           saved $46.2 million.
- Maintenance expense decreased 2.9% because we performed fewer
           airframe checks in 2001 and performed a greater percentage of the
           checks in Alaska maintenance facilities rather than at outside
           contractors. We also incurred lower outside engine repair costs in
           2001 compared to 2000. Those reductions were partly offset by higher
           amortization of airframe and engine overhauls that were capitalized
           in prior years.
- Commission expense decreased 1.5%, consistent with the 0.6% decrease
           in passenger revenue, and also due to a smaller proportion of sales
           being made through travel agents. In 2001, 59.9% of Air Group ticket
           sales were made through travel agents, versus 63.9% in 2000. In 2001,
           16.3% of the ticket sales were made through Alaskas Internet web
           site versus 10.4% in 2000.
- Other selling expense consists of credit card commissions,
           centralized reservation systems fees, Mileage Plan award costs, and
           advertising expenses. In 2001, Mileage Plan awards expense increased
           $3.9 million due to the growth of the program. Centralized
           reservation systems fees also increased slightly in 2001 due to rate
           increases. These increases were offset by planned decreases in
           advertising and promotion costs.
- Depreciation and amortization increased 23.5%, primarily due to the
           addition of nine owned aircraft during 2001.
- Landing fees and other rentals  increased  33.7%,  exceeding the 2.5% increase in landings,  due to higher
           landing  fee and  rental  rates at  airports  throughout  the  system.  The  higher  rates  reflect  the
           airports  increased cost of operations due to new security  directives,  expansion of their facilities,
           and increased costs for utilities.  Due to the events of September 11, airports are  experiencing  fewer
           landings  and lower  receipts  from  concessionaires.  Therefore,  the  Company  anticipates  that these
           revenue  shortfalls  will be passed through to airlines via increased  landing fees and terminal  rents.
           In the fourth  quarter of 2001 the Company  expensed  $5.1 million for estimated  shortfalls  related to
           2001.

10

---

- Other expense increased 3.3%, primarily due to higher expenditures
           for insurance, flight crew hotels and utilities, partly offset by
           lower recruiting, passenger remuneration, and legal costs. Subsequent
           to the events of September 11, the Company experienced significant
           increases in hull, liability and war risk insurance rates, and is
           also subject to surcharges for war risk coverage. As a result of
           these increases, Alaska expects to incur approximately $38 million in
           insurance expense in 2002, compared to $13.1 million in 2001. The
           Company does not know when, if ever, the current insurance rates and
           surcharges will decrease or be discontinued.

Nonoperating Income (Expense)

Net nonoperating income was $56.0 million in 2001 compared to $5.4 million in
2000. The $50.6 million increase was primarily due to U.S government
compensation and interest expense. Alaska recognized $71.6 million of U.S.
government compensation, which was the amount received through December 31, 2001
under the Air Transportation Safety and System Stabilization Act described above
under Industry Conditions. We estimate that Alaska is eligible to receive up to
$83.9 million under the Act. The ultimate amount of compensation to be received
is based on submission and approval of Alaskas final application in 2002. This
amount may be higher or lower than the amount of cash that has been received to
date, but management believes Alaska incurred losses in excess of $83.9 million
and will qualify for reimbursement of the maximum amount. Interest expense, net
of capitalized interest, increased $18.7 million due to new debt incurred during
the past 12 months. Effective January 1, 2001, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments
and Hedging Activities, as amended. SFAS No. 133 requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. The Company has fuel hedge contracts that are carried on the balance
sheet at fair value. Each period, the contracts are measured and adjusted to
fair market value. The change in the value of the fuel hedge contracts that
perfectly offsets the change in the value of the aircraft fuel purchase being
hedged is recorded as comprehensive income/loss until the hedged contract is
settled and is then recognized in earnings. To the extent the change in the
value of the fuel hedge contracts does not perfectly offset the change in the
value of the aircraft fuel purchase being hedged, that portion of the hedge is
recognized in earnings. In 2001, $2.6 million of charges were recorded as part
of other nonoperating expense to recognize the changes in fair value of fuel
hedging contracts in accordance with the new standard. As detailed in Note 1 to
the Financial Statements at December 31, 2001, the Company has fuel hedge
contracts for 136 million gallons of projected jet fuel usage in 2002 and 2003,
which represents approximately 24% and 20% of projected usage, respectively.

Critical Accounting Policies

The Company has three critical accounting policies, which have been chosen among
alternatives, that require a more significant amount of management judgment than
other accounting policies the Company employs. They are described below.

Mileage Plan

The Company has a loyalty program that awards miles to passengers who fly on
Alaska and travel partners. Additionally, the Company sells miles to third
parties, such as rental car agencies, for cash. In either case, the outstanding
miles may be redeemed for travel on Alaska, Horizon, or any of our alliance
partners. The Company has an obligation to provide this future travel; therefore
the Company recognizes a liability and the corresponding expense or deferred
revenue for this future obligation.

11

---

At December 31, 2001, the Company had 63 billion miles outstanding, representing
a liability of $248 million. The liability is computed based on several
assumptions that require management judgment to estimate and formulate. There
are uncertainties inherent in estimates; therefore, an incorrect assumption may
impact the amount and/or timing of revenue recognition or Mileage Plan expenses.
The most significant assumptions in accounting for the Mileage Plan are
described below.

1. The number of miles that will not be redeemed for travel and the miles used
    per award (i.e. free ticket): Outstanding miles may not always be redeemed
    for travel. A cardholder may not reach the threshold necessary for a free
    ticket, therefore, based on the number of Mileage Plan accounts and the
    miles in the accounts, the Company estimates how many miles will never be
    used, and does not record a liability for those miles. We also estimate how
    many miles will be used per award. If actual miles used are less than
    estimated, we may need to increase the liability and corresponding expense.The costs which will be incurred to carry the passenger:
    When the frequent flyer travels on his or her award ticket, incremental
    costs, such as food, fuel and insurance, are incurred by the Company to
    carry that passenger. The Company estimates what these costs will be and
    accrues a liability for these costs. If the passenger travels on another
    airline, the Company must pay the other airline for carrying that passenger.
    The other airline costs are based on negotiated agreements and are much
    higher than the costs incurred by the Company to carry that passenger. The
    Company estimates how much it will pay to other airlines for future travel
    awards and accrues this expense. When the award is flown, if the costs
    actually incurred by the Company or paid to other airlines are higher than
    the costs that were estimated and accrued, the liability may be understated.Redemption on Alaska or Horizon versus other airlines:
    The cost for Alaska or Horizon to carry an award passenger is much lower
    than the cost the Company will pay to other airlines. This is because the
    cost to the Company is only the incremental cost of that passenger, such as
    food and fuel. Fixed costs, such as aircraft rent, will be incurred
    regardless of whether that additional passenger flies. If the passenger
    flies on another airline, the cost to the Company is much higher as we are
    paying a negotiated price to that airline. The Company estimates the number
    of awards which will be redeemed on Alaska or Horizon versus other airlines
    and accrues the costs based on this estimate. If the number of awards
    redeemed on other airlines is higher than estimated, the liability may be
    understated.
2. The costs which will be incurred to carry the passenger:
    When the frequent flyer travels on his or her award ticket, incremental
    costs, such as food, fuel and insurance, are incurred by the Company to
    carry that passenger. The Company estimates what these costs will be and
    accrues a liability for these costs. If the passenger travels on another
    airline, the Company must pay the other airline for carrying that passenger.
    The other airline costs are based on negotiated agreements and are much
    higher than the costs incurred by the Company to carry that passenger. The
    Company estimates how much it will pay to other airlines for future travel
    awards and accrues this expense. When the award is flown, if the costs
    actually incurred by the Company or paid to other airlines are higher than
    the costs that were estimated and accrued, the liability may be understated.Redemption on Alaska or Horizon versus other airlines:
    The cost for Alaska or Horizon to carry an award passenger is much lower
    than the cost the Company will pay to other airlines. This is because the
    cost to the Company is only the incremental cost of that passenger, such as
    food and fuel. Fixed costs, such as aircraft rent, will be incurred
    regardless of whether that additional passenger flies. If the passenger
    flies on another airline, the cost to the Company is much higher as we are
    paying a negotiated price to that airline. The Company estimates the number
    of awards which will be redeemed on Alaska or Horizon versus other airlines
    and accrues the costs based on this estimate. If the number of awards
    redeemed on other airlines is higher than estimated, the liability may be
    understated.
3. Redemption on Alaska or Horizon versus other airlines:
    The cost for Alaska or Horizon to carry an award passenger is much lower
    than the cost the Company will pay to other airlines. This is because the
    cost to the Company is only the incremental cost of that passenger, such as
    food and fuel. Fixed costs, such as aircraft rent, will be incurred
    regardless of whether that additional passenger flies. If the passenger
    flies on another airline, the cost to the Company is much higher as we are
    paying a negotiated price to that airline. The Company estimates the number
    of awards which will be redeemed on Alaska or Horizon versus other airlines
    and accrues the costs based on this estimate. If the number of awards
    redeemed on other airlines is higher than estimated, the liability may be
    understated.

The Company reviews all Mileage Plan estimates each quarter, and changes certain
assumptions based on historical trends. The Company adopted this methodology of
accounting for the Mileage Plan in June 2000. Apart from the special charge in
2000 related to the adoption of this new methodology, there have been no
material effects on the income statement or balance sheet from updating the
assumptions in 2000 or 2001.

Aircraft Maintenance

The Company incurs expenses to repair and maintain aircraft. Routine maintenance
and repairs are expensed when incurred. Major airframe and engine overhauls are
capitalized and expensed over the estimated life of the overhaul. Management
uses estimates to determine the appropriate life of an overhaul. For leased
aircraft, the Company is subject to lease provisions that require

12

---

that a minimum portion of the life of an overhaul be remaining on the airframe
and/or engine at the lease return date, or the Company may pay a certain amount
if the minimum life is not met. The Company also estimates what the unamortized
overhaul and asset values will be at the lease return dates for the leased
aircraft. Both of those costs are accrued to a lease return provision on a
straightline basis over the lease lives. The provision is reviewed annually and
the assumptions regarding overhaul timing and costs are updated. The Company has
not recognized any material adjustments in the financial statements in 1999,
2000, or 2001 from revising the lease return reserve assumptions.

Longlived Assets

Due to the events of September 11 and the impact on the airline industry, the
Company evaluated whether the book value of its aircraft was impaired in
accordance with SFAS No. 121, Accounting for the Impairment of
LongLived Assets and for LongLived Assets to Be Disposed Of.
The Company performed an impairment test, as required by SFAS No. 121, which was
based on the estimated future cash flows to be generated by the Companys
aircraft. Based on this test, the Company determined that no impairment
writedown was necessary for the Companys fleet. There is inherent
risk in estimating the future cash flows used in the impairment test. If cash
flows do not materialize as estimated, there is a risk that an impairment charge
may be necessary in the future. However, the Company believes that the
accounting practices followed with regard to longlived assets are
appropriate and based on the best information available at the time.

Liquidity and Capital Resources

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

|                                                                                                      |  | December 31, 2000 |         | December 31, 2001 |   | Change 
|----------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | ----------------- | - | -------
|
|Cash and marketable securities                                                                        |  | $                 | 461.6   |                   | $ | 660.6  
|Working capital                                                                                       |  |                   | 55.8    |                   |   | 204.5  
|Unused credit facility                                                                                |  |                   | 150.0   |                   |   | 0.0    
|Longterm debt and   capital lease obligations                                                        |  |                   | 609.2   |                   |   | 863.3  
|Shareholders equity                                                                                  |  |                   | 703.6   |                   |   | 690.4  
|Debttocapital                                                                                       |  |                   | 46%:54% |                   |   | 56%:44%
|Debttocapital assuming aircraft   operating leases are capitalized   at seven times annualized rent |  |                   | 70%:30% |                   |   | 72%:28%

2001 Financial Changes Net cash provided by operating activities was $276.8
million in 2001, compared to $197.7 million in 2000. The increase in 2001 is partially
attributable to $71.6 million of U. S. government cash compensation received in
2001. Additional cash was provided by the issuance of $384.5 million of new
debt, including $150.0 million borrowed under Alaskas credit facility. The
Company used cash generated from operations and the issuance of debt to purchase
$341.9 million of capital equipment, including eight new and one used Boeing 737
aircraft, spare parts and airframe and engine overhauls. Cash was also used to
repay $153.9 million of debt.

Shareholders equity decreased $13.2 million, primarily due to the net loss of
$10.1 million.

13

---

Financing Activities  During 2001, Alaska issued $234.5 million of debt secured
by flight equipment, including $64.5 million with fixed interest rates of
approximately 6.8% and a term of 12 years. Interest rates on the other $170.0
million varies with LIBOR and has payment terms of 12 to 16.5 years.
Additionally, in September 2001, Alaska borrowed $150 million under its credit
facility at an interest rate that varies with LIBOR and is payable on or before
December 31, 2004.

Commitments  In December 2001, Alaska changed its fleet plan to defer delivery
of certain Boeing aircraft. The former schedule provided for delivery of four
737s in 2002 and four in 2003. At December 31, 2001, the Company had firm orders
for eight aircraft requiring aggregate payments of approximately $220 million,
as set forth below. In addition, Alaska has options to acquire 26 more 737s.
Alaska expects to finance its new aircraft with leases, longterm debt, or
internally generated cash. As previously mentioned, as a result of the events of
September 11, credit rating agencies downgraded the longterm credit ratings of
most U.S. airlines and their related entities. To date, the Company has not had
difficulty obtaining credit on acceptable terms, and does not anticipate
problems obtaining credit in the future, but future credit may be at higher
rates than prior to September 11.

Delivery PeriodFirm OrdersAircraft

2002

2003

2004

TotalBoeing B737700





2





2Boeing B737900


1


2


3


6Total


1


4


3


8Payments (Millions)

$
50

$
83

$
87

$
220


New Accounting Standards  In June 2001, the Financial Accounting Standards
Board (FASB) issued SFAS No. 141, Business Combinations (effective July 1,
2001) and SFAS No. 142, Goodwill and Other Intangible Asets. SFAS 141
prohibits poolingofinterests accounting for acquisitions. Effective January 1,
2002, the Company will adopt SFAS No 142. Under this Statement, the Companys
intangible assets are considered to have an indefinite life and will no longer
be amortized but instead will be subject to periodic impairment testing. The
impact of this change is expected to increase annual net income by $0.5 million.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations (effective for the Company on January 1, 2003). This Statement
addresses financial accounting and reporting for obligations associated with the
retirement of tangible longlived assets and the associated asset retirement
costs. In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of LongLived Assets (effective for the Company on
January 1, 2002). This Statement supersedes SFAS No. 121, Accounting for the
Impairment of LongLived Assets and for LongLived Assets to Be Disposed Of and
APB Opinion No. 30, Reporting the Results of Operations  Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions. The Company is in the process
of evaluating the financial statement impact of SFAS No. 143 and SFAS No. 144.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
 MARKET RISK
The Company does not purchase or hold any derivative financial instruments for
trading purposes. The Company has significant commodity price risk exposure to
jet fuel price increases. Currently, a onecent change in the fuel price per
gallon affects annual fuel costs by

14

---

approximately $3.1 million. To help manage this exposure, the Company began
purchasing primarily crude oil call options during 2000. Settlement of these
options during the first half of 2001 resulted in nonoperating expense of $2.6
million for 2001. At December 31, 2001, the Company had swap agreements for
crude oil contracts in place to hedge approximately 24% of its 2002 and 20% of
its 2003 expected jet fuel requirements. At December 31, 2001, these contracts
had unrealized pretax losses of $5.0 million. A hypothetical 10% increase in jet
fuel prices would increase 2002 fuel expense by approximately $16 million and
2003 fuel expense by approximately $17 million. A hypothetical 10% decrease in
jet fuel prices would decrease 2002 fuel expense by approximately $17 million
and 2003 fuel expense by approximately $18 million. This analysis includes the
effect of the fuel hedging contracts in place at December 31, 2001. A
hypothetical 10% change in the average interest rates incurred on variable rate
debt during 2001 would correspondingly change the Companys net earnings
and cash flows associated with these items by approximately $3.0
million.

ITEM 8.  FINANCIAL STATEMENTS
See Item 14.

ITEM 9.  DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.

PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8K

(a)   Financial Statements:

Page(s)Balance Sheet as of December 31, 2001 and 2000

1718Statements of Income for the years ended   December 31, 1999, 2000 and 2001

19Statements of Shareholders Equity for the years ended   December 31, 1999, 2000 and 2001

20Statements of Cash Flows for the years ended December 31, 1999,   2000 and 2001

21Notes to Financial Statements

2230Report of Independent Public Accountants

32Financial Statement Schedule II, Valuation and Qualifying Accounts,
for the years ended December 31, 1999, 2000 and 2001

33


See Exhibit Index on page 34

(b)   No reports on Form 8K were filed during the fourth quarter of 2001.

15

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange 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. |  |                                                                        
|--------------------- |  | -----------------------------------------------------------------------
|By:                   |  | /s/WILLIAM S. AYERWilliam S. Ayer Chief Executive Officer and President

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on February 25, 2002 on behalf of the registrant
and in the capacities indicated.

|                                          |  |                                                                                            |  | 
|----------------------------------------- |  | ------------------------------------------------------------------------------------------ |  | 
|/s/JOHN F. KELLYJohn F. Kelly             |  | Chairman and Director                                                                      |  | 
|/s/BRADLEY D. TILDENBradley D. Tilden     |  | Executive Vice President/Finance and Chief Financial Officer (Principal Financial Officer) |  | 
|/s/TERRI K. MAUPINTerri K. Maupin         |  | Staff Vice President/Finance and Controller (Principal Accounting Officer)                 |  | 
|/s/WILLIAM S. AYERWilliam S. Ayer         |  | Chief Executive Officer, President and Director                                            |  | 
|/s/GEORGE D. BAGLEYGeorge D. Bagley       |  | Executive Vice President/Operations and Director                                           |  | 
|/s/RONALD F. COSGRAVERonald F. Cosgrave   |  | Director                                                                                   |  | 
|/s/MARY JANE FATEMary Jane Fate           |  | Director                                                                                   |  | 
|/s/R. MARC LANGLANDR. Marc Langland       |  | Director                                                                                   |  | 
|/s/J. KENNETH THOMPSONJ. Kenneth Thompson |  | Director                                                                                   |  | 

16

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BALANCE SHEETS         Alaska Airlines, Inc.

ASSETS

|As of December 31
(In Millions)                                             |  | 2000 |         | 2001
|--------------------------------------------------------------------------- |  | ---- | ------- | ----
|Current Assets                                                              |  |      |         |     
|Cash and cash equivalents                                                   |  | $    | 101.0   |     
|Marketable securities                                                       |  |      | 360.6   |     
|Receivables from related companies                                          |  |      | 53.0    |     
|Receivablesless allowance for doubtful accounts (2000  $1.7; 2001  $1.8) |  |      | 76.5    |     
|Inventories and suppliesnet                                                |  |      | 34.5    |     
|Prepaid expenses and other assets                                           |  |      | 87.2    |     
|                                                                            |  |      |         |     
|Total Current Assets                                                        |  |      | 712.8   |     
|                                                                            |  |      |         |     
|Property and Equipment                                                      |  |      |         |     
|Flight equipment                                                            |  |      | 1,527.2 |     
|Other property and equipment                                                |  |      | 299.3   |     
|Deposits for future flight equipment                                        |  |      | 192.0   |     
|                                                                            |  |      |         |     
|                                                                            |  |      | 2,018.5 |     
|Less accumulated depreciation & amortization                                |  |      | 488.0   |     
|                                                                            |  |      |         |     
|                                                                            |  |      | 1,530.5 |     
|                                                                            |  |      |         |     
|Capital leases:                                                             |  |      |         |     
|Flight and other equipment                                                  |  |      | 44.4    |     
|Less accumulated amortization                                               |  |      | 33.8    |     
|                                                                            |  |      |         |     
|                                                                            |  |      | 10.6    |     
|                                                                            |  |      |         |     
|Total Property and EquipmentNet                                            |  |      | 1,541.1 |     
|                                                                            |  |      |         |     
|Intangible Assets                                                           |  |      | 13.0    |     
|                                                                            |  |      |         |     
|Other Assets                                                                |  |      | 109.2   |     
|                                                                            |  |      |         |     
|Total Assets                                                                |  | $    | 2,376.1 |     
|                                                                            |  |      |         |     

See
accompanying notes to financial statements.

17

---

BALANCE SHEETS     Alaska Airlines, Inc.

LIABILITIES AND SHAREHOLDER'S EQUITY

|As of December 31
(In Millions Except Share Amounts)                                 |  | 1999 |         | 2000
|------------------------------------------------------------------------------------ |  | ---- | ------- | ----
|Current Liabilities                                                                  |  |      |         |     
|Accounts payable                                                                     |  | $    | 117.1   |     
|Payables to related companies                                                        |  |      | 0.5     |     
|Accrued aircraft rent                                                                |  |      | 74.2    |     
|Accrued wages, vacation and payroll taxes                                            |  |      | 59.1    |     
|Other accrued liabilities                                                            |  |      | 127.1   |     
|Air traffic liability                                                                |  |      | 212.3   |     
|Current portion of long-term debt and capital lease obligations                      |  |      | 66.7    |     
|                                                                                     |  |      |         |     
|Total Current Liabilities                                                            |  |      | 657.0   |     
|                                                                                     |  |      |         |     
|LongTerm Debt & Capital Lease Obligations                                           |  |      | 609.2   |     
|                                                                                     |  |      |         |     
|Other Liabilities and Credits                                                        |  |      |         |     
|Deferred income taxes                                                                |  |      | 126.1   |     
|Deferred revenue                                                                     |  |      | 133.0   |     
|Other liabilities                                                                    |  |      | 147.2   |     
|                                                                                     |  |      |         |     
|                                                                                     |  |      | 406.3   |     
|                                                                                     |  |      |         |     
|Commitments                                                                          |  |      |         |     
|                                                                                     |  |      |         |     
|Shareholders Equity                                                                 |  |      |         |     
|Common stock, $1 par value Authorized: 1,000 shares Issued: 2000 and 2001500 shares |  |      |        |     
|Capital in excess of par value                                                       |  |      | 324.8   |     
|Accumulated other comprehensive income (loss)                                        |  |      |        |     
|Retained earnings                                                                    |  |      | 378.8   |     
|                                                                                     |  |      |         |     
|                                                                                     |  |      | 703.6   |     
|                                                                                     |  |      |         |     
|Total Liabilities and Shareholder's Equity                                           |  | $    | 2,376.1 |     
|                                                                                     |  |      |         |     

See
accompanying notes to financial statements.

18

---

STATEMENTS OF INCOME       Alaska Airlines, Inc.

|Year Ended December 31
(In Millions)                                         |  | 1999 |         | 2000 |   | 2001    |  
|---------------------------------------------------------------------------- |  | ---- | ------- | ---- | - | ------- | -
|Operating Revenues                                                           |  |      |         |      |   |         |  
|Passenger                                                                    |  | $    | 1,519.6 |      | $ | 1,617.9 |  
|Freight and mail                                                             |  |      | 80.0    |      |   | 76.4    |  
|Othernet                                                                    |  |      | 81.2    |      |   | 54.7    |  
|                                                                             |  |      |         |      |   |         |  
|Total Operating Revenues                                                     |  |      | 1,680.8 |      |   | 1,749.0 |  
|                                                                             |  |      |         |      |   |         |  
|Operating Expenses                                                           |  |      |         |      |   |         |  
|Wages and benefits                                                           |  |      | 523.9   |      |   | 576.7   |  
|Contracted services                                                          |  |      | 55.6    |      |   | 66.1    |  
|Aircraft fuel                                                                |  |      | 205.2   |      |   | 313.1   |  
|Aircraft maintenance                                                         |  |      | 96.0    |      |   | 128.8   |  
|Aircraft rent                                                                |  |      | 157.2   |      |   | 144.3   |  
|Food and beverage service                                                    |  |      | 49.1    |      |   | 51.0    |  
|Commissions                                                                  |  |      | 91.0    |      |   | 65.1    |  
|Other selling expenses                                                       |  |      | 82.2    |      |   | 98.5    |  
|Depreciation and amortization                                                |  |      | 67.9    |      |   | 83.9    |  
|Loss on disposition of assets                                                |  |      | 0.4     |      |   | 1.3     |  
|Landing fees and other rentals                                               |  |      | 66.5    |      |   | 74.4    |  
|Other                                                                        |  |      | 109.5   |      |   | 135.4   |  
|Special chargeMileage Plan                                                  |  |      |        |      |   | 24.0    |  
|                                                                             |  |      |         |      |   |         |  
|Total Operating Expenses                                                     |  |      | 1,504.5 |      |   | 1,762.6 |  
|                                                                             |  |      |         |      |   |         |  
|Operating Income (Loss)                                                      |  |      | 176.3   |      |   | (13.6   | )
|                                                                             |  |      |         |      |   |         |  
|Nonoperating Income (Expense)                                                |  |      |         |      |   |         |  
|Interest income                                                              |  |      | 21.7    |      |   | 27.9    |  
|Interest expense                                                             |  |      | (16.3   | )    |   | (36.0   | )
|Interest capitalized                                                         |  |      | 8.3     |      |   | 12.4    |  
|U.S. government compensation                                                 |  |      |        |      |   |        |  
|Othernet                                                                    |  |      | 6.4     |      |   | 1.1     |  
|                                                                             |  |      |         |      |   |         |  
|                                                                             |  |      | 20.1    |      |   | 5.4     |  
|                                                                             |  |      |         |      |   |         |  
|Income (loss) before income tax and accounting change                        |  |      | 196.4   |      |   | (8.2    | )
|Income tax expense (credit)                                                  |  |      | 77.0    |      |   | (0.8    | )
|                                                                             |  |      |         |      |   |         |  
|Income (loss) before accounting change                                       |  |      | 119.4   |      |   | (7.4    | )
|Cumulative effect of accounting change, net of income taxes of $35.6 million |  |      |        |      |   | (56.9   | )
|                                                                             |  |      |         |      |   |         |  
|Net Income (Loss)                                                            |  | $    | 119.4   |      | $ | (64.3   | )
|                                                                             |  |      |         |      |   |         |  

See
accompanying notes to financial statements.

19

---

STATEMENTS OF SHAREHOLDERS EQUITY
Alaska Airlines, Inc.

|(In Millions)                                |  | Common
Stock |   | Capital in
Excess of
Par Value |   | AccumulatedOtherComprehensive
Income (Loss) |  | Retained
Earnings |      | Total |  
|-------------------------------------------- |  | ------------ | - | ------------------------------ | - | ------------------------------------------- |  | ----------------- | ---- | ----- | -
|Balances at December 31, 1998                |  | $            |  |                                | $ | 225.8                                       |  | $                 | 0.0  |       | $
|1999 net income                              |  |              |   |                                |   |                                             |  |                   |      |       |  
|                                             |  |              |   |                                |   |                                             |  |                   |      |       |  
|Balances at December 31, 1999                |  |              |  |                                |   | 225.8                                       |  |                   | 0.0  |       |  
|                                             |  |              |   |                                |   |                                             |  |                   |      |       |  
|2000 net loss                                |  |              |   |                                |   |                                             |  |                   |      |       |  
|Capital contribution from Alaska Air Group   |  |              |   |                                |   | 99.0                                        |  |                   |      |       |  
|                                             |  |              |   |                                |   |                                             |  |                   |      |       |  
|Balances at December 31, 2000                |  |              |  |                                |   | 324.8                                       |  |                   | 0.0  |       |  
|                                             |  |              |   |                                |   |                                             |  |                   |      |       |  
|2001 net loss                                |  |              |   |                                |   |                                             |  |                   |      |       |  
|Other comprehensive income (loss):           |  |              |   |                                |   |                                             |  |                   |      |       |  
|Fuel hedging losses,  net of $1.9 tax credit |  |              |   |                                |   |                                             |  |                   | (3.1 | )     |  
|                                             |  |              |   |                                |   |                                             |  |                   |      |       |  
|Total comprehensive income (loss)            |  |              |   |                                |   |                                             |  |                   |      |       |  
|                                             |  |              |   |                                |   |                                             |  |                   |      |       |  
|Balances at December 31, 2001                |  | $            |  |                                | $ | 324.8                                       |  | $                 | (3.1 | )     | $
|                                             |  |              |   |                                |   |                                             |  |                   |      |       |  

See
accompanying notes to financial statements.

20

---

STATEMENTS OF CASH FLOWSAlaska Airlines, Inc.

|Year Ended December 31
(In Millions)                                                    |                                                        | 1999 |        | 2000  |   | 2001   |      
|--------------------------------------------------------------------------------------- | ------------------------------------------------------ | ---- | ------ | ----- | - | ------ | -----
|Cash flows from operating activities:                                                   |                                                        |      |        |       |   |        |      
|Net income (loss)                                                                       |                                                        | $    | 119.4  |       | $ | (64.3  | )    
|Adjustments to reconcile net income(loss) to net cash provided by operating activities: |                                                        |      |        |       |   |        |      
|                                                                                        | Cumulative effect of accounting change                 |      |        |      |   |        | 56.9 
|                                                                                        | Special chargeMileage Plan                            |      |        |      |   |        | 24.0 
|                                                                                        | Depreciation and amortization                          |      |        | 67.9  |   |        | 83.9 
|                                                                                        | Amortization of airframe and engine overhauls          |      |        | 43.5  |   |        | 50.7 
|                                                                                        | Loss on sale of assets                                 |      |        | 0.4   |   |        | 1.3  
|                                                                                        | Increase (decrease) in deferred income tax liabilities |      |        | 45.1  |   |        | (17.2
|                                                                                        | Increase in accounts receivablenet                    |      |        | (25.0 | ) |        | (31.4
|                                                                                        | Decrease (increase) in other current assets            |      |        | 1.3   |   |        | (14.9
|                                                                                        | Increase in air traffic liability                      |      |        | 5.5   |   |        | 29.2 
|                                                                                        | Increase in other current liabilities                  |      |        | 56.3  |   |        | 33.2 
|                                                                                        | Increase (decrease) in deferred revenue and other-net  |      |        | (19.9 | ) |        | 46.3 
|                                                                                        |                                                        |      |        |       |   |        |      
|Net cash provided by operating activities                                               |                                                        |      | 294.5  |       |   | 197.7  |      
|                                                                                        |                                                        |      |        |       |   |        |      
|Cash flows from investing activities:                                                   |                                                        |      |        |       |   |        |      
|Proceeds from disposition of assets                                                     |                                                        |      | 0.3    |       |   | 37.2   |      
|Purchases of marketable securities                                                      |                                                        |      | (137.8 | )     |   | (464.1 | )    
|Sales and maturities of marketable securities                                           |                                                        |      | 218.5  |       |   | 300.0  |      
|Flight equipment deposits returned                                                      |                                                        |      |       |       |   |       |      
|Additions to flight equipment deposits                                                  |                                                        |      | (149.2 | )     |   | (121.6 | )    
|Additions to property and equipment                                                     |                                                        |      | (333.6 | )     |   | (251.8 | )    
|Restricted deposits                                                                     |                                                        |      | 5.6    |       |   | (1.1   | )    
|                                                                                        |                                                        |      |        |       |   |        |      
|Net cash used in investing activities                                                   |                                                        |      | (396.2 | )     |   | (501.4 | )    
|                                                                                        |                                                        |      |        |       |   |        |      
|Cash flows from financing activities:                                                   |                                                        |      |        |       |   |        |      
|Proceeds from issuance of longterm debt                                                |                                                        |      | 232.0  |       |   | 338.2  |      
|Longterm debt and capital lease payments                                               |                                                        |      | (27.1  | )     |   | (65.8  | )    
|                                                                                        |                                                        |      |        |       |   |        |      
|Net cash provided by financing activities                                               |                                                        |      | 204.9  |       |   | 272.4  |      
|                                                                                        |                                                        |      |        |       |   |        |      
|Net change in cash and cash equivalents                                                 |                                                        |      | 103.2  |       |   | (31.3  | )    
|Cash and cash equivalents at beginning of year                                          |                                                        |      | 29.1   |       |   | 132.3  |      
|                                                                                        |                                                        |      |        |       |   |        |      
|Cash and cash equivalents at end of year                                                |                                                        | $    | 132.3  |       | $ | 101.0  |      
|                                                                                        |                                                        |      |        |       |   |        |      
|Supplemental disclosure of cash paid during the year for:                               |                                                        |      |        |       |   |        |      
|                                                                                        | Interest (net of amount capitalized)                   |      | $      | 7.0   |   | $      | 28.5 
|                                                                                        | Income taxes                                           |      |        | 34.9  |   |        | 3.6  

Noncash investing and financing activities:

|1999 |  | A flight simulator was transferred to Alaska Air Group Leasing in exchange for an $8.8 million note receivable and a $2.2 million reduction in its payable to Alaska Air Group.
|---- | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2000 |  | A $99.0 million capital contribution from Alaska Air Group was used to reduce a noninterest bearing payable to Alaska Air Group.                                              
|     |   | A flight simulator was transferred to Alaska Air Group Leasing in exchange for a $2.4 million note receivable and a $0.8 million reduction in its payable to Alaska Air Group. 

See accompanying notes to financial statements.

21

---

NOTES TO FINANCIAL STATEMENTS
Alaska Airlines, Inc.
December 31, 2001

Note 1.  Summary of Significant Accounting Policies

Organization and Nature of Operations
Alaska Airlines, Inc. (Alaska or the Company), an Alaska corporation, is a
wholly owned subsidiary of Alaska Air Group, Inc. (Air Group), a Delaware
corporation. Air Group is also the parent company of Alaska Air Group Leasing
(AAGL) and Horizon Air Industries, Inc. (Horizon). Alaska is a major airline
serving Alaska; Vancouver, Canada; the U.S. West Coast; and Mexico. It operates
an all jet fleet and its average passenger trip is 896 miles.

Basis of Presentation
The preparation of these financial statements in conformity with accounting
principles generally accepted in the United States of America requires the use
of management's estimates. Actual results could differ from those estimates.
Certain reclassifications have been made in prior years' financial statements to
conform to the 2001 presentation.

Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments with purchase maturities
of three months or less. They are carried at cost, which approximates market.
The Company reduces its cash balance when checks are disbursed. Due to the time
delay in checks clearing the banks, the Company normally maintains a negative
cash balance on its books, which is reported as a current liability. The amount
of the negative cash balance was $27.1 million and $17.4 million at December 31,
2000 and 2001, respectively.

Inventories and Supplies
Expendable and repairable aircraft parts, as well as other materials and
supplies, are stated at average cost. An allowance for obsolescence of flight
equipment expendable and repairable parts is accrued based on estimated disposal
date and salvage value. Surplus inventories are carried at their net realizable
value. At December 31, 2000 and 2001, the allowance for all inventories was
$19.7 million and $23.1 million, respectively.

Property, Equipment and Depreciation
Property and equipment are recorded at cost and depreciated using the
straight-line method over their estimated useful lives, which are as follows:

Aircraft and related flight equipment:Boeing 737-200C

10-14 yearsBoeing 737-400/700/900

20 yearsBoeing MD-80

20 yearsBuildings

10-30 yearsCapitalized leases and leasehold improvements

Term of leaseOther equipment

3-15 years


Routine maintenance and repairs are expensed when incurred. The cost of major
airframe and engine overhauls are capitalized and amortized to maintenance
expense over the periods benefited. Major modifications that extend the life or
improve the usefulness of aircraft are capitalized and depreciated over their
estimated period of use. Assets and related obligations for items financed under
capital leases are initially recorded at an amount equal to the present value of
the future minimum lease payments. The Company reviews long-lived assets for
impairment whenever events or changes in circumstances indicate that the total
amount of an asset may not be recoverable. An impairment loss is recognized when
estimated future undiscounted cash flows expected to result from the use of the
asset and its eventual disposition are less than its carrying amount. If the
asset is not considered recoverable, an amount equal to

22

---

the excess of the carrying amount over the fair value will be charged against
the asset with a corresponding expense to the income statement.

Intangible Assets
The excess of the purchase price over the fair value of net assets acquired is
recorded as an intangible asset and is amortized over 40 years. Accumulated
amortization at December 31, 2000 and 2001 was $7.4 million and $7.9 million,
respectively. In June 2001, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations" (effective July 1, 2001) and SFAS No. 142, "Goodwill and Other
Intangible Assets". SFAS No. 141 prohibits pooling-of-interests accounting for
acquisitions. Effective January 1, 2002, the Company will adopt SFAS No. 142.
Under this statement, the Company's intangible assets are considered to have an
indefinite life and will no longer be amortized but instead will be subject to
periodic impairment testing. The impact of this change is expected to increase
annual net income by $0.5 million.

Deferred Revenue
Deferred revenue results from the sale of mileage credits, the sale and
leaseback of aircraft, and the receipt of manufacturer or vendor credits. This
revenue is recognized when award transportation is provided or over the term of
the applicable agreements.

Leased Aircraft Return Costs
The costs associated with returning leased aircraft are accrued over the lease
periods. As leased aircraft are retired, the costs are charged against the
established reserve. The reserve is part of other liabilities, and at December
31, 2000 and 2001 was $52.1 million and $58.2 million, respectively.

Revenue Recognition
Passenger revenues are recognized when the passenger
travels. Tickets sold but not yet used are reported as air traffic liability.
Freight and mail revenues are recognized when service is provided. Other-net
revenues are primarily related to the Mileage Plan and they are recognized as
described in the "Frequent Flyer Awards" paragraph below.

Frequent Flyer Awards
Alaska operates a frequent flyer program ("Mileage Plan") that provides travel
awards to members based on accumulated mileage. For miles earned by flying on
Alaska and travel partners, the estimated incremental cost of providing free
travel awards is recognized as a selling expense and accrued as a liability as
miles are accumulated. Alaska also sells mileage credits to non-airline
partners, such as hotels, car rental agencies, and a credit card company.
Effective January 1, 2000, the Company began deferring a majority of the sales
proceeds and recognizing the proceeds as revenue when the award transportation
is provided. The deferred proceeds are recognized as passenger revenue for
awards issued on Alaska, and as other-net revenue for awards issued on other
airlines. Alaska's Mileage Plan liabilities are included under the following
balance sheet captions at December 31 (in millions):

2000

2001Current Liabilities:Other accrued liabilities

$
59.5

$
67.3Other Liabilities and Credits:Deferred revenue


94.0


123.0Other liabilities


45.0


58.0Total

$
198.5

$
248.3


Contracted Services
Contracted services includes the expenses for aircraft ground handling,
security, temporary employees and other similar services.

23

---

Other Selling Expenses
Other selling expenses includes credit card commissions, computerized
reservations systems (CRS) charges, Mileage Plan free travel awards,
advertising, and promotional costs. Advertising production costs are expensed
the first time the advertising takes place. Advertising expense was $14.6
million, $17.5 million, and $15.2 million, respectively, in 1999, 2000, and
2001.

Capitalized Interest
Interest is capitalized on flight equipment purchase deposits and ground
facility progress payments as a cost of the related asset and is depreciated
over the estimated useful life of the asset. Commencing in November 2001, the
Company ceased capitalization of interest on aircraft with deferred delivery
dates. Capitalization will commence when the deferral period is over.

Income Taxes
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards No. 109, which requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that
have been recognized in the Company's financial statements or tax returns.

Derivative Financial Instruments
Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", as amended. SFAS No. 133
requires companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair value.

The Company's operating results can be significantly impacted by changes in the
price of aircraft fuel. To manage the risks associated with changes in aircraft
fuel prices, the Company uses call options and swap agreements for crude oil
contracts. These contracts, referred to as "fuel hedge contracts", have a high
correlation to changes in aircraft fuel prices, and therefore qualify as cash
flow hedges under SFAS No. 133. Upon adoption of SFAS No. 133, the Company
recorded the fair market value of its fuel hedging contracts on the Consolidated
Balance Sheet. Each period, the contracts are adjusted to fair market value. The
change in the value of the fuel hedge contracts that perfectly offsets the
change in the value of the aircraft fuel purchase being hedged is recorded as
comprehensive income/loss until the hedged contract is settled and is then
recognized in earnings. To the extent the change in the value of the fuel hedge
contracts does not perfectly offset the change in the value of the aircraft fuel
purchase being hedged, that portion of the hedge is recognized in earnings. For
the year ended December 31, 2001, the Company recognized $2.6 million of
nonoperating expense related to fair market value changes in fuel hedge
contracts. At December 31, 2001, the Company's fuel hedge contracts for 136
million gallons of projected jet fuel usage in 2002 and 2003, had unrealized
losses of $3.1 million net of income taxes, recorded in other comprehensive
income.

The Company enters into foreign exchange forward contracts, generally with
maturities of less than one month, to manage the risk associated with net
foreign currency transactions. Resulting gains and losses are recognized
currently in other operating expense. The Company periodically enters into
interest rate swap agreements to hedge interest rate risk. At December 31, 2001,
there were no foreign currency contracts or interest rate swap agreements
outstanding.

New Accounting Standards
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" (effective for the Company on January 1, 2003). This Statement
addresses

24

---

financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (effective for the Company on
January 1, 2002). This Statement supersedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and
APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions". The Company is in the process
of evaluating the financial statement impact of SFAS No. 143 and SFAS No. 144.

Note 2.   Marketable Securities
Marketable securities are investments that are readily convertible to cash and
have original maturities that exceed three months. They are carried at cost,
classified as available for sale and consisted of the following at December 31
(in millions):

2000

2001Cost:U.S. government securities

$
245.5

$
59.7Asset backed obligations


79.1


72.9Other corporate obligations


36.0


37.8$
360.6

$
170.4Fair value:U.S. government securities

$
246.3

$
59.8Asset backed obligations


79.5


73.2Other corporate obligations


36.4


38.5$
362.2

$
171.5


There were no material unrealized holding gains or losses at December 31, 2000
or 2001.

Of the marketable securities on hand at December 31, 2001, 83% are expected to
mature in 2002, 13% in 2003, and 4% in 2004. Based on specific identification of
securities sold, the following occurred in 1999, 2000, and 2001 (in millions):

1999

2000

2001Proceeds from sales and maturities

$
218.5

$
300.0

$
424.6Gross realized gains


0.4


0.3


4.0Gross realized losses


0.3


0.6


0.4


Realized gains and losses are reported as a component of interest income.

Note 3.   Other Assets
Other assets consisted of the following at December 31 (in millions):

2000

2001Prepaid pension cost

$
73.3

$
98.4Restricted deposits


25.6


26.7Deferred costs and other


10.3


6.6$
109.2

$
131.7


At December 31, 2000, Alaska owned approximately 81,000 depository certificates
convertible, subject to certain restrictions, into the common stock of Equant
N.V., a telecommunication network company. At December 31, 2000, the
certificates had an estimated fair value of $2.0 million. During 2001, France
Telecom purchased Equant N.V. At December 31, 2001 the certificates had an
estimated fair value of $1.4 million. Alaska's carrying value of the
certificates was de minimis.

Note 4.  Related Company Transactions
During 2000, Alaska transferred a flight simulator to AAGL in exchange for an
$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 8.2% interest.
AAGL is leasing the simulator to Alaska for 12 years. In October 2000, Air Group
made a $99.0 million capital contribution to Alaska by reducing Alaska's payable
to Air Group.

At December 31, 2001, the receivables from related companies included $47.5
million from Horizon, $10.5 million from AAGL and $13.2 million from Air Group.

Note 5.  Long-Term Debt and Capital Lease Obligations At December 31, 2000 and
2001, long-term debt and capital lease obligations were as follows (in
millions):

25

---

2000

20017.4%* fixed rate notes payable due through 2015

$
406.4

$
420.74.6%* variable rate notes payable due through 2018


251.7


470.9Long-term debt


658.1


891.6Capital lease obligations


17.8


14.9Less current portion


(66.7
)

(43.2
)$
609.2

$
863.3


* weighted average for 2001

At December 31, 2001, borrowings of $726.3 million were secured by flight
equipment and real property. During 2001, Alaska issued $234.5 million of debt
secured by flight equipment, including $64.5 million with fixed interest rates
of approximately 6.8% and a term of 12 years. Interest rates on the other $170.0
million varies with LIBOR and has payment terms of 12 to 16.5 years. In
September 2001, Alaska borrowed $150 million under its credit facility at an
interest rate that varies with LIBOR and is payable on or before December 31,
2004.

Certain Alaska loan agreements contain provisions that require maintenance of
specific levels of net worth, leverage and fixed charge coverage, and limit
investments, lease obligations, sales of assets, and additional indebtedness. At
December 31, 2001, the Company was in compliance with all loan provisions.

At December 31, 2001, long-term debt principal payments for the next five years
were (in millions):

2002

$
40.12003

$
42.42004

$
217.92005

$
35.82006

$
38.4


Note 6.  CommitmentsLease Commitments
The Company has lease contracts for 49 aircraft that have remaining noncanceable
lease terms of one to 15 years. The majority of airport and terminal facilities
are also leased, with terms ranging from one to 88 years. Total rent expense was
$192.5 million, $188.1 million and $192.5 million, in 1999, 2000, and 2001,
respectively. Future minimum lease payments with noncancelable terms in excess
of one year as of December 31, 2001 are shown below (in millions):

Operating Leases
CapitalAircraft

Facilities

Leases2002

$
130.8

$
27.9

$
4.12003


113.7


26.2


4.12004


89.6


24.4


8.42005


85.0


23.6


0.22006


82.6


13.2


0.1Thereafter


633.0


80.2


0.1Total lease payments

$
1,134.7

$
195.5


17.0Less amount representing interest








(2.1
)Present value of capital lease payments







$
14.9


Aircraft Commitments
The Company has firm orders for 8 Boeing 737 series aircraft to be delivered
between 2002 and 2004. The firm orders require payments of approximately $220
million between 2002 and 2004. As of December 31, 2001, deposits of $81 million
related to the firm orders had been made. In addition to the ordered aircraft,
the Company holds purchase options on 26 Boeing 737s.

Note 7.  Employee Benefit PlansPension Plans
Four defined benefit and four defined contribution retirement plans cover
essentially all employees. The defined benefit plans provide benefits based on
an employee's term of service and average compensation for a specified period of
time before retirement. Pension plans are funded as required by the Employee
Retirement Income Security Act of 1974 (ERISA). The defined benefit plan assets
consist primarily

26

---

of marketable equity and fixed income securities. The
following table sets forth the status of the plans for 2000 and 2001 (in
millions):

2000

2001Projected benefit obligationBeginning of year

$
369.3

$
430.2Service cost


24.0


29.0Interest cost


28.5


32.3Amendments


0.7


5.2Change in assumptions


16.0


16.4Actuarial gain


0.9


6.2Benefits paid


(9.2
)

(12.1
)End of year

$
430.2

$
507.2Plan assets at fair valueBeginning of year

$
437.1

$
438.7Actual return on plan assets


5.8


(17.1
)Employer contributions


5.0


45.0Benefits paid


(9.2
)

(12.1
)End of year

$
438.7

$
454.5Funded status


8.5


(52.7
)Unrecognized loss


13.9


99.6Unrecognized transition asset


(0.1
)

(0.1
)Unrecognized prior service cost


51.0


51.6Prepaid pension cost

$
73.3

$
98.4Weighted average assumptions as of December 31Discount rate


7.50
%

7.25
%Expected return on plan assets


10.0
%

10.0
%Rate of compensation increase


5.4
%

5.4
%


Net pension expense for the defined benefit plans included the following
components for 1999, 2000, and 2001 (in millions):

1999

2000

2001Service cost

$
25.8

$
24.0

$
29.0Interest cost


25.3


28.5


32.3Expected return on assets


(36.7
)

(43.4
)

(46.0
)Amortization of prior service cost


4.4


4.5


4.6Recognized actuarial loss (gain)


0.1


(0.1
)

0.1Amortization of transition asset


(0.2
)




Net pension expense

$
18.7

$
13.5

$
20.0


Alaska also maintains an unfunded, noncontributory benefit plan for certain
elected officers. The unfunded accrued pension cost for this plan was $28
million as of December 31, 2001.

The defined contribution plans are deferred compensation plans under section
401(k) of the Internal Revenue Code. All of these plans require Company
contributions. Total expense for the defined contribution plans was $8.0
million, $10.7 million, and $12.4 million, respectively, in 1999, 2000, and
2001.

Profit Sharing Plans
Alaska has an employee profit sharing plan. Profit sharing expense for 1999 was
$18.4 million, and there was no expense for 2000 and 2001.

Other Postretirement Benefits
The Company allows retirees to continue their medical, dental, and vision
benefits by paying all or a portion of the active employee plan premium until
eligible for Medicare, currently age 65. This results in a subsidy to retirees,
because the premiums received by the Company are less than the actual cost of
the retirees' claims. The accumulated postretirement benefit obligation (APBO)
for this subsidy is unfunded, and at December 31, 2000 and 2001 was $28.7
million and $32.6 million, respectively. The accrued liability related to the
subsidy is included with other liabilities on the Consolidated Balance Sheet,
and totaled $23.4 million and $27.4 million at December 31, 2000 and 2001,
respectively. Annual expense related to this subsidy was approximately $4.0
million in 1999, 2000, and 2001.

Note 8.  Income Taxes
Alaska files a consolidated tax return with Air Group and other Air Group
subsidiaries. Each member of the consolidated group, including Alaska,
calculates its tax provision and tax liability, if applicable, on a
separate-entity basis. Any differences between the consolidated amounts and the
total of the

27

---

subsidiaries' amounts are included in the tax provision of the
parent company.

Deferred income taxes result from temporary differences in the timing of
recognition of revenue and expense for tax and financial reporting purposes.
Deferred tax assets and liabilities comprise the following at December 31 (in
millions):

2000

2001Excess of tax over book depreciation

$
203.0

$
278.3Employee benefits


8.2


1.2Othernet


5.6


Gross deferred tax liabilities


216.8


279.5Frequent flyer program


(70.8
)

(88.0
)Alternative minimum tax


(0.1
)

(21.7
)Aircraft return provisions


(13.8
)

(17.4
)Deferred gains


(11.6
)

(9.9
)Inventory obsolescence


(8.0
)

(9.2
)Fuel hedges





(1.9
)Othernet


(5.4
)

(7.0
)Gross deferred tax assets


(109.7
)

(155.1
)Net deferred tax liabilities

$
107.1

$
124.4Current deferred tax asset

$
(19.0
)
$
(26.1
)Noncurrent deferred tax liability


126.1


150.5Net deferred tax liabilities

$
107.1

$
124.4


The components of income tax expense (credit) were as follows
(in millions):

1999

2000

2001Current tax expense (credit):Federal

$
20.8

$
(1.4
)
$
(21.7
)State


6.7


0.1


(1.2
)Total current


27.5


(1.3
)

(22.9
)Deferred tax expense (credit):Federal


46.3


0.9


19.7State


3.2


(0.4
)

(0.5
)Total deferred


49.5


0.5


19.2Total before acctg. change


77.0


(0.8
)

(3.7
)Deferred tax credit, cumulative effect of acctg. change





(35.6
)

Total tax expense (credit)

$
77.0

$
(36.4
)
$
(3.7
)


Income tax expense (credit) reconciles to the amount computed by applying the
U.S. federal rate of 35% to income before taxes as follows (in millions):

|                                                      |  | 1999 |       | 2000 |   | 2001 |  
|----------------------------------------------------- |  | ---- | ----- | ---- | - | ---- | -
|Income (loss) before income tax and accounting change |  | $    | 196.4 |      | $ | (8.2 | )
|                                                      |  |      |       |      |   |      |  
|Expected tax expense (credit)                         |  | $    | 68.7  |      | $ | (2.8 | )
|Nondeductible expenses                                |  |      | 1.6   |      |   | 2.2  |  
|State income tax                                      |  |      | 6.6   |      |   | (0.2 | )
|Othernet                                             |  |      | 0.1   |      |   |     |  
|                                                      |  |      |       |      |   |      |  
|Actual tax expense                                    |  | $    | 77.0  |      | $ | (0.8 | )
|                                                      |  |      |       |      |   |      |  
|Effective tax rate                                    |  |      | 39.2  | %    |   | 9.8  | %
|                                                      |  |      |       |      |   |      |  

After consideration of temporary differences, the taxable loss for 2001 was
approximately $56 million.

Note 9.  Financial Instruments
The estimated fair values of the Company's financial instruments were as follows
(in millions):

December 31, 2000Carrying Amount

Fair
ValueAssets:Cash and cash equivalents

$
101.0

$
101.0Marketable securities


360.6


362.2Fuel hedge contracts


2.6


1.6Restricted deposits and depository certificates


25.6


27.6Longterm debt


658.1


678.1


December 31, 2001Carrying
Amount

Fair
ValueAssets:Cash and cash equivalents

$
490.2

$
490.2Marketable securities


170.4


171.5Restricted deposits and depository certificates


26.7


28.1Fuel hedge contracts


5.0


5.0Longterm debt


891.6


904.6


The fair value of cash equivalents approximates carrying value due to the short
maturity of these instruments. The fair value of marketable securities is based
on quoted market prices. The fair value of fuel hedge contracts is based on
commodity exchange prices. The fair value of restricted deposits

28

---

approximates the carrying amount. At December 31, 2000, the fair value of
restricted depository certificates convertible into the common stock of Equant
N.V. was $2.0 million based on a purchase offer from France Telecom. At December
31, 2001, the fair value of these certificates was $1.4 million based on the
market value of France Telecom stock. The fair value of long-term debt is based
on a discounted cash flow analysis using the Company's current borrowing
rate.

Note 10.  Special ChargeMileage Plan
In June 2000, Alaska recorded a $24.0 million special charge to recognize the
increased incremental cost of travel awards earned by flying on Alaska and
travel partners. The higher cost is due to an increase in the estimated costs
Alaska incurs to acquire awards on other airlines for its Mileage Plan members,
as well as lower assumed forfeiture of miles.

Note 11.  U.S. Government Compensation
In September, 2001, the U.S. Government passed the Air Transportation Safety and
System Stabilization Act to provide $5 billion of cash compensation and $10
billion of loan guarantees to U.S. airlines. The purpose of the Act was to
compensate the airlines for direct and incremental losses for the period
September 11 through December 31, 2001 as a result of the September 11 terrorist
attacks.

Alaska estimates its share of the $5 billion cash compensation is $83.9 million
and it has received $71.6 million. As a result of decreased demand for its
services, increased security costs and other direct and incremental costs
arising from the attacks, Alaska estimates that its terrorist-attack related
losses from September 11 thorough December 31 have exceeded $83.9 million.
However, due to the uncertainty of collection, only the $71.6 million cash
received was recognized in nonoperating income in 2001.

Note 12.  ContingenciesOakland Maintenance Investigation
In December 1998, the U.S. attorney for the Northern District of California
initiated a grand jury investigation concerning certain 1998 maintenance
activities at Alaska's Oakland maintenance base. The investigation also included
the aircraft involved in the loss of Flight 261 in January 2000. The FAA
separately proposed a civil penalty, which Alaska and the FAA have settled for
an agreed amount. In December 2001, the U.S. attorney notified Alaska that it
would not file criminal charges in connection with this investigation. Alaska
expects no further material action in this matter.

Flight 261 Litigation
Alaska is a defendant in a number of lawsuits relating to the loss of Flight 261
on January 31, 2000. Representatives of all 88 passengers and crew on board have
filed cases against Alaska, the Boeing Company, and others. The suits seek
unspecified compensatory and punitive damages. In May 2001, the judge presiding
over the majority of the cases ruled that punitive damages are not available
against Alaska. Alaska has settled a number of these cases and continues in its
efforts to settle the remaining ones. Consistent with industry standards, the
Company maintains insurance against aircraft accidents.

Management believes the ultimate disposition of the above matters is not likely
to materially affect the Company's financial position or results of operations.
This forward-looking statement is based on management's current understanding of
the relevant law and facts; it is subject to various contingencies, including
the potential costs and risks associated with litigation and the actions of
judges and juries.

29

---

The Company is also a party to other ordinary routine litigation incidental to
its business and with respect to which no material liability is expected.

Note 13.  Change in Accounting Principle
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin 101 (SAB 101), Revenue Recognition in Financial Statements. SAB 101
gives specific guidance on the conditions that must be met before revenue may be
recognized, and in June 2000 Alaska changed its method of accounting for the
sale of miles in its Mileage Plan. Under the new method, a majority of the sales
proceeds is deferred, then recognized ratably over the estimated period of time
that the award transportation is provided. The deferred proceeds are recognized
as passenger revenue for awards issued on Alaska, and as other revenue-net for
awards issued on other airlines. In connection with the change, Alaska
recognized a $56.9 million cumulative effect charge, net of income taxes of
$35.6 million, effective January 1, 2000.

30

---

Alaska Airlines Financial and Statistical Data

|                                             |  | Quarter Ended December 31 |       | Year Ended December 31 |  
|-------------------------------------------- |  | ------------------------- | ----- | ---------------------- | -
|
|Operating Revenues:                          |  |                           |       |                        |  
|Passenger                                    |  | $                         | 396.3 |                        | $
|Freight and mail                             |  |                           | 18.7  |                        |  
|Othernet                                    |  |                           | 14.0  |                        |  
|                                             |  |                           |       |                        |  
|Total Operating Revenues                     |  |                           | 429.0 |                        |  
|                                             |  |                           |       |                        |  
|Operating Expenses:                          |  |                           |       |                        |  
|Wages and benefits                           |  |                           | 145.5 |                        |  
|Contracted services                          |  |                           | 19.7  |                        |  
|Aircraft fuel                                |  |                           | 89.5  |                        |  
|Aircraft maintenance                         |  |                           | 38.0  |                        |  
|Aircraft rent                                |  |                           | 37.0  |                        |  
|Food and beverage service                    |  |                           | 13.0  |                        |  
|Commissions                                  |  |                           | 15.7  |                        |  
|Other selling expenses                       |  |                           | 27.7  |                        |  
|Depreciation and amortization                |  |                           | 23.7  |                        |  
|Loss on sale of assets                       |  |                           | 0.5   |                        |  
|Landing fees and other rentals               |  |                           | 20.0  |                        |  
|Other                                        |  |                           | 38.8  |                        |  
|Special chargeMileage Plan                  |  |                           |      |                        |  
|                                             |  |                           |       |                        |  
|Total Operating Expenses                     |  |                           | 469.1 |                        |  
|                                             |  |                           |       |                        |  
|Operating Loss                               |  |                           | (40.1 | )                      |  
|                                             |  |                           |       |                        |  
|Interest income                              |  |                           | 8.6   |                        |  
|Interest expense                             |  |                           | (10.9 | )                      |  
|Interest capitalized                         |  |                           | 3.6   |                        |  
|U.S. government compensation                 |  |                           |      |                        |  
|Othernet                                    |  |                           | (0.6  | )                      |  
|                                             |  |                           |       |                        |  
|                                             |  |                           | 0.7   |                        |  
|                                             |  |                           |       |                        |  
|Loss Before Income Tax and Accounting Change |  | $                         | (39.4 | )                      | $
|                                             |  |                           |       |                        |  
|Operating Statistics:                        |  |                           |       |                        |  
|Revenue passengers (000)                     |  |                           | 3,270 |                        |  
|RPMs (000,000)                               |  |                           | 2,899 |                        |  
|ASMs (000,000)                               |  |                           | 4,379 |                        |  
|Passenger load factor                        |  |                           | 66.2  | %                      |  
|Breakeven load factor                        |  |                           | 75.0  | %                      |  
|Yield per passenger mile                     |  |                           | 13.67 | ¢                      |  
|Operating revenue per ASM                    |  |                           | 9.80  | ¢                      |  
|Operating expenses per ASM*                  |  |                           | 10.71 | ¢                      |  
|Expense per ASM excluding fuel*              |  |                           | 8.67  | ¢                      |  
|Fuel cost per gallon                         |  |                           | 118.1 | ¢                      |  
|Fuel gallons (000,000)                       |  |                           | 75.7  |                        |  
|Average number of employees                  |  |                           | 9,963 |                        |  
|Aircraft utilization (blk hrs/day)           |  |                           | 10.6  |                        |  
|Operating fleet at period-end                |  |                           | 95    |                        |  

*Year-to-date excludes the impact of a special charge in June 2000.
NM = Not Meaningful

31

---

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Shareholder of Alaska Airlines, Inc.:

We have audited the accompanying balance sheets of Alaska Airlines, Inc. (an
Alaska corporation) as of December 31, 2001 and 2000, and the related statements
of income, shareholder's equity and cash flows for each of the three years in
the period ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Alaska Airlines, Inc. as of
December 31, 2001 and 2000, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2001, in conformity
with generally accepted accounting principles generally accepted in the United
States.

As explained in Notes 1 and 13 to the financial statements, effective January 1,
2000, the Company changed its method of accounting for the sale of airline miles
in its Mileage Plan.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in Item 14(a) is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.

| |  |  |  | /s/Arthur Andersen LLPARTHUR ANDERSEN LLP
| |  |  |  | -----------------------------------------

Seattle, Washington
January 25, 2002

32

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Schedule II

VALUATION AND QUALIFYING ACCOUNTS  Alaska Airlines, Inc.

|(In Millions)                                        |                                                         | Beginning
Balance |   | Additions
Charged
to Expense |  | (A)
Deductions |      | Ending
Balance
|---------------------------------------------------- | ------------------------------------------------------- | ----------------- | - | ---------------------------- |  | -------------- | ---- | --------------
|Year Ended December 31, 1999                         |                                                         |                   |   |                              |  |                |      |               
|(a) Reserve deducted from asset to which it applies: |                                                         |                   |   |                              |  |                |      |               
|                                                     | Allowance for doubtful accounts                         |                   | $ | 0.9                          |  | $              | 1.2  |               
|                                                     |                                                         |                   |   |                              |  |                |      |               
|                                                     | Obsolescence allowance for flight equipment spare parts |                   | $ | 15.6                         |  | $              | 4.2  |               
|                                                     |                                                         |                   |   |                              |  |                |      |               
|(b) Reserve recorded as other longterm liabilities: |                                                         |                   |   |                              |  |                |      |               
|                                                     | Leased aircraft return provision                        |                   | $ | 45.2                         |  | $              | 9.5  |               
|                                                     |                                                         |                   |   |                              |  |                |      |               
|Year Ended December 31, 2000                         |                                                         |                   |   |                              |  |                |      |               
|(a) Reserve deducted from asset to which it applies: |                                                         |                   |   |                              |  |                |      |               
|                                                     | Allowance for doubtful accounts                         |                   | $ | 1.0                          |  | $              | 1.8  |               
|                                                     |                                                         |                   |   |                              |  |                |      |               
|                                                     | Obsolescence allowance for flight equipment spare parts |                   | $ | 18.4                         |  | $              | 1.5  |               
|                                                     |                                                         |                   |   |                              |  |                |      |               
|(b) Reserve recorded as other longterm liabilities: |                                                         |                   |   |                              |  |                |      |               
|                                                     | Leased aircraft return provision                        |                   | $ | 43.2                         |  | $              | 9.9  |               
|                                                     |                                                         |                   |   |                              |  |                |      |               
|Year Ended December 31, 2001                         |                                                         |                   |   |                              |  |                |      |               
|(a) Reserve deducted from asset to which it applies: |                                                         |                   |   |                              |  |                |      |               
|                                                     | Allowance for doubtful accounts                         |                   | $ | 1.7                          |  | $              | 2.5  |               
|                                                     |                                                         |                   |   |                              |  |                |      |               
|                                                     | Obsolescence allowance for flight equipment spare parts |                   | $ | 19.7                         |  | $              | 4.1  |               
|                                                     |                                                         |                   |   |                              |  |                |      |               
|(b) Reserve recorded as other longterm liabilities: |                                                         |                   |   |                              |  |                |      |               
|                                                     | Leased aircraft return provision                        |                   | $ | 52.1                         |  | $              | 12.3 |               
|                                                     |                                                         |                   |   |                              |  |                |      |               

(A) Deduction
from reserve for purpose for which reserve was created.

33

---

EXHIBIT INDEX

Certain of the following exhibits have heretofore been filed with the Commission and are incorporated herein by reference from the document described in
parenthesis. Certain others are filed herewith.

|3.1   |  | Articles of Incorporation of Alaska Airlines, Inc. as amended through March 7, 1991                                                                                                                                                                                                        
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.2   |  | Bylaws of Alaska Airlines, Inc. as amended and in effect November 4, 1997                                                                                                                                                                                                                  
|4.1   |  | Trust Indentures and Security Agreement for Alaska Airlines Equipment Trust Certificates, Series A and B (Exhibit No. 4(a)(1) to Form S-3, Amendment No. 1, Registration No. 33-46668)                                                                                                     
|4.2   |  | Trust Indentures and Security Agreement for Alaska Airlines Equipment Trust Certificates, Series C and D (Exhibit No. 4(a)(1) to Form S-3, Amendment No. 2, Registration No. 33-46668)                                                                                                     
|4.3   |  | Participation Agreement for Alaska Airlines Equipment Trust Certificates, Series A and B (Exhibit No. 4(b)(1) to Form S-3, Amendment No. 1, Registration No. 33-46668)                                                                                                                     
|4.4   |  | Participation Agreement for Alaska Airlines Equipment Trust Certificates, Series C and D (Exhibit No. 4(b)(1) to Form S-3, Amendment No. 2, Registration No. 33-46668)                                                                                                                     
|4.5   |  | Lease Agreement for Alaska Airlines Equipment Trust Certificates (Exhibit No. 4(b)(2) to Form S-3, Registration No. 33-46668)                                                                                                                                                              
|10.1  |  | Management Incentive Plan (2000 Alaska Air Group, Inc. Proxy Statement)                                                                                                                                                                                                                    
|10.2  |  | Loan Agreement dated as of December 1, 1984, between Alaska Airlines, Inc. and the Industrial Development Corporation of the Port of Seattle                                                                                                                                               
|#10.3 |  | Lease Agreement dated January 22, 1990 between International Lease Finance Corporation and Alaska Airlines, Inc. for the lease of a B737-400 aircraft, summaries of 19
substantially identical lease agreements and Letter Agreement #1 dated January 22, 1990 (Exhibit 10-14 to 1990 10-K)
|#10.4 |  | Agreement dated September 18, 1996 between Alaska Airlines, Inc. and Boeing for the purchase of 12 Boeing 737-400 aircraft (Exhibit 10.1 to Third Quarter 1996 10-Q)                                                                                                                       
|10.5  |  | Alaska Air Group, Inc. 1981 Supplementary Retirement Plan for Elected Officers (Exhibit 10.7 to 1997 10-K)                                                                                                                                                                                 
|10.6  |  | Alaska Air Group, Inc. 1995 Supplementary Retirement Plan for Elected Officers (Exhibit 10.8 to 1997 10-K)                                                                                                                                                                                 

34

---