##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549FORM 10-K/A
(Amendment No. 1)


|           |  |                                                                                                                          
|---------- |  | -------------------------------------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                                                          
|           |  |                                                                                                                          
|x          |  | AMENDMENT No. 1 To ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the fiscal year ended December 31, 2001

OR

|  |  |                                                                                                           
|- |  | ----------------------------------------------------------------------------------------------------------
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the transition period from                      to

Commission File Number 0-19978

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 Class
Common 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 o

The registrant meets the conditions set forth in General Instructions I of
Form 10-K and is therefore filing this Form 10-K/A 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.





---



##### Table of Contents



During 2002, the Company changed its accounting policies relating to the
accrual for certain lease return costs and capitalization of software
development costs. In addition, the Company changed its accounting for
aircraft purchase commitments assumed by a third party and the amounts recorded
for the cumulative effect of the accounting change upon the adoption of Staff
Accounting Bulletin 101 (SAB 101) in 2000. The Company also made other
corrections and certain reclassifications of deferred income taxes and other
balance sheet and income statement items, none of which have a significant
impact to previously reported equity or net earnings. Because the previous
accounting methods and classifications are not considered to be in compliance
with generally accepted accounting principles in the United States of America,
the Companys previously issued financial statements for the years ended
December 31, 1999, 2000 and 2001, including the interim periods within those
years, have been restated.

This Form 10-K/A corrects the previously issued financial statements. See
Selected Financial and Operating Data, Managements Discussion and Analysis of
Financial Condition and Results of Operations, and the Financial Statements
including the Notes to Financial Statements, for the impact of the restatement.

This amendment to the Companys Annual Report on Form 10-K for the fiscal year
ended December 31, 2001 amends and restates only those items of the previously
filed Form 10-K which have been affected by the restatement. In order to
preserve the nature and character of the disclosures set forth in such items as
originally filed, no attempt has been made in this amendment to modify or
update such disclosures except as required to reflect the effects of the
restatement and to make non-substantial revisions to the notes to the financial
statements. For additional information regarding the restatement, see Note 13
to Financial Statements included in Part II, Item 14.

1



---

TABLE OF CONTENTS



|               |                                                                                               |  |  |  |  |  |  | 
|-------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|               | ITEM 1. BUSINESS                                                                             
|               | ITEM 2. PROPERTIES                                                                           
|               | ITEM 3. LEGAL PROCEEDINGS                                                                    
|               | ITEM 5. MARKET PRICE FOR THE REGISTRANTS COMMON STOCK AND RELATED STOCKHOLDER MATTERS       
|               | ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|               | ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK                           
|               | ITEM 8. FINANCIAL STATEMENTS                                                                 
|               | ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                                 
|               | ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K                    
|SIGNATURES    
|               | NOTES TO FINANCIAL STATEMENTS                                                                
|CERTIFICATIONS
|EXHIBIT INDEX 
|EXHIBIT 3.2   
|EXHIBIT 12    
|EXHIBIT 23    
|EXHIBIT 99.1  
|EXHIBIT 99.2  



---



##### Table of Contents






ITEM 1. BUSINESS

GENERAL INFORMATION


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 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 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.


2



---



##### Table of Contents



|                                     |  |           |  |                     |  |                        |  |             |  |  |  | 
|------------------------------------ |  | --------- |  | ------------------- |  | ---------------------- |  | ----------- |  |  |  | 
|                                     |  |           |  |                     |  | Codesharing            |  | Codesharing
|                                     |  | Frequent  |  | Alaska Flight #     |  | Other Airline Flight #
|                                     |  | Flyer     |  | on Flights Operated |  | On Flights Operated   
|                                     |  | Agreement |  | by Other Airline    |  | by Alaska/Horizon     
|                                     |  |           |  |                     |  |                       
|Major U.S. or
International Airlines |  |           |  |                     |  |                        |  |             |  |  |  | 
|                                     |  |           |  |                     |  |                        |  |             |  |  |  | 
|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.

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. During the third quarter of 2002,
the United States Department of Transportation (DOT) completed its review
procedures and remitted final compensation payments to Alaska of $0.3 million.

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


3



---



##### Table of Contents



Security Administration (the TSA) within the 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, 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, 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 14.7% 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


4



---



##### Table of Contents



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 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 35% 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.


5



---



##### Table of Contents



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. 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
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.


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 1,596,000 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 1,482,000 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-

6



---



##### Table of Contents



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.

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:


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




ITEM 2. PROPERTIES

Aircraft


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


|                |  |           |     |       |  |        |    |       |  |          |    |  |  |  |     |             |  |  |      | 
|--------------- |  | --------- | --- | ----- |  | ------ | -- | ----- |  | -------- | -- |  |  |  | --- | ----------- |  |  | ---- | 
|                |  | Passenger |     |       |  |        |    |       |  |          |    |  |  |  |     | Average Age
|Aircraft Type   |  | Capacity  |     | Owned |  | Leased |    | Total |  | in Years
|                |  |           |     |       |  |        |    |       |  |         
|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  | 
|               

Part II, Item 7, Managements Discussion and Analysis of Financial Condition
and Results of Operations, discusses future orders and options for additional
aircraft.

7



---



##### Table of Contents



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 5 to Financial Statements.

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 was expanded
to include the aircraft involved in the loss of Flight 261 in January 2000. The
FAA separately proposed a civil penalty in connection with the 1998 maintenance
activities, 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 relative to the 1998 maintenance activities did not warrant filing
criminal charges, and closed that part of the investigation. The U.S. attorney
also placed the portion of its investigation related to Flight 261 on inactive
status, with the possibility of reactivating and reviewing the matter when the
National Transportation Safety Board issues its final report on the accident.


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


8



---



##### Table of Contents



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.




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, Inc.




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

Managements Discussion and Analysis of Financial Condition and Results of
Operations presented below reflects certain restatements to our previously
reported operating results for the years ended December 31, 1999, 2000 and
2001.

During 2002, the Company changed its accounting policies relating to the
accrual for certain lease return costs, and capitalization of software
development costs. In addition, the Company changed its accounting for
aircraft purchase commitments assumed by a third party and the amounts recorded
for the cumulative effect of the accounting change upon the adoption of the
SECs Staff Accounting Bulletin 101 (SAB 101) in 2000. The Company also made
other corrections and certain reclassifications of deferred income taxes and
other balance sheet and income statement items, none of which have a
significant impact to previously reported equity or net earnings. Because the
previous accounting methods and classifications are not considered to be in
compliance with generally accepted accounting principles in the United States
of America, the Companys previously issued financial statements for the years
ended December 31, 1999, 2000 and 2001, including the interim periods within
those years, have been restated. See Note 13 to the financial statements for
further discussion of this matter.

This report may contain forward-looking statements that are based on the best
information currently available to management. These forward-looking
statements are intended to be subject to the safe harbor protection provided by
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Forward-looking statements are indicated by phrases such
as will, should, the Company believes, we expect or any other language
indicating a prediction of future events, including without limitation
statements relating to the Companys

9



---



##### Table of Contents



expectations regarding financing new
aircraft commitments. There can be no assurance that
actual developments will be those anticipated by the Company. Actual results
could differ materially from those projected as a result of a number of
factors, some of which the Company cannot predict or control. For a discussion
of these factors, see Item 1 Business Risks.

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. 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 recognized $71.6
million of the $5 billion cash compensation. During the third quarter of 2002,
the United States Department of Transportation (DOT) completed its review
procedures and remitted final compensation payments to Alaska of $0.3 million.

RESULTS OF OPERATIONS
2001 Compared with 2000

The net loss for 2001 was $11.8 million, compared with a loss before accounting
change of $14.8 million in 2000. The operating loss was $71.6 million in 2001,
compared with an operating loss of $26.0 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 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


10



---



##### Table of Contents



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 2.8% in the first quarter due to fuel-related fare
increases implemented in late 2000. In the second and third quarters, yield
was down 2.4% and 5.7%, respectively, due to a decline in business passengers
and fare sales. Yields were down 7.0% 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 3.2%. The higher traffic combined with the
lower yield resulted in a 1.1% 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 19.9%, largely due to increased revenue from the
sale of miles in Alaskas frequent flyer program.

Expenses

Excluding fuel, operating expenses grew by $85.7 million, or 5.8%, as a result
of a 3.5% increase in ASMs and a 2.3% increase in cost per ASM. The cost per
ASM excluding fuel remained constant during the first nine months of 2001 when
compared to the same period in 2000, but increased by 10.1% 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 11.4% due to a 5.2% increase in the
number of employees combined with a 5.9% increase in average wages and
benefits per employee. Employees were added in most areas 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 4.0%, 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.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11



---



##### Table of Contents





| |  |  | Contracted services increased 11.3%, 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 0.9% as a result of fewer airframe
checks in 2001 and a greater percentage of the checks being performed
in Alaska maintenance facilities rather than at outside contractors.
We also incurred lower outside engine repair costs in 2001 compared to
2000.                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  |  | Commission expense decreased 1.4%, consistent with the 1.1%
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,
computer reservation systems fees, Mileage Plan award costs, and
advertising expenses. The decrease in 2001 compared to the same
period in 2000 is primarily due to the Company recording $40.2 million
in 2000 due to a change in estimate for the cost of travel awards
earned by Mileage Plan members flying on Alaska and travel partners.
Higher costs are a result of increasing the estimated costs Alaska
incurs to acquire awards on other airlines for its Mileage Plan
members, as well as lower assumed forfeiture miles.                                                                                                                              
|
| |  |  | 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.
|
| |  |  | Other expense increased 2.4%, 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                                                                                                                                                                                                                                                                                                                                                                                                                                                             

12



---



##### Table of Contents





| |  |  | 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 $55.2 million in 2001 compared to $5.9 million in
2000. The $49.3 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. During
the third quarter of 2002, the DOT completed its review procedures and remitted
final compensation payments to Alaska of $0.3 million. Interest expense, net
of capitalized interest, increased $17.7 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. The cumulative effect of adoption of SFAS No.
133 was not material to the Companys financial position or results of
operations. 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, $5.9 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.

2000 Compared with 1999

In accordance with guidance provided in the SECs Staff Accounting Bulletin
101, Alaska changed its method of accounting for the sale of miles in its
Mileage Plan. In connection with the change, Alaska recognized a $46.8 million
cumulative effect charge, net of income taxes of $29.5 million, effective
January 1, 2000. The loss before accounting change for 2000 was $14.8 million,
compared with net income of $113.3 million in 1999. The operating loss was
$26.0 million in 2000 compared with an operating income of $164.3 million in
1999. Higher fuel prices increased operating expenses by approximately $110
million in 2000.


Operating income decreased by $190.3 million to a loss of $26.0 million,
resulting in a negative 1.5% operating margin as compared with a
positive 9.7% margin in
1999. The negative operating margin in 2000 is partially attributable to a
$56.5 million increase in selling expense. Of this increase,

13



---



##### Table of Contents



$40.2 million is
due to a change in estimate related to the cost of travel awards earned by
Mileage Plan members flying on Alaska and other travel partners. Capacity
decreased 0.2% and traffic
grew by 1.8%. Operating revenue per ASM increased 4.6%, while operating
expenses per ASM increased 17.6%. Higher unit costs were largely due to higher
fuel, labor, aircraft maintenance and selling costs.

Net nonoperating income decreased $16.3 million, primarily due to higher
interest expense resulting from new debt incurred in late 1999 and in the
second half of 2000. In addition, a $3.6 million gain on the sale of shares in
Equant N.V. (a telecommunication network company owned by many airlines) was
recorded in December 1999.

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.


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 more than estimated, we may need to increase the
liability and corresponding expense.                  
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|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

14



---



##### Table of Contents





|   |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|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. In 2000, the Company changed
its estimate regarding the number of outstanding Mileage Plan miles that will
ultimately be redeemed for free travel. A portion of this change in estimate
was included in the cumulative effect of the change in accounting principle
related to the adoption of Staff Accounting Bulletin 101. The Company has
determined that this classification of the change in estimate was in error, and
has restated the December 31, 2000 Statement of Operations to include this
amount in selling expense. See Note 13 to the financial statements.

Aircraft Maintenance/Leased Aircraft Return Costs

The Company incurs expenses to repair and maintain aircraft. Routine
maintenance and repairs are expensed when incurred. For owned aircraft, major
airframe and engine overhauls are capitalized and expensed over the estimated
life of the overhaul. The Company leases many of its aircraft under relatively
long-term operating lease agreements. These aircraft are subject to periodic
airframe and engine overhauls based on the Companys maintenance program. Many
of these lease agreements contain provisions which require that, at the end of
the lease, either certain minimum times remain until the next overhaul or the
Company make a cash payment to the lessor. At the inception of the lease, the
Company does not know the balance between actual time remaining to the next
overhaul and cash payments that will be used to satisfy its return commitments.
Accordingly, airframe and engine overhauls are capitalized and amortized over
the shorter of the estimated life of the overhaul or the remaining lease term.
Additionally, since the amount of cash payments by themselves cannot be
reasonably predicted at the inception of the lease, the Company accrues cash
payments expected to be made to lessors over the last few years of the lease
when probable and estimable.


In the case of both owned and leased aircraft, management uses estimates to
determine the appropriate life of an overhaul.

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


15



---



##### Table of Contents



Of. The Company performed as
impairment test, as required by SFAS No. 121, which was based on the estimated
future undiscounted 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 impairments 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
|                                                                                                  |  |                                       |        |                   |  |       
|                                                                                                  |  | (In millions, except debt-to-capital) |        |                   |  |       
|Cash and marketable securities                                                                    |  | $                                     | 459.0  |                   |  | $      | 660.5  |   |  | $  | 201.5  |  
|Working capital                                                                                   |  |                                       | 73.4   |                   |  |        | 225.8  |   |  |    | 152.4  |  
|Unused credit facility                                                                            |  |                                       | 150.0  |                   |  |        | 0.0    |   |  |    | (150.0 | )
|Long-term debt and
capital lease obligations                                                      |  |                                       | 509.2  |                   |  |        | 852.2  |   |  |    | 343.0  |  
|Shareholders equity                                                                              |  |                                       | 732.6  |                   |  |        | 719.0  |   |  |    | (13.6  | )
|Debt-to-capital                                                                                   |  |                                       | 41%:59 | %                 |  |        | 54%:46 | % |  | NA
|Debt-to-capital assuming aircraft
operating leases are capitalized
at seven times annualized rent |  |                                       | 67%:33 | %                 |  |        | 72%:28 | % |  | NA

2001 Financial Changes

Net cash provided by operating activities was $282.9 million in 2001, compared
to $202.0 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 $388.8 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 $401.0
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 $69.2 million of debt.


Shareholders equity decreased $13.6 million due primarily to the net loss of
$11.8 million.

Financing Activities- During 2001, Alaska issued $238.8 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. The other $170.0 million has
interest rates that vary with LIBOR and 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, 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. The new schedule is set forth below. 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

16



---



##### Table of Contents



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 Orders
|                    |  |      |    |      |  |                              
|Aircraft            |  | 2002 |    | 2003 |  | 2004                          |    | Total
|                   
|Boeing B737-700     |  |      |   |      |  |                               | 2  |       |  |   |   |  |  |   | 2   | 
|Boeing B737-900     |  |      | 1  |      |  |                               | 2  |       |  |   | 3  |  |  |   | 6   | 
|                   
|Total               |  |      | 1  |      |  |                               | 4  |       |  |   | 3  |  |  |   | 8   | 
|                   
|Payments (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 Assets. SFAS No. 141
prohibits pooling-of-interests accounting for acquisitions. Effective January
1, 2002, the Company adopted SFAS No 142. Under this statement, the Companys
goodwill is 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 results of operations by
$.5 million resulting from no longer amortizing goodwill. During the second
quarter of 2002, the Company completed the first step of its impairment test
related to its $12.5 million of goodwill and determined that the net book value
exceeded its fair value. In the fourth quarter of 2002, the Company completed
the second step of its impairment test and determined that all of the Companys
goodwill was impaired. As a result, the Company recorded a one-time, non-cash
charge, effective January 1, 2002 of $12.5 million to write-off all of its
goodwill. This charge is reflected as a cumulative effect of accounting change
in the statement of operations for the year ended December 31, 2002.

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 adoption of SFAS No.
143 is not expected to have a material impact on the Companys financial
position, results of operations or cash flows. The adoption of SFAS 144 did
not have a material impact on the Companys financial statements.

2000 Financial Changes

The Companys cash and marketable securities portfolio increased by $131.5
million during 2000. Operating activities provided $202.0 million of cash in
2000. Additional cash was provided by the issuance of new debt ($238 million)
and insurance proceeds from an aircraft accident ($37 million). Cash was used
for $279 million of capital expenditures, including the purchase of seven new


17



---



##### Table of Contents



Boeing 737 aircraft, flight equipment deposits and airframe and engine
overhauls, and for $66 million of debt repayment.

1999 Financial Changes

The Companys cash and marketable securities portfolio increased by $20.1
million during 1999. Operating activities provided $298.2 million of cash in
1999. Additional cash was provided by the issuance of new debt ($232 million).
Cash was used for $487 million of capital expenditures, including the purchase
of nine new Boeing 737 aircraft, two formerly leased Boeing 737s, flight
equipment deposits, an aircraft simulator, airframe and engine overhauls, and
for $27 million of debt repayment.


Effect of Inflation- Inflation and specific price changes do not have a
significant effect on the Companys operating revenues, operating expenses and
operating income.




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 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 $5.9 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 aftertax
losses of $1.0 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.


18



---



##### Table of Contents



Selected Quarterly Financial Information (Unaudited)

During 2002, the Company changed its accounting policies relating to the
accrual for certain lease return costs, and capitalization of software
development costs. In addition, the Company changed its accounting for
aircraft purchase commitments assumed by a third party and the amounts recorded
for the cumulative effect upon the adoption of SAB 101. The Company also made
other corrections and certain reclassifications of deferred income taxes and
other balance sheet and income statement items, none of which have a
significant impact to previously reported equity or net earnings. Because the
previous accounting methods and classifications are not considered to be in
compliance with generally accepted accounting principles in the United States
of America, the Companys previously issued consolidated financial statements
for the years ended December 31, 1999, 2000 and 2001, including the interim
periods within those years have been restated. See Note 13 to the financial
statements.


The effect of the restatement for the quarterly periods in 2000 and 2001 is as
follows: (in millions):
As Previously Reported:

|                                       |  |             |       |             |  |             |       |             |  |               |       |      |  |      |       |      |  |   |       |  |  |   |       |  |  |   |       |   |  |   |       |  
|-------------------------------------- |  | ----------- | ----- | ----------- |  | ----------- | ----- | ----------- |  | ------------- | ----- | ---- |  | ---- | ----- | ---- |  | - | ----- |  |  | - | ----- |  |  | - | ----- | - |  | - | ----- | -
|                                       |  | 1st Quarter |       | 2nd Quarter |  | 3rd Quarter |       | 4th Quarter
|                                       |  |             |       |             |  |             |       |            
|                                       |  | 2000        |       | 2001        |  | 2000        |       | 2001        |  | 2000          |       | 2001 |  | 2000 |       | 2001
|                                       |  |             |       |             |  |             |       |             |  |               |       |      |  |      |       |     
|                                       |  |             |       |             |  |             |       |             |  | (in millions) |       |      |  |      |       |      |  |  
|Operating revenues                     |  | $           | 391.5 |             |  | $           | 418.1 |             |  | $             | 444.2 |      |  | $    | 471.3 |      |  | $ | 484.3 |  |  | $ | 480.0 |  |  | $ | 429.0 |   |  | $ | 381.5 |  
|Operating income (loss)                |  |             | (15.0 | )           |  |             | (32.5 | )           |  |               | 8.2   |      |  |      | 11.1  |      |  |   | 33.3  |  |  |   | 15.9  |  |  |   | (40.1 | ) |  |   | (64.3 | )
|Income (loss) before
accounting change |  |             | (8.2  | )           |  |             | (21.6 | )           |  |               | 6.0   |      |  |      | 4.8   |      |  |   | 17.4  |  |  |   | 21.2  |  |  |   | (22.6 | ) |  |   | (14.5 | )
|Net income (loss)                      |  |             | (65.1 | )           |  |             | (21.6 | )           |  |               | 6.0   |      |  |      | 4.8   |      |  |   | 17.4  |  |  |   | 21.2  |  |  |   | (22.6 | ) |  |   | (14.5 | )

Restated:

|                                       |  |             |       |             |  |             |       |             |  |               |       |      |  |      |       |      |  |   |       |  |  |   |       |  |  |   |       |   |  |   |       |  
|-------------------------------------- |  | ----------- | ----- | ----------- |  | ----------- | ----- | ----------- |  | ------------- | ----- | ---- |  | ---- | ----- | ---- |  | - | ----- |  |  | - | ----- |  |  | - | ----- | - |  | - | ----- | -
|                                       |  | 1st Quarter |       | 2nd Quarter |  | 3rd Quarter |       | 4th Quarter
|                                       |  |             |       |             |  |             |       |            
|                                       |  | 2000        |       | 2001        |  | 2000        |       | 2001        |  | 2000          |       | 2001 |  | 2000 |       | 2001
|                                       |  |             |       |             |  |             |       |             |  |               |       |      |  |      |       |     
|                                       |  |             |       |             |  |             |       |             |  | (in millions) |       |      |  |      |       |      |  |   |       |  |  |  
|Operating revenues                     |  | $           | 396.8 |             |  | $           | 418.6 |             |  | $             | 448.2 |      |  | $    | 474.7 |      |  | $ | 488.2 |  |  | $ | 484.2 |  |  | $ | 433.0 |   |  | $ | 385.5 |  
|Operating income (loss)                |  |             | (29.5 | )           |  |             | (37.8 | )           |  |               | 8.3   |      |  |      | 10.2  |      |  |   | 34.4  |  |  |   | 17.0  |  |  |   | (39.2 | ) |  |   | (61.0 | )
|Income (loss) before
accounting change |  |             | (17.3 | )           |  |             | (24.7 | )           |  |               | 6.3   |      |  |      | 4.6   |      |  |   | 18.1  |  |  |   | 22.3  |  |  |   | (21.9 | ) |  |   | (14.0 | )
|Net income (loss)                      |  |             | (64.1 | )           |  |             | (24.7 | )           |  |               | 6.3   |      |  |      | 4.6   |      |  |   | 18.1  |  |  |   | 22.3  |  |  |   | (21.9 | ) |  |   | (14.0 | )




ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.


19



---



##### Table of Contents






ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

|                                                                                                                         |                                                                                                       |         |    |       | 
|------------------------------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------------------------------------------- | ------- | -- | ----- | 
|(a) Financial Statements:                                                                                                |                                                                                                       | Page(s)
|                                                                                                                         |                                                                                                       |        
|                                                                                                                         | Selected Quarterly Financial Information (Unaudited)                                                  |         |    | 19    | 
|                                                                                                                         | Balance Sheets (as restated) as of December 31, 2001 and 2000                                         |         |    | 22-23 | 
|                                                                                                                         | Statements of Operations (as restated) for the years ended
December 31, 1999, 2000 and 2001           |         |    | 24    | 
|                                                                                                                         | Statements of Shareholders Equity (as restated) for the years ended
December 31, 1999, 2000 and 2001 |         |    | 25    | 
|                                                                                                                         | Statements of Cash Flows (as restated) for the years ended December 31, 1999,
2000 and 2001           |         |    | 26    | 
|                                                                                                                         | Notes to Financial Statements                                                                         |         |    | 27-38 | 
|                                                                                                                         | Independent Auditors Report                                                                          |         |    | 40    | 
|Financial Statement Schedule II, Valuation and Qualifying Accounts,
for the years ended December 31, 1999, 2000 and 2001 |                                                                                                       |         | 41 |      

See Exhibit Index on page 43



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

20



---



##### Table of Contents






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. Ayer

William S. AyerChief Executive Officer and President |  | Date: March 10, 2003

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on
March 10, 2003 on
behalf of the registrant and in the capacities indicated.

|                                        |  |                                                                                           
|--------------------------------------- |  | ------------------------------------------------------------------------------------------
|/s/ John F. Kelly
John F. Kelly         |  | Chairman and Director                                                                     
|                                       
|                                        |  |                                                                                           
|                                       
|/s/ Bradley D. Tilden
Bradley D. Tilden |  | Executive Vice President/Finance and Chief Financial Officer
(Principal Financial Officer)
|                                       
|                                        |  |                                                                                           
|                                       
|/s/ Terri K. Maupin
Terri K. Maupin     |  | Staff Vice President/Finance and Controller
(Principal Accounting Officer)                
|                                       
|                                        |  |                                                                                           
|                                       
|/s/ William S. Ayer
William S. Ayer     |  | Chief Executive Officer, President and Director                                           

21



---



##### Table of Contents



BALANCE SHEETS
Alaska Airlines, Inc.

ASSETS

|                                                                              |  |          |         |          |  |   |         | 
|----------------------------------------------------------------------------- |  | -------- | ------- | -------- |  | - | ------- | 
|                                                                              |  | Restated |         | Restated
|As of December 31 (In Millions)                                               |  | 2000     |         | 2001    
|                                                                             
|Current Assets                                                                |  |          |         |          |  |   |         | 
|Cash and cash equivalents                                                     |  | $        | 101.2   |          |  | $ | 490.7   | 
|Marketable securities                                                         |  |          | 357.8   |          |  |   | 169.8   | 
|Receivables from related companies                                            |  |          | 53.0    |          |  |   | 71.2    | 
|Receivables  less allowance for doubtful accounts
(2000 - $1.7; 2001 - $1.8) |  |          | 81.6    |          |  |   | 67.3    | 
|Inventories and supplies  net                                                |  |          | 34.0    |          |  |   | 36.6    | 
|Prepaid expenses and other assets                                             |  |          | 100.3   |          |  |   | 85.2    | 
|                                                                             
|Total Current Assets                                                          |  |          | 727.9   |          |  |   | 920.8   | 
|                                                                             
|Property and Equipment                                                        |  |          |         |          |  |   |         | 
|Flight equipment                                                              |  |          | 1,567.1 |          |  |   | 1,888.7 | 
|Other property and equipment                                                  |  |          | 317.1   |          |  |   | 333.7   | 
|Deposits for future flight equipment                                          |  |          | 92.0    |          |  |   | 71.8    | 
|                                                                             
|                                                                              |  |          | 1,976.2 |          |  |   | 2,294.2 | 
|Less accumulated depreciation & amortization                                  |  |          | 523.4   |          |  |   | 606.2   | 
|                                                                             
|Total Property and Equipment  Net                                            |  |          | 1,452.8 |          |  |   | 1,688.0 | 
|                                                                             
|Intangible Assets                                                             |  |          | 13.0    |          |  |   | 12.5    | 
|                                                                             
|Other Assets                                                                  |  |          | 109.6   |          |  |   | 134.7   | 
|                                                                             
|Total Assets                                                                  |  | $        | 2,303.3 |          |  | $ | 2,756.0 | 
|                                                                             

See accompanying notes to financial statements.

22



---



##### Table of Contents



BALANCE SHEETS
Alaska Airlines, Inc.

LIABILITIES AND SHAREHOLDERS EQUITY

|                                                                |                                    |          |         |          |  |   |         |       | 
|--------------------------------------------------------------- | ---------------------------------- | -------- | ------- | -------- |  | - | ------- | ----- | 
|As of December 31                                               |                                    | Restated |         | Restated
|(In Millions Except Share Amounts)                              |                                    | 2000     |         | 2001    
|                                                               
|Current Liabilities                                             |                                    |          |         |          |  |   |         |      
|Accounts payable                                                |                                    | $        | 124.2   |          |  | $ | 98.8    |      
|Payables to related companies                                   |                                    |          | 0.5     |          |  |   | 4.4     |      
|Accrued aircraft rent                                           |                                    |          | 64.9    |          |  |   | 71.9    |      
|Accrued wages, vacation and payroll taxes                       |                                    |          | 62.1    |          |  |   | 68.0    |      
|Other accrued liabilities                                       |                                    |          | 127.4   |          |  |   | 192.3   |      
|Air traffic liability                                           |                                    |          | 208.7   |          |  |   | 216.4   |      
|Current portion of long-term debt and
capital lease obligations |                                    |          | 66.7    |          |  |   | 43.2    |      
|                                                               
|Total Current Liabilities                                       |                                    |          | 654.5   |          |  |   | 695.0   |      
|                                                               
|Long-Term Debt & Capital Lease Obligations                      |                                    |          | 509.2   |          |  |   | 852.2   |      
|                                                               
|Other Liabilities and Credits                                   |                                    |          |         |          |  |   |         |      
|Deferred income taxes                                           |                                    |          | 152.1   |          |  |   | 182.3   |      
|Deferred revenue                                                |                                    |          | 156.8   |          |  |   | 193.5   |      
|Other liabilities                                               |                                    |          | 98.1    |          |  |   | 114.0   |      
|                                                               
|                                                                |                                    |          | 407.0   |          |  |   | 489.8   |      
|                                                               
|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    |  |   |         | 324.8 | 
|Accumulated other comprehensive loss                            |                                    |          | (0.4    | )        |  |   | (2.2    | )    
|Retained earnings                                               |                                    |          | 408.2   |          |  |   | 396.4   |      
|                                                               
|                                                                |                                    |          | 732.6   |          |  |   | 719.0   |      
|                                                               
|Total Liabilities and Shareholders Equity                      |                                    | $        | 2,303.3 |          |  | $ | 2,756.0 |      
|                                                               

See accompanying notes to financial statements.

23



---



##### Table of Contents



STATEMENTS OF OPERATIONS
Alaska Airlines, Inc.

|                                                                             |  |          |         |          |  |          |         |   |  |   |         |  
|---------------------------------------------------------------------------- |  | -------- | ------- | -------- |  | -------- | ------- | - |  | - | ------- | -
|Year Ended December 31                                                       |  | Restated |         | Restated |  | Restated
|(In Millions)                                                                |  | 1999     |         | 2000     |  | 2001    
|                                                                            
|Operating Revenues                                                           |  |          |         |          |  |          |         |   |  |   |         |  
|Passenger                                                                    |  | $        | 1,514.6 |          |  | $        | 1,625.4 |   |  | $ | 1,607.6 |  
|Freight and mail                                                             |  |          | 80.0    |          |  |          | 76.4    |   |  |   | 78.2    |  
|Other  net                                                                  |  |          | 95.7    |          |  |          | 64.4    |   |  |   | 77.2    |  
|                                                                            
|Total Operating Revenues                                                     |  |          | 1,690.3 |          |  |          | 1,766.2 |   |  |   | 1,763.0 |  
|                                                                            
|Operating Expenses                                                           |  |          |         |          |  |          |         |   |  |   |         |  
|Wages and benefits                                                           |  |          | 505.1   |          |  |          | 577.0   |   |  |   | 642.9   |  
|Employee profit sharing                                                      |  |          | 21.4    |          |  |          |        |   |  |   |        |  
|Contracted services                                                          |  |          | 61.6    |          |  |          | 68.3    |   |  |   | 76.0    |  
|Aircraft fuel                                                                |  |          | 205.2   |          |  |          | 313.1   |   |  |   | 269.8   |  
|Aircraft maintenance                                                         |  |          | 98.6    |          |  |          | 130.9   |   |  |   | 129.7   |  
|Aircraft rent                                                                |  |          | 157.2   |          |  |          | 144.3   |   |  |   | 137.6   |  
|Food and beverage service                                                    |  |          | 49.1    |          |  |          | 51.0    |   |  |   | 55.5    |  
|Commissions                                                                  |  |          | 91.0    |          |  |          | 65.0    |   |  |   | 64.1    |  
|Other selling expenses                                                       |  |          | 82.2    |          |  |          | 138.7   |   |  |   | 102.7   |  
|Depreciation and amortization                                                |  |          | 67.9    |          |  |          | 85.9    |   |  |   | 106.1   |  
|Loss on disposition of assets                                                |  |          | 6.8     |          |  |          | 1.3     |   |  |   | 5.0     |  
|Landing fees and other rentals                                               |  |          | 66.5    |          |  |          | 74.4    |   |  |   | 99.5    |  
|Other                                                                        |  |          | 113.4   |          |  |          | 142.3   |   |  |   | 145.7   |  
|                                                                            
|Total Operating Expenses                                                     |  |          | 1,526.0 |          |  |          | 1,792.2 |   |  |   | 1,834.6 |  
|                                                                            
|Operating Income (Loss)                                                      |  |          | 164.3   |          |  |          | (26.0   | ) |  |   | (71.6   | )
|                                                                            
|Nonoperating Income (Expense)                                                |  |          |         |          |  |          |         |   |  |   |         |  
|Interest income                                                              |  |          | 21.7    |          |  |          | 27.6    |   |  |   | 26.0    |  
|Interest expense                                                             |  |          | (16.3   | )        |  |          | (36.0   | ) |  |   | (47.4   | )
|Interest capitalized                                                         |  |          | 10.4    |          |  |          | 13.8    |   |  |   | 7.5     |  
|U.S. government compensation                                                 |  |          |        |          |  |          |        |   |  |   | 71.6    |  
|Other  net                                                                  |  |          | 6.4     |          |  |          | 0.5     |   |  |   | (2.5    | )
|                                                                            
|                                                                             |  |          | 22.2    |          |  |          | 5.9     |   |  |   | 55.2    |  
|                                                                            
|Income (loss) before income tax and accounting change                        |  |          | 186.5   |          |  |          | (20.1   | ) |  |   | (16.4   | )
|Income tax expense (benefit)                                                 |  |          | 73.2    |          |  |          | (5.3    | ) |  |   | (4.6    | )
|                                                                            
|Income (loss) before accounting change                                       |  |          | 113.3   |          |  |          | (14.8   | ) |  |   | (11.8   | )
|Cumulative effect of accounting change,
net of income taxes of $29.5 million |  |          |        |          |  |          | (46.8   | ) |  |   |        |  
|                                                                            
|Net Income (Loss)                                                            |  | $        | 113.3   |          |  | $        | (61.6   | ) |  | $ | (11.8   | )
|                                                                            

See accompanying notes to financial statements.

24



---



##### Table of Contents



STATEMENTS OF SHAREHOLDERS EQUITY (AS RESTATED)
Alaska Airlines, Inc.

|                                                              |  |        |   |           |  |               |       |          |  |             |      |   |  |   |       |   |  |   |       |  
|------------------------------------------------------------- |  | ------ | - | --------- |  | ------------- | ----- | -------- |  | ----------- | ---- | - |  | - | ----- | - |  | - | ----- | -
|                                                              |  |        |   |           |  |               |       |          |  | Accumulated |      |   |  |   |       |   |  |  
|                                                              |  |        |   |           |  | Capital in    |       | Other    |  |             |      |   |  |   |       |  
|                                                              |  | Common |   | Excess of |  | Comprehensive |       | Retained |  |             |      |  
|(In Millions)                                                 |  | Stock  |   | Par Value |  | Income (Loss) |       | Earnings |  | Total      
|                                                             
|Balances at December 31, 1998:                                |  |        |   |           |  |               |       |          |  |             |      |   |  |   |       |   |  |   |       |  
|As previously reported                                        |  | $      |  |           |  | $             | 225.8 |          |  | $           | 0.0  |   |  | $ | 323.7 |   |  | $ | 549.5 |  
|Prior period adjustment (see Note 13)                         |  |        |   |           |  |               |       |          |  |             | (2.4 | ) |  |   | 32.8  |   |  |   | 30.4  |  
|                                                             
|Balances at December 31, 1998, as restated                    |  |        |  |           |  |               | 225.8 |          |  |             | (2.4 | ) |  |   | 356.5 |   |  |   | 579.9 |  
|                                                             
|1999 net income                                               |  |        |   |           |  |               |       |          |  |             |      |   |  |   | 113.3 |   |  |   | 113.3 |  
|Other comprehensive income (loss):                            |  |        |   |           |  |               |       |          |  |             |      |   |  |   |       |   |  |   |       |  
|Officers supplemental retirement plan
net of $1.2 tax expense |  |        |   |           |  |               |       |          |  |             | 2.0  |   |  |   |       |   |  |   | 2.0   |  
|Related to marketable securities:                             |  |        |   |           |  |               |       |          |  |             |      |   |  |   |       |   |  |   |       |  
|Change in fair value                                          |  |        |   |           |  |               |       |          |  |             | (2.0 | ) |  |   |       |   |  |   |       |  
|Income tax effect                                             |  |        |   |           |  |               |       |          |  |             | 0.7  |   |  |   |       |   |  |   |       |  
|                                                              |  |        |   |           |  |               |       |          |  |             | (1.3 | ) |  |   |       |   |  |   | (1.3  | )
|Total comprehensive income                                    |  |        |   |           |  |               |       |          |  |             |      |   |  |   |       |   |  |   | 114.0 |  
|                                                             
|Balances at December 31, 1999, as restated                    |  |        |  |           |  |               | 225.8 |          |  |             | (1.7 | ) |  |   | 469.8 |   |  |   | 693.9 |  
|                                                             
|2000 net loss                                                 |  |        |   |           |  |               |       |          |  |             |      |   |  |   | (61.6 | ) |  |   | (61.6 | )
|Other comprehensive income (loss):                            |  |        |   |           |  |               |       |          |  |             |      |   |  |   |       |   |  |   |       |  
|Officers supplemental retirement plan
net of $0.3 tax expense |  |        |   |           |  |               |       |          |  |             | (0.4 | ) |  |   |       |   |  |   | (0.4  | )
|Related to marketable securities:                             |  |        |   |           |  |               |       |          |  |             |      |   |  |   |       |   |  |   |       |  
|Change in fair value                                          |  |        |   |           |  |               |       |          |  |             | 3.1  |   |  |   |       |   |  |   |       |  
|Reclassification to earnings                                  |  |        |   |           |  |               |       |          |  |             | (0.3 | ) |  |   |       |   |  |   |       |  
|Income tax effect                                             |  |        |   |           |  |               |       |          |  |             | (1.1 | ) |  |   |       |   |  |   |       |  
|                                                              |  |        |   |           |  |               |       |          |  |             | 1.7  |   |  |   |       |   |  |   | 1.7   |  
|Total comprehensive loss                                      |  |        |   |           |  |               |       |          |  |             |      |   |  |   |       |   |  |   | (60.3 | )
|Capital contribution from Alaska Air Group                    |  |        |   |           |  |               | 99.0  |          |  |             |      |   |  |   |       |   |  |   | 99.0  |  
|                                                             
|Balances at December 31, 2000, as restated                    |  |        |  |           |  |               | 324.8 |          |  |             | (0.4 | ) |  |   | 408.2 |   |  |   | 732.6 |  
|                                                             
|2001 net loss                                                 |  |        |   |           |  |               |       |          |  |             |      |   |  |   | (11.8 | ) |  |   | (11.8 | )
|Other comprehensive income (loss):                            |  |        |   |           |  |               |       |          |  |             |      |   |  |   |       |   |  |   |       |  
|Officers supplemental retirement plan
net of $0.4 tax benefit |  |        |   |           |  |               |       |          |  |             | (0.7 | ) |  |   |       |   |  |   | (0.7  | )
|Related to marketable securities:                             |  |        |   |           |  |               |       |          |  |             |      |   |  |   |       |   |  |   |       |  
|Change in fair value                                          |  |        |   |           |  |               |       |          |  |             | 3.4  |   |  |   |       |   |  |   |       |  
|Reclassification to earnings                                  |  |        |   |           |  |               |       |          |  |             | (3.5 | ) |  |   |       |   |  |   |       |  
|Income tax effect                                             |  |        |   |           |  |               |       |          |  |             | 0.0  |   |  |   |       |   |  |   |       |  
|                                                              |  |        |   |           |  |               |       |          |  |             | (0.1 | ) |  |   |       |   |  |   | (0.1  | )
|Related to fuel hedges:                                       |  |        |   |           |  |               |       |          |  |             |      |   |  |   |       |   |  |   |       |  
|Change in fair value                                          |  |        |   |           |  |               |       |          |  |             | (1.7 | ) |  |   |       |   |  |   |       |  
|Income tax effect                                             |  |        |   |           |  |               |       |          |  |             | 0.7  |   |  |   |       |   |  |   |       |  
|                                                              |  |        |   |           |  |               |       |          |  |             | (1.0 | ) |  |   |       |   |  |   | (1.0  | )
|Total comprehensive loss                                      |  |        |   |           |  |               |       |          |  |             |      |   |  |   |       |   |  |   | (13.6 | )
|                                                             
|Balances at December 31, 2001, as restated                    |  | $      |  |           |  | $             | 324.8 |          |  | $           | (2.2 | ) |  | $ | 396.4 |   |  | $ | 719.0 |  
|                                                             

See accompanying notes to financial statements.

25



---



##### Table of Contents



STATEMENTS OF CASH FLOWS
Alaska Airlines, Inc.

|                                                                                         |                                      |                                                       |        |          |       |          |        |          |       |   |        |       |       |  
|---------------------------------------------------------------------------------------- | ------------------------------------ | ----------------------------------------------------- | ------ | -------- | ----- | -------- | ------ | -------- | ----- | - | ------ | ----- | ----- | -
|                                                                                         |                                      |                                                       |        | Restated |       | Restated |        | Restated
|                                                                                         |                                      |                                                       |        |          |       |          |        |         
|Year Ended December 31 (In Millions)                                                     |                                      | 1999                                                  |        | 2000     |       | 2001    
|                                                                                        
|Cash flows from operating activities:                                                    |                                      |                                                       |        |          |       |          |        |          |       |   |        |      
|Net income (loss)                                                                        |                                      | $                                                     | 113.3  |          |       | $        | (61.6  | )        |       | $ | (11.8  | )    
|Adjustments to reconcile net income (loss) to
net cash provided by operating activities: |                                      |                                                       |        |          |       |          |        |          |       |   |        |      
|                                                                                         |                                      | Cumulative effect of accounting change                |        |          |      |          |        |          | 46.8  |   |        |       |      |  
|                                                                                         |                                      | Depreciation and amortization                         |        |          | 67.9  |          |        |          | 85.9  |   |        |       | 106.1 |  
|                                                                                         |                                      | Amortization of airframe and engine overhauls         |        |          | 43.1  |          |        |          | 51.6  |   |        |       | 56.7  |  
|                                                                                         |                                      | Change in derivatives fair values                     |        |          |      |          |        |          |      |   |        |       | 4.9   |  
|                                                                                         |                                      | Loss on sale of assets                                |        |          | 6.8   |          |        |          | 1.3   |   |        |       | 5.0   |  
|                                                                                         |                                      | Increase in deferred income tax liabilities           |        |          | 33.1  |          |        |          | 38.6  |   |        |       | 31.4  |  
|                                                                                         |                                      | Increase (decrease) in accounts receivable  net      |        |          | (7.4  | )        |        |          | (3.9  | ) |        |       | 14.3  |  
|                                                                                         |                                      | Increase in other current assets                      |        |          | (18.3 | )        |        |          | (87.8 | ) |        |       | (6.4  | )
|                                                                                         |                                      | Increase in air traffic liability                     |        |          | 16.4  |          |        |          | 18.8  |   |        |       | 7.7   |  
|                                                                                         |                                      | Increase (decrease) in other current liabilities      |        |          | 62.4  |          |        |          | (39.3 | ) |        |       | 44.0  |  
|                                                                                         |                                      | Increase (decrease) in deferred revenue and other-net |        |          | (19.1 | )        |        |          | 151.6 |   |        |       | 31.0  |  
|                                                                                        
|Net cash provided by operating activities                                                |                                      |                                                       | 298.2  |          |       |          | 202.0  |          |       |   | 282.9  |      
|                                                                                        
|Cash
flows from investing activities:                                                    |                                      |                                                       |        |          |       |          |        |          |       |   |        |      
|Proceeds from disposition of assets                                                      |                                      |                                                       | 0.2    |          |       |          | 34.8   |          |       |   | 1.2    |      
|Purchases of marketable securities                                                       |                                      |                                                       | (152.0 | )        |       |          | (459.7 | )        |       |   | (258.5 | )    
|Sales and maturities of marketable securities                                            |                                      |                                                       | 232.7  |          |       |          | 300.0  |          |       |   | 446.4  |      
|Flight equipment deposits returned                                                       |                                      |                                                       |       |          |       |          | 100.0  |          |       |   | 9.0    |      
|Additions to flight equipment deposits                                                   |                                      |                                                       | (149.4 | )        |       |          | (121.7 | )        |       |   | (37.9  | )    
|Additions to property and equipment                                                      |                                      |                                                       | (337.3 | )        |       |          | (257.7 | )        |       |   | (372.1 | )    
|Restricted deposits                                                                      |                                      |                                                       | 5.6    |          |       |          | (1.1   | )        |       |   | (1.1   | )    
|                                                                                        
|Net cash used in investing activities                                                    |                                      |                                                       | (400.2 | )        |       |          | (405.4 | )        |       |   | (213.0 | )    
|                                                                                        
|Cash
flows from financing activities:                                                    |                                      |                                                       |        |          |       |          |        |          |       |   |        |      
|Proceeds from issuance of long-term debt                                                 |                                      |                                                       | 232.1  |          |       |          | 238.1  |          |       |   | 388.8  |      
|Long-term debt and capital lease payments                                                |                                      |                                                       | (27.2  | )        |       |          | (65.8  | )        |       |   | (69.2  | )    
|                                                                                        
|Net cash provided by financing activities                                                |                                      |                                                       | 204.9  |          |       |          | 172.3  |          |       |   | 319.6  |      
|                                                                                        
|Net change in cash and cash equivalents                                                  |                                      |                                                       | 102.9  |          |       |          | (31.1  | )        |       |   | 389.5  |      
|Cash
and cash equivalents at beginning of year                                           |                                      |                                                       | 29.6   |          |       |          | 132.3  |          |       |   | 101.2  |      
|                                                                                        
|Cash
and cash equivalents at end of year                                                 |                                      | $                                                     | 132.5  |          |       | $        | 101.2  |          |       | $ | 490.7  |      
|                                                                                        
|Supplemental disclosure of cash paid (refunded) during the year for:                     |                                      |                                                       |        |          |       |          |        |          |       |   |        |      
|                                                                                         | Interest (net of amount capitalized) |                                                       | $      | 7.0      |       |          | $      | 28.5     |       |   | $      | 49.9  |      
|                                                                                         | Income taxes                         |                                                       |        | 34.9     |       |          |        | 3.6      |       |   |        | (18.4 | )    



---

| |  | 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 $0.6 million reduction in its payable to Alaska Air Group.

See accompanying notes to financial statements.

26



---



##### Table of Contents






NOTES TO FINANCIAL STATEMENTS

Alaska Airlines, Inc.
December 31, 2001


Note 1. Summary of Significant Accounting Policies

Organization and Basis of Presentation

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).


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.

Nature of Operations

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. Substantially all of Alaskas sales occur in the United States.


Cash and Cash Equivalents

Cash equivalents consist of highly liquid investments with original 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, 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  net

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 $20.3 million and $24.3 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        |            | 10-14years   
|                                       | Boeing 737-400/700/900 |            | 20years      
|                                       | Boeing MD-80           |            | 20years      
|Buildings                              |                        | 10-30years
|Capitalized leases and                 |                        |            |               | 
|                                       | leasehold improvements |            | Term of lease
|Other equipment                        |                        | 3-15years 

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 shorter of the term to the next overhaul or the end of the
lease term. 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

27



---



##### Table of Contents



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

Goodwill

The excess of the purchase price over the fair value of net assets acquired is
recorded as goodwill 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 adopted SFAS No. 142.
Under SFAS No. 142, the Companys goodwill is 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
results of operations by $0.5 million resulting from no longer amortizing
goodwill. Assuming the Company had adopted this standard as of January 1,
2000, the pro forma effect of adopting SFAS No. 142 is immaterial to the
Companys net income (loss) and income (loss) per share.


During the second quarter of 2002, the Company completed the first step of its
impairment test under SFAS No. 142 related to its $12.5 million of goodwill and
determined that the net book value exceeded its fair value. In the fourth
quarter of 2002, the Company completed the second step of its impairment test
and determined that all of the Companys goodwill was impaired. As a result,
the Company recorded a one-time, non-cash charge, effective January 1, 2002 of
$12.5 million to write-off all of its goodwill. This charge is nonoperational
in nature and will be reflected as a cumulative effect of accounting change in
the statement of operations for the year ended December 31, 2002.

Internally Developed Software

The Company capitalizes certain internal development software costs in
accordance with Statement of Position 98-1 Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. Amortization
commences when the software is ready for its intended use over the estimated
useful life of the software. Capitalized costs primarily include internal
salaries and wages of individuals dedicated to the development of internal use
software. The Company capitalized software development costs of $5.5 million,
$6.1 million and $9.2 million during the years ended December 31, 1999, 2000
and 2001, respectively.


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

Cash payments associated with returning leased aircraft are accrued when
probable and estimable. 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 $8.0 million and $11.6 million, respectively.


28



---



##### Table of Contents



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  |       | 2001
|                              
|Current Liabilities:           |                           |   |       |       |      |   |       |      
|                               | Other accrued liabilities |   | $     | 53.0  |      |   | $     | 65.7  | 
|Other Liabilities and Credits: |                           |   |       |       |      |   |       |      
|                               | Deferred revenue          |   |       | 117.8 |      |   |       | 150.7 | 
|                               | Other liabilities         |   |       | 27.7  |      |   |       | 31.9  | 
|                              
|Total                          |                           | $ | 198.5 |       |      | $ | 248.3 |      
|                              

Contracted Services

Contracted services includes the expenses for ground handling, security,
navigation fees, temporary employees, data processing fees, and other similar
services.


Other Selling Expenses

Other selling expenses includes credit card commissions, computerized
reservations systems (CRS) charges, Mileage Plan free travel awards,
advertising, and promotional costs. In 2000, selling expense includes $40.2
million due to a change in estimate related to the cost of travel awards earned
by Mileage Plan members flying on Alaska and travel partners. The higher costs
are 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. 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, ground facility
progress payments and construction in progress as a cost of the related asset
and is depreciated over the estimated useful life of the asset. The Company
ceased capitalization of interest on aircraft with deferred delivery dates.
Capitalization will commence when the deferral period is over.


Income Taxes

The Company uses the asset and liability approach for accounting and reporting
on income taxes. Deferred tax assets and liabilities are recognized for the
future consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred


29



---



##### Table of Contents



tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.

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 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 $5.9 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 $1.0 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 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 the accounting and reporting provisions of 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, for the disposal of a segment of a business. The adoption of
SFAS No. 143 is not expected to have a material impact on the Companys
financial position, results of operations or cash flows. The adoption of SFAS
No. 144 did not have a material impact on the Companys financial statements.


Note 2. Marketable Securities

At December 31, 2000 and 2001, all of the Companys marketable securities are
classified as available-for-sale as required


30



---



##### Table of Contents



by SFAS No. 115. The securities
are carried at fair value, with the unrealized gains and losses reported in
shareholders equity under the caption Accumulated Other Comprehensive Income
(Loss). Realized gains and losses are included in Other Nonoperating Income
(Expense) in the Statements of Operations. The cost of securities sold is
based on the specific identification method. Interest and dividends on
securities classified as available-for-sale are included in interest income in
the Statements of Operations.

Marketable equity securities consisted of the following at December 31 (in millions):

|                            |  |      |       |      |  |   |       | 
|--------------------------- |  | ---- | ----- | ---- |  | - | ----- | 
|                            |  | 2000 |       | 2001
|                           
|Cost:                       |  |      |       |      |  |   |       | 
|U.S. government securities  |  | $    | 242.6 |      |  | $ | 59.2  | 
|Asset backed obligations    |  |      | 78.6  |      |  |   | 72.5  | 
|Other corporate obligations |  |      | 35.0  |      |  |   | 36.2  | 
|                           
|                            |  | $    | 356.2 |      |  | $ | 167.9 | 
|                           
|Fair value:                 |  |      |       |      |  |   |       | 
|U.S. government securities  |  | $    | 243.4 |      |  | $ | 59.3  | 
|Asset backed obligations    |  |      | 79.0  |      |  |   | 72.9  | 
|Other corporate obligations |  |      | 35.4  |      |  |   | 37.6  | 
|                           
|                            |  | $    | 357.8 |      |  | $ | 169.8 | 
|                           

Of the marketable on hand at December 31, 2001, 83% are expected to
mature in 2002, 13% in 2003, and 4% in 2004.

|                                   |  |      |       |      |  |      |       |  |  |   |       | 
|---------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                                   |  | 1999 |       | 2000 |  | 2001
|                                  
|Proceeds from sales
and maturities |  | $    | 232.8 |      |  | $    | 300.0 |  |  | $ | 446.4 | 
|Gross realized gains               |  |      | 0.4   |      |  |      | 0.3   |  |  |   | 4.0   | 
|Gross realized losses              |  |      | 0.3   |      |  |      | 0.6   |  |  |   | 0.4   | 
|                                  

Note 3. Other Assets

Other assets consisted of the following at December 31 (in millions):


|                         |  |      |       |      |  |   |       | 
|------------------------ |  | ---- | ----- | ---- |  | - | ----- | 
|                         |  | 2000 |       | 2001
|                        
|Prepaid pension cost     |  | $    | 73.3  |      |  | $ | 98.4  | 
|Restricted deposits      |  |      | 25.6  |      |  |   | 26.7  | 
|Deferred costs and other |  |      | 10.7  |      |  |   | 9.6   | 
|                        
|                         |  | $    | 109.6 |      |  | $ | 134.7 | 
|                        

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 $2.1 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. In April 2002 the Company sold the
certificates resulting in a gain of approximately $0.9 million

Note 4. Related Company Transactions

During 2000, Alaska transferred a flight simulator to AAGL in exchange for a
$2.4 million note receivable from AAGL and a $0.6 million reduction in its
payable to Air Group. The loan has repayment terms of 12 years at 6.5%
interest. AAGL is leasing the simulator to Alaska for 12 years. In October
2000, Air Group made a $99.0 million capital contribution to Alaska by
reducing Alaskas payable to Air Group.


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

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

The Company periodically loans Horizon funds at varying interest rates. All
amounts are payable on demand. Interest income recognized related to
the Horizon loans totalled $1.5 million, $3.1 million and
$3.1 million during 1999, 2000, and 2001, respectively. At December 31, 2001, receivables from related
companies include $47.5 million from Horizon, $10.5 million from AAGL and
$13.2 million from Air Group.

Alaska has an agreement with Horizon to provide revenue sharing on certain
markets, the Incentive Payment Program (IPP). Under the IPP, Alaska makes a
monthly payment to Horizon for markets which provide connecting traffic to
Alaska but create losses for Horizon, the incentive markets. The payment is
based on full-allocated cost for Horizon to provide the transportation
service, plus a 5% mark-up. Incentive markets are analyzed quarterly and the
monthly reimbursement amount is adjusted to reflect the prior quarters actual
performance. Alaska made incentive

31



---



##### Table of Contents



payments to Horizon of
$13.1 million, $15.6 million and $19.0 million in 1999, 2000 and 2001 which are reflected as
commission expense in the Statements of Operations.

Alaska also provides certain services to Horizon for which Alaska receives
payment from Horizon based on the cost of the services, including personnel
expenses related to development and maintenance of alaskaair.com, the
maintenance of telecommunications lines and related software, personnel and
systems expenses to process Horizons revenue transactions, and printing and
graphics services. Alaska also pays certain leasing and other facilities
costs on Horizons behalf which are reimbursed monthly by Horizon. Total
amounts received by Alaska from Horizon were $1.6 million,
$3.8 million and $3.9 million on 1999, 2000 and 2001.

In the normal course of business,
Alaska and Horizon provide certain ground handling services to each
respective company. Ground services provided by Alaska to Horizon
totaled $.5 million, $.6 million and $.7 million
during 1999, 2000 and 2001, respectively. Ground services provided by
Horizon to Alaska totaled $2.4 million, $2.1 million and
$2.4 million during 1999, 2000 and 2001, respectively.

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):


|                                                   |  |      |       |      |  |   |       |  
|-------------------------------------------------- |  | ---- | ----- | ---- |  | - | ----- | -
|                                                   |  | 2000 |       | 2001
|                                                  
|7.4%* fixed rate notes payable
due through 2015    |  | $    | 406.4 |      |  | $ | 420.7 |  
|4.6%* variable rate notes payable
due through 2018 |  |      | 151.7 |      |  |   | 455.5 |  
|                                                  
|Long-term debt                                     |  |      | 558.1 |      |  |   | 876.2 |  
|Capital lease obligations                          |  |      | 17.8  |      |  |   | 14.9  |  
|Other                                              |  |      |      |      |  |   | 4.3   |  
|Less current portion                               |  |      | (66.7 | )    |  |   | (43.2 | )
|                                                  
|                                                   |  | $    | 509.2 |      |  | $ | 852.2 |  
|                                                  



---

|* |  | 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. The other $170.0 million has
interest rates that vary with LIBOR and 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, payable on or before December 31, 2004.

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

|     |  |   |       | 
|---- |  | - | ----- | 
|    
|2002 |  | $ | 40.1  | 
|    
|2003 |  | $ | 42.4  | 
|    
|2004 |  | $ | 202.6 | 
|    
|2005 |  | $ | 35.8  | 
|    
|2006 |  | $ | 38.4  | 
|    

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.

Note 6. CommitmentsLease Commitments

The Company has lease contracts for 49 aircraft that have remaining
noncancelable 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 $195.7 million, $188.1 million and $192.5 million, in
1999, 2000, and 2001, respectively.


32



---



##### Table of Contents



Future minimum lease payments with noncancelable terms in excess of one year as
of December 31, 2001 are shown below (in millions):

|                                        |  |           |         |            |  |         |       |  |  |   |      |  
|--------------------------------------- |  | --------- | ------- | ---------- |  | ------- | ----- |  |  | - | ---- | -
|                                        |  | Operating |         | Leases     |  | Capital
|                                        |  | Aircraft  |         | Facilities |  | Leases 
|                                       
|2002                                    |  | $         | 130.8   |            |  | $       | 27.9  |  |  | $ | 4.1  |  
|2003                                    |  |           | 113.7   |            |  |         | 26.2  |  |  |   | 4.1  |  
|2004                                    |  |           | 89.6    |            |  |         | 24.4  |  |  |   | 8.4  |  
|2005                                    |  |           | 85.0    |            |  |         | 23.6  |  |  |   | 0.2  |  
|2006                                    |  |           | 82.6    |            |  |         | 13.2  |  |  |   | 0.1  |  
|Thereafter                              |  |           | 633.0   |            |  |         | 80.2  |  |  |   | 0.1  |  
|                                       
|Total lease payments                    |  | $         | 1,134.7 |            |  | $       | 195.5 |  |  |   | 17.0 |  
|                                        |  |           |         |            |  |         |      
|Less amount representing interest       |  |           |         |            |  |         |       |  |  |   | (2.1 | )
|                                       
|Present value of capital lease payments |  |           |         |            |  |         |       |  |  | $ | 14.9 |  
|                                       

Aircraft Commitments

The Company has firm orders for eight 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 approximately $66 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
various employee groups of Alaska. 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 of marketable equity and fixed income securities.


The following table sets forth the status of the plans for 2000 and 2001 (in millions):

|                                |  |      |       |      |  |   |       |  
|------------------------------- |  | ---- | ----- | ---- |  | - | ----- | -
|                                |  | 2000 |       | 2001
|                               
|Projected benefit obligation    |  |      |       |      |  |   |       |  
|Beginning of year               |  | $    | 369.3 |      |  | $ | 430.2 |  
|Service cost                    |  |      | 24.0  |      |  |   | 29.0  |  
|Interest cost                   |  |      | 28.5  |      |  |   | 32.3  |  
|Amendments                      |  |      | 0.7   |      |  |   | 5.2   |  
|Change in assumptions           |  |      | 16.0  |      |  |   | 16.4  |  
|Actuarial loss                  |  |      | 0.9   |      |  |   | 6.2   |  
|Benefits paid                   |  |      | (9.2  | )    |  |   | (12.1 | )
|                               
|End of year                     |  | $    | 430.2 |      |  | $ | 507.2 |  
|                               
|Plan assets at fair value       |  |      |       |      |  |   |       |  
|Beginning of year               |  | $    | 437.1 |      |  | $ | 438.7 |  
|Actual return on plan assets    |  |      | 5.8   |      |  |   | (17.1 | )
|Employer contributions          |  |      | 5.0   |      |  |   | 45.0  |  
|Benefits paid                   |  |      | (9.2  | )    |  |   | (12.1 | )
|                               
|End of year                     |  | $    | 438.7 |      |  | $ | 454.5 |  
|                               
|Funded status                   |  |      | 8.5   |      |  |   | (52.7 | )
|Unrecognized loss               |  |      | 13.9  |      |  |   | 99.6  |  
|Unrecognized transition asset   |  |      | (0.1  | )    |  |   | (0.1  | )
|Unrecognized prior service cost |  |      | 51.0  |      |  |   | 51.6  |  
|                               
|Prepaid pension cost            |  | $    | 73.3  |      |  | $ | 98.4  |  
|                               

Weighted average assumptions
as of December 31

|                               |  |  |      |   |  |  |      |  
|------------------------------ |  |  | ---- | - |  |  | ---- | -
|Discount 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 |  | 2001
|                                  
|Service cost                       |  | $    | 25.8  |      |  | $    | 24.0  |   |  | $ | 29.0  |  
|Interest cost                      |  |      | 25.3  |      |  |      | 28.5  |   |  |   | 32.3  |  
|Expected return on assets          |  |      | (36.7 | )    |  |      | (43.4 | ) |  |   | (46.0 | )
|Amortization of
prior service cost |  |      | 4.4   |      |  |      | 4.5   |   |  |   | 4.6   |  
|Recognized actuarial
loss (gain)   |  |      | 0.1   |      |  |      | (0.1  | ) |  |   | 0.1   |  
|Amortization of
transition asset   |  |      | (0.2  | )    |  |      |      |   |  |   | --    |  
|                                  
|Net pension expense                |  | $    | 18.7  |      |  | $    | 13.5  |   |  | $ | 20.0  |  
|                                  

In December 2002, the Company will record a non-cash charge to equity in
connection with the defined benefit pension plans that the Company sponsors for
eligible employees. This charge is a result of an unfunded accrued benefit
obligation

33



---



##### Table of Contents



resulting from lower than expected return on plan assets, which was
determined in 2002. The Company estimates this charge will be approximately
$87 million net of taxes.

Alaska also maintains an unfunded, noncontributory benefit plan for certain
elected officers. The unfunded accrued pension cost for this plan was
$27
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, $10.2 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
$21.4 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 Balance Sheet,
and totaled $24.4 million and $29.4 million at December 31, 2000 and 2001,
respectively. Annual expense related to this subsidy was approximately $3.3
million in 1999, and $4.6 million in 2000 and in 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 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 |       | 2001
|                                    
|Excess of tax over book
depreciation |  | $    | 204.0 |      |  | $ | 279.8  |  
|Employee benefits                    |  |      | 5.3   |      |  |   |       |  
|Aircraft return provisions           |  |      | 0.4   |      |  |   |       |  
|Other  net                          |  |      | 6.9   |      |  |   | 1.7    |  
|                                    
|Gross deferred tax liabilities       |  |      | 216.6 |      |  |   | 281.5  |  
|                                    
|Frequent flyer program               |  |      | (70.8 | )    |  |   | (88.0  | )
|Alternative minimum tax              |  |      | (0.1  | )    |  |   | (21.7  | )
|Aircraft return provisions           |  |      |      |      |  |   | (4.7   | )
|Inventory obsolescence               |  |      | (8.0  | )    |  |   | (9.2   | )
|Deferred gains                       |  |      | (11.6 | )    |  |   | (9.9   | )
|Fuel hedges                          |  |      |      |      |  |   | (3.0   | )
|Employee benefits                    |  |      |      |      |  |   | (1.8   | )
|Other  net                          |  |      | (6.2  | )    |  |   | (7.6   | )
|                                    
|Gross deferred tax assets            |  |      | (96.7 | )    |  |   | (145.9 | )
|                                    
|Net deferred tax liabilities         |  | $    | 119.9 |      |  | $ | 135.6  |  
|                                    
|Current deferred tax asset           |  | $    | (32.2 | )    |  | $ | (46.7  | )
|Noncurrent deferred tax liability    |  |      | 152.1 |      |  |   | 182.3  |  
|                                    
|Net deferred tax liability           |  | $    | 119.9 |      |  | $ | 135.6  |  
|                                    

34



---



##### Table of Contents



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

|                                                        |         |   |      |      |  |      |       |      |   |   |       |       |   | 
|------------------------------------------------------- | ------- | - | ---- | ---- |  | ---- | ----- | ---- | - | - | ----- | ----- | - | 
|                                                        |         |   |      | 1999 |  | 2000 |       | 2001
|                                                       
|Current tax expense (credit):                           |         |   |      |      |  |      |       |      |   |   |       |      
|                                                        | Federal |   | $    | 15.0 |  |      | $     | 1.4  |   |   | $     | (22.1 | )
|                                                        | State   |   |      | 4.8  |  |      |       | 0.3  |   |   |       | (1.2  | )
|                                                       
|Total current                                           |         |   | 19.8 |      |  |      | 1.7   |      |   |   | (23.3 | )    
|                                                       
|Deferred tax expense (credit):                          |         |   |      |      |  |      |       |      |   |   |       |      
|                                                        | Federal |   |      | 50.0 |  |      |       | (4.8 | ) |   |       | 19.1  |  
|                                                        | State   |   |      | 3.4  |  |      |       | (2.2 | ) |   |       | (0.4  | )
|                                                       
|Total deferred                                          |         |   | 53.4 |      |  |      | (7.0  | )    |   |   | 18.7  |      
|                                                       
|Total before acctg. change                              |         |   | 73.2 |      |  |      | (5.3  | )    |   |   | (4.6  | )    
|                                                       
|Deferred tax credit, cumulative
effect of acctg. change |         |   |     |      |  |      | (29.5 | )    |   |   |      |      
|                                                       
|Total tax expense (credit)                              |         | $ | 73.2 |      |  | $    | (34.8 | )    |   | $ | (4.6  | )    
|                                                       

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

|                                                      |  |      |       |      |  |      |       |   |  |   |       |  
|----------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- | - |  | - | ----- | -
|                                                      |  | 1999 |       | 2000 |  | 2001
|                                                     
|Income (loss) before income tax
and accounting change |  | $    | 186.5 |      |  | $    | (20.1 | ) |  | $ | (16.4 | )
|                                                     
|Expected tax
expense (credit)                         |  | $    | 65.4  |      |  | $    | (7.0  | ) |  | $ | (5.7  | )
|Nondeductible expenses                                |  |      | 1.6   |      |  |      | 2.2   |   |  |   | 2.2   |  
|State income tax                                      |  |      | 6.3   |      |  |      | (0.5  | ) |  |   | (1.1  | )
|Other  net                                           |  |      | 0.1   |      |  |      |      |   |  |   |      |  
|                                                     
|Actual tax expense (credit)                           |  | $    | 73.2  |      |  | $    | (5.3  | ) |  | $ | (4.6  | )
|                                                     
|Effective tax rate                                    |  |      | 39.3  | %    |  |      | 26.4  | % |  |   | 28.9  | %
|                                                     

As of December 31, 2000 and 2001, the following intercompany tax accounts were
recorded on the Balance Sheets:

|                                     |  |      |       |      |  |  |        |  
|------------------------------------ |  | ---- | ----- | ---- |  |  | ------ | -
|                                     |  | 2000 |       | 2001
|                                    
|Receivable
from affiliated companies |  |      | ($1.3 | )    |  |  | ($11.4 | )
|Payable to Alaska Air Group          |  |      | $1.3  |      |  |  | $11.4  |  

Note 9. Financial Instruments

The estimated fair values of the Companys financial instruments were as
follows (in millions):


|                                                |  |                   |       |       |  |   |       | 
|----------------------------------------------- |  | ----------------- | ----- | ----- |  | - | ----- | 
|                                                |  | December 31, 2000
|                                                |  |                  
|                                                |  | Carrying          |       | Fair 
|                                                |  | Amount            |       | Value
|                                               
|Assets:                                         |  |                   |       |       |  |   |       | 
|Cash and cash equivalents                       |  | $                 | 101.2 |       |  | $ | 101.2 | 
|Marketable securities                           |  |                   | 357.8 |       |  |   | 357.8 | 
|Fuel hedge contracts                            |  |                   | 2.6   |       |  |   | 1.7   | 
|Restricted deposits and
depository certificates |  |                   | 25.6  |       |  |   | 27.7  | 
|Liabilities:                                    |  |                   |       |       |  |   |       | 
|Long-term debt                                  |  |                   | 558.1 |       |  |   | 578.1 | 
|                                               

|                                                |  |                   |       |       |  |   |       | 
|----------------------------------------------- |  | ----------------- | ----- | ----- |  | - | ----- | 
|                                                |  | December 31, 2001
|                                                |  |                  
|                                                |  | Carrying          |       | Fair 
|                                                |  | Amount            |       | Value
|                                               
|Assets:                                         |  |                   |       |       |  |   |       | 
|Cash and cash equivalents                       |  | $                 | 490.7 |       |  | $ | 490.7 | 
|Marketable securities                           |  |                   | 169.8 |       |  |   | 169.8 | 
|Restricted deposits and
depository certificates |  |                   | 26.7  |       |  |   | 28.1  | 
|Liabilities:                                    |  |                   |       |       |  |   |       | 
|Fuel hedge contracts                            |  |                   | 1.0   |       |  |   | 1.0   | 
|Long-term debt                                  |  |                   | 876.2 |       |  |   | 889.3 | 
|                                               

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. At December 31, 2000, the fair value of
restricted deposits include depository certificates convertible into the
common stock of Equant N.V. which was valued at $2.1 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.

35



---



##### Table of Contents



Note 10. 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.


Through December 31, 2001, Alaska received government compensation of $71.6
million. This amount is reflected in nonoperating income (expense) in the
statements of operations. During the third quarter of 2002, the Department of
Transportation completed its review procedures and remitted a final
compensation payment to Alaska of $0.3 million.

Note 11. 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 was expanded
to include the aircraft involved in the loss of Flight 261 in January 2000. The
FAA separately proposed a civil penalty in connection with the 1998
maintenance activities, 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 relative to the 1998 maintenance activities did not warrant
filing criminal charges, and closed that part of the investigation. The U.S.
attorney also placed the portion of its investigation related to Flight 261 on
inactive status, with the possibility of reactivating and reviewing the matter
when the National Transportation Safety Board issues its final report on the
accident.


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 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.

Note 12. 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 effective January 1, 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


36



---



##### Table of Contents



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 $46.8
million cumulative effect charge, net of income taxes of $29.5 million,
effective January 1, 2000.

Note 13. Restatement/Reclassification of Financial Statements

During 2002, the Company changed its accounting policies relating to the
accrual for certain lease return costs and capitalization of software
development costs. In addition, the Company changed its accounting for
aircraft purchase commitments assumed by a third party and the amounts recorded
for the cumulative effect of the accounting change upon the adoption of SAB 101
in 2000 (see Note 12). The Company also made other corrections and certain
reclassifications of deferred income taxes and other balance sheet and income
statement items, none of which have a significant impact to previously reported
equity or net earnings. Because the previous accounting methods and
classifications are not considered to be in compliance with generally accepted
accounting principles in the United States of America, the Companys previously
issued financial statements for the years ended December 31, 1999, 2000 and
2001, including the interim periods
within those years, have been restated. The changes result in an increase in
shareholders equity of $28.6 million as of December 31, 2001 and $29.0 million
as of December 31, 2000. Significant changes are more fully described below.


Leased Aircraft Return Costs

The Company leases many of its aircraft under relatively long-term operating
lease agreements. These aircraft are subject to periodic airframe and engine
overhauls based on the Companys maintenance program. The Companys previous
policy was to capitalize these overhauls and amortize the costs over the
estimated lives of the overhauls. Separately, many of the Companys lease
agreements contain provisions, which require that at the end of the lease,
either certain minimum times remain until the next overhaul or the Company make
a cash payment to the lessor. At the inception of the lease, the Company does
not know the balance between actual time remaining to the next overhaul and
cash payments that will be used to satisfy its return commitments. Under the
previous method, the Company accrued the costs of returning leased aircraft,
including any cash payments due to lessors and any unamortized overhauls, on a
straight-line basis over the lives of the leases. Airframe and engine
overhauls are now capitalized and amortized over the remaining lease term, if
shorter than the life of the overhaul. Additionally, under our new method,
since the amount of cash payments by themselves cannot be reasonably predicted
at the inception of the lease, the Company will accrue cash payments expected
to be made to lessors over the last few years of the lease when probable and
estimable.


Internally Developed Software

The Company revised its accounting practices for certain costs of internally
developed software. These costs were previously charged to expense as they
were incurred. Internally developed software costs are now capitalized and
amortized over the estimated lives of the software.


Aircraft Purchase Commitments

The Company has a purchase commitment that may trigger a liability under
certain events of default. The Company previously recognized a portion of this
commitment, which was funded by a third party as a liability, and related
aircraft purchase deposits, on its balance sheet. Since the


37



---



##### Table of Contents



executory contract
for the purchase commitment is not an obligation of the Company until the
aircraft is delivered, this commitment is disclosed as a purchase commitment
and not included in long-term debt or deposits for future flight equipment.

Mileage Plan

During the year ended December 31, 2000, the Company revised certain
assumptions used to determine the incremental cost of travel awards earned by
flying on Alaska and travel partners and recorded the effect of that change in
estimate as a special charge in the statement of operations. The Company has
determined that this expense should be included in selling expense and has
accordingly restated the December 31, 2000 Statement of Operations.


In 2000, the Company also changed its liability to Mileage Plan members
primarily as a result of changing the estimate regarding the number of
outstanding Mileage Plan miles that will ultimately be redeemed for free travel
that related to estimated travel on other airlines. This change in estimate
($10.1 million net of applicable income taxes of $6.1 million) that related to
estimated travel on other airlines was inappropriately included in the
cumulative effect of the change in accounting principle related to the adoption
of SAB 101. The Company has determined
that this change in estimate should have been included in selling expense and
has restated the December 31, 2000 Statement of Operations.

The effect of the restatements for 1999, 2000, and 2001 is as follows (in
millions):

|                               |                        |  |      |         |      |  |      |         |   |  |   |         |  
|------------------------------ | ---------------------- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                               |                        |  | 1999 |         | 2000 |  | 2001
|                              
|Total Revenue:                 |                        |  |      |         |      |  |      |         |   |  |   |        
|                               | As Previously Reported |  | $    | 1,680.8 |      |  | $    | 1,749.0 |   |  | $ | 1,750.9 |  
|                               | Restated               |  | $    | 1,690.3 |      |  | $    | 1,766.2 |   |  | $ | 1,763.0 |  
|Total Operating Expenses:      |                        |  |      |         |      |  |      |         |   |  |   |        
|                               | As Previously Reported |  | $    | 1,504.5 |      |  | $    | 1,762.6 |   |  | $ | 1,820.7 |  
|                               | Restated               |  | $    | 1,526.0 |      |  | $    | 1,792.2 |   |  | $ | 1,834.6 |  
|Total Operating Income (Loss): |                        |  |      |         |      |  |      |         |   |  |   |        
|                               | As Previously Reported |  | $    | 176.3   |      |  | $    | (13.6   | ) |  | $ | (69.8   | )
|                               | Restated               |  | $    | 164.3   |      |  | $    | (26.0   | ) |  | $ | (71.6   | )
|Net Income (Loss):             |                        |  |      |         |      |  |      |         |   |  |   |        
|                               | As Previously Reported |  | $    | 119.4   |      |  | $    | (64.3   | ) |  | $ | (10.1   | )
|                               | Restated               |  | $    | 113.3   |      |  | $    | (61.6   | ) |  | $ | (11.8   | )

The effect of the restatement on selected balance sheet items is as follows as
of December 31, 2000 and 2001 (in millions):

|                            |                        |  |      |         |      |  |   |         | 
|--------------------------- | ---------------------- |  | ---- | ------- | ---- |  | - | ------- | 
|                            |                        |  | 2000 |         | 2001
|                           
|Current Assets:             |                        |  |      |         |      |  |   |        
|                            | As Previously Reported |  | $    | 712.8   |      |  | $ | 904.7   | 
|                            | Restated               |  | $    | 727.9   |      |  | $ | 920.8   | 
|Property and Equipment-Net: |                        |  |      |         |      |  |   |        
|                            | As Previously Reported |  | $    | 1,530.5 |      |  | $ | 1,684.3 | 
|                            | Restated               |  | $    | 1,452.8 |      |  | $ | 1,688.0 | 
|Current Liabilities:        |                        |  |      |         |      |  |   |        
|                            | As Previously Reported |  | $    | 657.0   |      |  | $ | 700.2   | 
|                            | Restated               |  | $    | 654.5   |      |  | $ | 695.0   | 
|Long-Term Debt:             |                        |  |      |         |      |  |   |        
|                            | As Previously Reported |  | $    | 609.2   |      |  | $ | 863.3   | 
|                            | Restated               |  | $    | 509.2   |      |  | $ | 852.2   | 
|Shareholders Equity:       |                        |  |      |         |      |  |   |        
|                            | As Previously Reported |  | $    | 703.6   |      |  | $ | 690.4   | 
|                            | Restated               |  | $    | 732.6   |      |  | $ | 719.0   | 

The effect of the restatement to shareholders equity as of January 1, 1999 is as follows:

|                       |  |   |       |       | 
|---------------------- |  | - | ----- | ----- | 
|As Previously Reported |  | $ | 549.5 |      
|Restated               |  |   | $     | 579.9 | 

38



---



##### Table of Contents



Alaska Airlines Financial and
Statistical Data (Unaudited)

|                                             |  |                           |        |                        |  |        |        |          |  |          |       |        |      |   |         |   |      |   |         |          |  |  |       |  
|-------------------------------------------- |  | ------------------------- | ------ | ---------------------- |  | ------ | ------ | -------- |  | -------- | ----- | ------ | ---- | - | ------- | - | ---- | - | ------- | -------- |  |  | ----- | -
|                                             |  | Quarter Ended December 31 |        | Year Ended December 31
|                                             |  |                           |        |                       
|                                             |  | Restated                  |        | Restated               |  | %      |        | Restated |  | Restated |       | %     
|Financial Data (in millions):                |  | 2000                      |        | 2001                   |  | Change |        | 2000     |  | 2001     |       | Change
|                                             |  |                           |        |                        |  |        |        |          |  |          |       |       
|Operating Revenues:                          |  |                           |        |                        |  |        |        |          |  |          |       |        |      |   |         |   |      |   |         |          |  |  |       |  
|Passenger                                    |  | $                         | 398.2  |                        |  | $      | 349.6  |          |  |          | (12.2 | )      |      | $ | 1,625.4 |   |      | $ | 1,607.6 |          |  |  | (1.1  | )
|Freight and mail                             |  |                           | 18.7   |                        |  |        | 17.7   |          |  |          | (5.3  | )      |      |   | 76.4    |   |      |   | 78.2    |          |  |  | 2.4   |  
|Other  net                                  |  |                           | 16.1   |                        |  |        | 18.2   |          |  |          | 13.0  |        |      |   | 64.4    |   |      |   | 77.2    |          |  |  | 19.9  |  
|                                             |  |                           |        |                        |  |        |        |          |  |          |       |        |      |   |         |   |      |   |         |          |  |  |       |  
|Total Operating Revenues                     |  |                           | 433.0  |                        |  |        | 385.5  |          |  |          | (11.0 | )      |      |   | 1,766.2 |   |      |   | 1,763.0 |          |  |  | (0.2  | )
|                                             |  |                           |        |                        |  |        |        |          |  |          |       |        |      |   |         |   |      |   |         |          |  |  |       |  
|Operating Expenses:                          |  |                           |        |                        |  |        |        |          |  |          |       |        |      |   |         |   |      |   |         |          |  |  |       |  
|Wages and benefits                           |  |                           | 145.7  |                        |  |        | 166.4  |          |  |          | 14.2  |        |      |   | 577.0   |   |      |   | 642.9   |          |  |  | 11.4  |  
|Contracted services                          |  |                           | 20.0   |                        |  |        | 19.0   |          |  |          | (5.0  | )      |      |   | 68.3    |   |      |   | 76.0    |          |  |  | 11.3  |  
|Aircraft fuel                                |  |                           | 89.5   |                        |  |        | 49.9   |          |  |          | (44.2 | )      |      |   | 313.1   |   |      |   | 269.8   |          |  |  | (13.8 | )
|Aircraft maintenance                         |  |                           | 38.4   |                        |  |        | 29.7   |          |  |          | (22.7 | )      |      |   | 130.9   |   |      |   | 129.7   |          |  |  | (0.9  | )
|Aircraft rent                                |  |                           | 37.1   |                        |  |        | 33.6   |          |  |          | (9.4  | )      |      |   | 144.3   |   |      |   | 137.6   |          |  |  | (4.6  | )
|Food and beverage service                    |  |                           | 13.0   |                        |  |        | 13.2   |          |  |          | 1.5   |        |      |   | 51.0    |   |      |   | 55.5    |          |  |  | 8.8   |  
|Commissions                                  |  |                           | 15.7   |                        |  |        | 13.6   |          |  |          | (13.4 | )      |      |   | 65.0    |   |      |   | 64.1    |          |  |  | (1.4  | )
|Other selling expenses                       |  |                           | 27.6   |                        |  |        | 23.8   |          |  |          | (13.8 | )      |      |   | 138.7   |   |      |   | 102.7   |          |  |  | (26.0 | )
|Depreciation and amortization                |  |                           | 24.2   |                        |  |        | 30.0   |          |  |          | 24.0  |        |      |   | 85.9    |   |      |   | 106.1   |          |  |  | 23.5  |  
|Loss on sale of assets                       |  |                           | 0.4    |                        |  |        | 3.2    |          |  | NM       |       |        | 1.3  |   |         |   | 5.0  |   |         | NM      
|Landing fees and other rentals               |  |                           | 19.9   |                        |  |        | 28.7   |          |  |          | 44.2  |        |      |   | 74.4    |   |      |   | 99.5    |          |  |  | 33.7  |  
|Other                                        |  |                           | 40.7   |                        |  |        | 35.4   |          |  |          | (13.0 | )      |      |   | 142.3   |   |      |   | 145.7   |          |  |  | 2.4   |  
|Special charge  Mileage Plan                |  |                           |       |                        |  |        |       |          |  |          |       |        |      |   |        |   |      |   |        |          |  |  |       |  
|                                             |  |                           |        |                        |  |        |        |          |  |          |       |        |      |   |         |   |      |   |         |          |  |  |       |  
|Total Operating Expenses                     |  |                           | 472.2  |                        |  |        | 446.5  |          |  |          | (5.4  | )      |      |   | 1,792.2 |   |      |   | 1,834.6 |          |  |  | 2.4   |  
|                                             |  |                           |        |                        |  |        |        |          |  |          |       |        |      |   |         |   |      |   |         |          |  |  |       |  
|Operating Loss                               |  |                           | (39.2  | )                      |  |        | (61.0  | )        |  |          | 55.6  |        |      |   | (26.0   | ) |      |   | (71.6   | )        |  |  | 175.4 |  
|                                             |  |                           |        |                        |  |        |        |          |  |          |       |        |      |   |         |   |      |   |         |          |  |  |       |  
|Interest income                              |  |                           | 8.6    |                        |  |        | 4.4    |          |  |          |       |        |      |   | 27.6    |   |      |   | 26.0    |          |  |  |       |  
|Interest expense                             |  |                           | (10.9  | )                      |  |        | (12.9  | )        |  |          |       |        |      |   | (36.0   | ) |      |   | (47.4   | )        |  |  |       |  
|Interest capitalized                         |  |                           | 3.9    |                        |  |        | 0.9    |          |  |          |       |        |      |   | 13.8    |   |      |   | 7.5     |          |  |  |       |  
|U.S. government compensation                 |  |                           |       |                        |  |        | 52.9   |          |  |          |       |        |      |   |        |   |      |   | 71.6    |          |  |  |       |  
|Other  net                                  |  |                           | (0.8   | )                      |  |        | (3.1   | )        |  |          |       |        |      |   | 0.5     |   |      |   | (2.5    | )        |  |  |       |  
|                                             |  |                           |        |                        |  |        |        |          |  |          |       |        |      |   |         |   |      |   |         |          |  |  |       |  
|                                             |  |                           | 0.8    |                        |  |        | 42.2   |          |  |          |       |        |      |   | 5.9     |   |      |   | 55.2    |          |  |  |       |  
|                                             |  |                           |        |                        |  |        |        |          |  |          |       |        |      |   |         |   |      |   |         |          |  |  |       |  
|Loss Before Income Tax
and Accounting Change |  | $                         | (38.4  | )                      |  | $      | (18.8  | )        |  |          | (51.0 | )      |      | $ | (20.1   | ) |      | $ | (16.4   | )        |  |  | (18.4 | )
|                                             |  |                           |        |                        |  |        |        |          |  |          |       |        |      |   |         |   |      |   |         |          |  |  |       |  
|Operating
Statistics:                        |  |                           |        |                        |  |        |        |          |  |          |       |        |      |   |         |   |      |   |         |          |  |  |       |  
|Revenue passengers (000)                     |  |                           | 3,270  |                        |  |        | 3,025  |          |  |          | (7.5  | )      |      |   | 13,525  |   |      |   | 13,668  |          |  |  | 1.1   |  
|RPMs (000,000)                               |  |                           | 2,899  |                        |  |        | 2,736  |          |  |          | (5.6  | )      |      |   | 11,986  |   |      |   | 12,249  |          |  |  | 2.2   |  
|ASMs (000,000)                               |  |                           | 4,379  |                        |  |        | 4,121  |          |  |          | (5.9  | )      |      |   | 17,315  |   |      |   | 17,919  |          |  |  | 3.5   |  
|Passenger load factor                        |  |                           | 66.2   | %                      |  |        | 66.4   | %        |  | 0.2 pts  |       |        | 69.2 | % |         |   | 68.4 | % |         | (0.8)pts
|Breakeven load factor                        |  |                           | 69.6   | %                      |  |        | 82.2   | %        |  | 12.6 pts |       |        | 71.4 | % |         |   | 73.5 | % |         | 2.1 pts 
|Yield per passenger mile                     |  |                           | 13.74¢ |                        |  |        | 12.78¢ |          |  |          | (7.0  | )      |      |   | 13.56¢  |   |      |   | 13.12¢  |          |  |  | (3.2  | )
|Operating revenue per ASM                    |  |                           | 9.89¢  |                        |  |        | 9.35¢  |          |  |          | (5.4  | )      |      |   | 10.20¢  |   |      |   | 9.84¢   |          |  |  | (3.5  | )
|Operating expenses per ASM*                  |  |                           | 10.78¢ |                        |  |        | 10.84¢ |          |  |          | 0.5   |        |      |   | 10.35¢  |   |      |   | 10.24¢  |          |  |  | (1.1  | )
|Expense per ASM excluding fuel*              |  |                           | 8.74¢  |                        |  |        | 9.62¢  |          |  |          | 10.1  |        |      |   | 8.54¢   |   |      |   | 8.73¢   |          |  |  | 2.3   |  
|Fuel cost per gallon                         |  |                           | 118.1¢ |                        |  |        | 71.9¢  |          |  |          | (39.2 | )      |      |   | 103.4¢  |   |      |   | 88.3¢   |          |  |  | (14.6 | )
|Fuel gallons (000,000)                       |  |                           | 75.7   |                        |  |        | 69.6   |          |  |          | (8.1  | )      |      |   | 302.9   |   |      |   | 305.7   |          |  |  | 0.9   |  
|Average number of employees                  |  |                           | 9,963  |                        |  |        | 9,834  |          |  |          | (1.3  | )      |      |   | 9,611   |   |      |   | 10,115  |          |  |  | 5.2   |  
|Aircraft utilization (blk hrs/day)           |  |                           | 10.6   |                        |  |        | 9.2    |          |  |          | (13.2 | )      |      |   | 10.7    |   |      |   | 10.4    |          |  |  | (2.8  | )
|Operating fleet at period-end                |  |                           | 95     |                        |  |        | 101    |          |  |          | 6.3   |        |      |   | 95      |   |      |   | 101     |          |  |  | 6.3   |  



---

| |  | NM = Not Meaningful
| |  | -------------------

39



---



##### Table of Contents



INDEPENDENT AUDITORS REPORT

Board of Directors and Shareholders
Alaska Airlines, Inc.
Seattle, Washington

We have audited the accompanying balance sheets of Alaska Airlines, Inc. (an
Alaska Corporation) (the Company), a wholly owned subsidiary of Alaska Air
Group, Inc., as of December 31, 2001 and 2000 and the related statements of
operations, shareholders equity, and cash flows for each of the three years in
the period ended December 31, 2001. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These financial
statements and financial statement schedule are the responsibility of the
Companys management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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, such financial statements present fairly, in all material
respects, the financial position of the Company 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 accounting
principles generally accepted in the United States of America. Also, in our
opinion, such financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, present fairly in all material
respects the information set forth therein.

As discussed in Note 13, the accompanying financial statements and supplemental
schedule have been restated. As discussed in Note 12, for the year ended
December 31, 2000, the Company changed its method of accounting for the
deferral of revenue on miles sold under the mileage plan.

/s/ DELOITTE & TOUCHE LLP

Deloitte & Touche LLP
Seattle, Washington

January 2, 2003

40



---



##### Table of Contents



|                                                        |  |            
|------------------------------------------------------- |  | -----------
|VALUATION AND QUALIFYING ACCOUNTS
Alaska Airlines, Inc. |  | Schedule II

|                                                     |                                                             |         |           |            |         |            |           |         |        |  |   |      |   |  |   |      | 
|---------------------------------------------------- | ----------------------------------------------------------- | ------- | --------- | ---------- | ------- | ---------- | --------- | ------- | ------ |  | - | ---- | - |  | - | ---- | 
|                                                     |                                                             |         |           |            |         |            | Additions |         |        |  |   |      |   |  |  
|                                                     |                                                             |         | Beginning |            | Charged |            | (A)       |         | Ending
|(In Millions)                                        |                                                             | Balance |           | to Expense |         | Deductions |           | Balance
|                                                     |                                                             |         |           |            |         |            |           |        
|Year Ended December 31, 1999                         |                                                             |         |           |            |         |            |           |         |        |  |   |      |   |  |   |     
|(a) Reserve deducted from asset
to which it applies: |                                                             |         |           |            |         |            |           |         |        |  |   |      |   |  |   |     
|                                                     | Allowance for doubtful accounts                             |         | $         | 0.9        |         |            | $         | 1.2     |        |  | $ | (1.1 | ) |  | $ | 1.0  | 
|                                                     |                                                             |         |           |            |         |            |           |         |        |  |   |      |   |  |   |      | 
|                                                     | Obsolescence allowance for flight
equipment spare parts (B) |         | $         | 15.7       |         |            | $         | 3.9     |        |  | $ | (1.4 | ) |  | $ | 18.2 | 
|                                                     |                                                             |         |           |            |         |            |           |         |        |  |   |      |   |  |   |      | 
|(b) Reserve recorded as other
long-term liabilities: |                                                             |         |           |            |         |            |           |         |        |  |   |      |   |  |   |     
|                                                     | Leased aircraft return provision (B)                        |         | $         | 2.8        |         |            | $         | 3.3     |        |  | $ | (2.1 | ) |  | $ | 4.0  | 
|                                                     |                                                             |         |           |            |         |            |           |         |        |  |   |      |   |  |   |      | 
|Year Ended December 31, 2000                         |                                                             |         |           |            |         |            |           |         |        |  |   |      |   |  |   |     
|(a) Reserve deducted from asset
to which it applies: |                                                             |         |           |            |         |            |           |         |        |  |   |      |   |  |   |     
|                                                     | Allowance for doubtful accounts                             |         | $         | 1.0        |         |            | $         | 1.8     |        |  | $ | (1.1 | ) |  | $ | 1.7  | 
|                                                     |                                                             |         |           |            |         |            |           |         |        |  |   |      |   |  |   |      | 
|                                                     | Obsolescence allowance for flight
equipment spare parts (B) |         | $         | 18.2       |         |            | $         | 2.2     |        |  | $ | (0.2 | ) |  | $ | 20.2 | 
|                                                     |                                                             |         |           |            |         |            |           |         |        |  |   |      |   |  |   |      | 
|(b) Reserve recorded as other
long-term liabilities: |                                                             |         |           |            |         |            |           |         |        |  |   |      |   |  |   |     
|                                                     | Leased aircraft return provision (B)                        |         | $         | 4.0        |         |            | $         | 4.0     |        |  |   |     |   |  | $ | 8.0  | 
|                                                     |                                                             |         |           |            |         |            |           |         |        |  |   |      |   |  |   |      | 
|Year Ended December 31, 2001                         |                                                             |         |           |            |         |            |           |         |        |  |   |      |   |  |   |     
|(a) Reserve deducted from asset
to which it applies: |                                                             |         |           |            |         |            |           |         |        |  |   |      |   |  |   |     
|                                                     | Allowance for doubtful accounts                             |         | $         | 1.7        |         |            | $         | 2.5     |        |  | $ | (2.4 | ) |  | $ | 1.8  | 
|                                                     |                                                             |         |           |            |         |            |           |         |        |  |   |      |   |  |   |      | 
|                                                     | Obsolescence allowance for flight
equipment spare parts (B) |         | $         | 20.2       |         |            | $         | 4.1     |        |  | $ | (0.7 | ) |  | $ | 23.6 | 
|                                                     |                                                             |         |           |            |         |            |           |         |        |  |   |      |   |  |   |      | 
|(b) Reserve recorded as other
long-term liabilities: |                                                             |         |           |            |         |            |           |         |        |  |   |      |   |  |   |     
|                                                     | Leased aircraft return provision (B)                        |         | $         | 8.0        |         |            | $         | 4.0     |        |  | $ | (0.4 | ) |  | $ | 11.6 | 
|                                                     |                                                             |         |           |            |         |            |           |         |        |  |   |      |   |  |   |      | 



---

|(A) |  | Deduction from reserve for purpose for which reserve was created.   
|--- |  | --------------------------------------------------------------------
|   
|(B) |  | Amounts have been restated. See Note 13 to the Financial Statements.

41



---



##### Table of Contents






CERTIFICATIONS

I, William S. Ayer, certify that:



|1. |  | I have reviewed this amendment to the annual report on Form
10-K/A of Alaska Airlines, Inc..;                                                                                                                                                                                                                           
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
|  
|3. |  | Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present
in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;                   

|               |  |                                                              
|-------------- |  | -------------------------------------------------------------
|March 10, 2003 |  | By /s/William S. Ayer
William S. Ayer
Chief Executive Officer

I, Bradley D. Tilden, certify that:



|1. |  | I have reviewed this amendment to the annual report on Form 10-K/A of
Alaska Airlines, Inc..;                                                                                                                                                                                                                           
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
|  
|3. |  | Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present
in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;                   

|               |  |                                                                  
|-------------- |  | -----------------------------------------------------------------
|March 10, 2003 |  | By /s/Bradley D. Tilden
Bradley D. Tilden
Chief Financial Officer

42



---



##### Table of Contents






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 (Exhibit 3.1 to Form 10-Q for the six
months ended June 30, 2002)                                 
|     |  |                                                                                                                                                                                       
|*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                                                                                                                                  

43



---



##### Table of Contents



|      |  |                                                                                                                                                                                                                                                                                            
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |  | Alaska Airlines, Inc.
and the Industrial Development Corporation of the Port of Seattle
(Exhibit 10-38 to 1984 10-K)                                                                                                                                                                       
|      |  |                                                                                                                                                                                                                                                                                            
|#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)                                                                                                                                                                                 
|      |  |                                                                                                                                                                                                                                                                                            
|*12   |  | Calculation of Ratio
of Earnings to Fixed Charges                                                                                                                                                                                                                                          
|      |  |                                                                                                                                                                                                                                                                                            
|*23   |  | Consent of Deloitte & Touche LLP                                                                                                                                                                                                                                                           
|      |  |                                                                                                                                                                                                                                                                                            
|*99.1 |  | Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                             
|      |  |                                                                                                                                                                                                                                                                                            
|*99.2 |  | Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                             



---

|* |  | Filed herewith.                                                     
|- |  | --------------------------------------------------------------------
| 
|# |  | Confidential treatment was granted as to a portion of this document.

44