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

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FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2000

OR

|/ / | 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

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ALASKA AIRLINES, INC.(Exact name of registrant as specified in its charter)

Alaska(State or other jurisdiction of incorporation or organization)

92-0009235(I.R.S. Employer Identification No.)


19300 Pacific Highway South, Seattle, Washington 98188(Address of Principal Executive Offices)

Registrant's
telephone number, including area code:(206) 431-7079

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

Title of ClassCommon Stock, $1.00 Par Value

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As
of December 31, 2000, common shares outstanding totaled 500.

Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes /x/  No / /

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

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

Exhibit
Index begins on page 33.

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PART I

ITEM 1. BUSINESS

GENERAL INFORMATION

Alaska Airlines, Inc. (Alaska or the Company) is a wholly owned subsidiary of Alaska Air Group, Inc. Alaska Air Group, Inc. is a holding
company that also owns Horizon Air Industries, Inc. (Horizon). Alaska is a major airline that was organized in 1932 and incorporated in the state of Alaska in 1937. Alaska became a wholly owned
subsidiary of Alaska Air Group, Inc. in 1985 pursuant to a reorganization of Alaska into a holding company structure. Alaska Air Group, Inc. is a registrant pursuant to
Section 12(b) of the Securities and Exchange Act of 1934 (Commission File No. 1-8957). Alaska's executive offices are located at 19300 Pacific Highway South, Seattle,
Washington 98188. In 2000, Alaska accounted for 80% of Alaska Air Group, Inc.'s total operating revenues.

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

Operations

Alaska Airlines is an Alaska corporation that was organized in 1932 and incorporated in 1937. Alaska serves 37 cities in seven states (Alaska, Washington,
Oregon, California, Nevada, Arizona and Illinois), one city in Canada and five cities in Mexico. In each year since 1973, Alaska has carried more passengers between Alaska and the U.S. mainland than
any other airline. In 2000, Alaska carried 13.5 million revenue passengers. Passenger traffic within Alaska and between Alaska and the U.S. mainland accounted for 24% of Alaska's 2000 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, 2000, Alaska's operating fleet consisted of 95 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 access to more connecting traffic from other airlines, and (c) providing members of alliance partners'

1

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frequent flyer programs an opportunity to travel on Alaska and Horizon while earning mileage credit in the alliance partners' program.

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

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
undertakes no 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 United States Department of Transportation (DOT) is
allowed to operate scheduled passenger service in the United States. Alaska carries 2.2% of all U.S. domestic passenger traffic. Alaska competes with one or more domestic or foreign airlines on most
of its routes. Some of these competitors are substantially larger than Alaska, have greater financial resources and have more extensive route systems.

Most
major U.S. carriers have developed, independently or in partnership with others, large computerized reservation systems (CRS). Airlines, including Alaska and Horizon, are charged
industry-set fees to have their flight schedules included in the various CRS displays used by travel agents and airlines. These systems are currently the predominant means of distributing
airline tickets.

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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 cannot predict the terms on which it may be able to participate in these sites, or their effect on the Company's ability to
compete with other airlines.

Fuel

Fuel costs were 17.8% of the Company's total operating expenses in 2000. Fuel prices, which can be volatile and are largely outside of the Company's control,
can have a significant impact on the Company's operating results. Currently, a one-cent change in the fuel price per gallon affects annual fuel costs by approximately $3.1 million.
The Company believes that operating fuel-efficient aircraft is an effective hedge against high fuel prices. During 2000, the Company resumed hedging against its exposure to fluctuations in
the price of jet fuel.

Unionized Labor Force

Labor costs were 33% of the Company's total operating expenses in 1999. Wage rates can have a significant impact on the Company's operating results. At
December 31, 2000, labor unions represented 86% 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 for management's discussion of liquidity and capital resources.

Government Regulation; International Routes

Like other airlines, the Company is subject to regulation by the Federal Aviation Administration (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.

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Economic Conditions

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

Risk of Loss and Liability; Weather

The Company is exposed to potential catastrophic losses in the event of aircraft accidents or terrorist incidents. Consistent with industry standards, the
Company maintains vigorous safety, training and maintenance programs, as well as insurance against such losses. However, any aircraft accident, even if fully insured, could cause a negative public
perception of the Company with adverse financial consequences. Additionally, unusually adverse weather can significantly reduce flight operations, resulting in lost revenues and added expenses.

OTHER INFORMATION

Employees

Alaska had 10,738 active full-time and part-time employees at December 31, 2000. Alaska's union contracts at December 31,
2000 were as follows:

|Union                                                         |  | Employee Group                         |  | Number of
Employees |  | Contract Status   
|------------------------------------------------------------- |  | -------------------------------------- |  | ------------------- |  | ------------------
|Air Line Pilots Association International                     |  | Pilots                                 |  | 1,345               |  | Amendable 4/30/03 
|Association of Flight Attendants                              |  | Flight attendants                      |  | 1,980               |  | Amendable 10/29/03
|International Association of Machinists and Aerospace Workers |  | Rampservice and stock clerks           |  | 1,121               |  | Amendable 1/10/04 
|                                                              |  | Clerical, office and passenger service |  | 3,249               |  | Amendable 10/29/02
|Aircraft Mechanics Fraternal Association                      |  | Mechanics, inspectors and cleaners     |  | 1,195               |  | Amendable 12/25/02
|Mexico Workers Association of Air Transport                   |  | Mexico airport personnel               |  | 92                  |  | Amendable 4/1/01  
|Transport Workers Union of America                            |  | Dispatchers                            |  | 24                  |  | Amendable 2/9/02  

Frequent Flyer Program

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

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 1999 and 2000, Alaska
estimated that 1,129,000 and 1,582,000 round-trip flight awards were eligible for redemption by Mileage Plan members who have

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mileage credits exceeding the 20,000-mile free round-trip domestic ticket award threshold. Of these eligible awards, Alaska estimated that 921,000 and 1,469,000, respectively,
would ultimately be redeemed. For the years 1998, 1999 and 2000, approximately 191,000, 226,000 and 281,000 round-trip flight awards were redeemed and flown on Alaska and Horizon. These
awards represent approximately 3.1% for 1998, 3.7% for 1999, and 4.8% for 2000, of the total passenger miles flown for each period. For the years 1998, 1999 and 2000, approximately 65,000, 99,000 and
137,000 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. Effective January 1, 2000, the Company began deferring a majority of the sales proceeds, and recognizing these proceeds as revenue when
the award transportation is provided. The deferred proceeds are recognized as passenger revenue for awards issued on Alaska and as other revenue-net for awards issued on other airlines. At
December 31, 1999 and 2000, the deferred revenue and the total liability for miles outstanding and for estimated payments to partner airlines was $40.0 million and $198.5 million,
respectively.

ITEM 2. PROPERTIES

Aircraft

The following table describes the aircraft operated and their average age at December 31, 2000.

|Aircraft Type   |  | Passenger
Capacity |  | Owned |  | Leased |  | Total |  | Average Age
in Years
|--------------- |  | ------------------ |  | ----- |  | ------ |  | ----- |  | --------------------
|Alaska Airlines |  |                    |  |       |  |        |  |       |  |                     
|Boeing 737-200C |  | 111                |  | 7     |  | 1      |  | 8     |  | 20.4                
|Boeing 737-400  |  | 138                |  | 9     |  | 31     |  | 40    |  | 5.7                 
|Boeing 737-700  |  | 120                |  | 13    |  |       |  | 13    |  | 0.8                 
|Boeing MD-80    |  | 140                |  | 15    |  | 19     |  | 34    |  | 10.6                
|                |  |                    |  |       |  |        |  |       |  |                     
|                |  |                    |  | 44    |  | 51     |  | 95    |  | 8.0                 
|                |  |                    |  |       |  |        |  |       |  |                     

Twenty
four of the 44 aircraft owned by Alaska as of December 31, 2000 are subject to liens securing long-term debt. Alaska's leased B737-200C,
B737-400 and MD-80 aircraft have lease expiration dates in 2001, between 2002 and 2016, and between 2001 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 Notes to Financial Statements.

At
December 31, 2000, 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 restricts 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

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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

In December 1998, search warrants and a grand jury subpoena (for the U.S. District Court for the Northern District of California) were served on Alaska,
initiating an investigation into the Company's Oakland maintenance base by the U.S. Attorney for the Northern District of California. Alaska has cooperated with the U.S. Attorney's initial and
subsequent requests for information concerning the Company's maintenance operations. In addition, the Federal Aviation Administration (FAA) issued a
Letter of Investigation (LOI) to Alaska relating to maintenance performed on an MD-80 aircraft. In April 1999, the FAA issued a notice of proposed civil penalty for $44,000. In
July 1999, Alaska responded informally to the notice, disputing that any violation occurred, and to date the FAA has not taken any further action. The Company understands that information
developed by the National Transportation Safety Board in connection with the crash of Flight 261 on January 31, 2000 is being shared with the U.S. Attorney and that the U.S. Attorney is using
this information, along with other records relating to the aircraft Alaska has produced, to evaluate whether any crimes were committed in connection with Flight 261. To the Company's knowledge, no
charges have been filed as a result of the grand jury investigation.

Alaska
is currently a defendant in a number of lawsuits relating to Flight 261. Between February 14, 2000 and the present, 82 wrongful death suits have been filed against
Alaska Airlines as a result of Flight 261. The Boeing Company, the manufacturer of the aircraft's horizontal stabilizer jackscrew assembly and the manufacturer of the grease used to lubricate the
jackscrew have also been named in the lawsuits. The suits were filed in federal courts in California, Illinois and Washington, as well as in state courts in Washington, Alaska and California. In early
July 2000 all of the cases (except the Washington state court case) were consolidated in the U.S. District Court for the Northern District of California. The plaintiffs seek unspecified
compensatory and punitive damages. Although Alaska disputes the availability of punitive damages, it has stated in a court hearing its desire to settle all of the cases for full compensatory damages
without contesting liability. The Company is unable to predict the amount of claims that may ultimately be made against it or how those claims might be resolved. Consistent with industry standards,
the Company maintains insurance against aircraft accidents.

In
April 2000, the FAA began an audit of Alaska's maintenance and flight operations departments to ensure adherence to mandated procedures. During the audit, the FAA requested
that Alaska take a number of actions, which Alaska has done or is currently implementing. In June 2000, the FAA informed Alaska that it was proposing to amend Alaska's operations specification
to suspend the Company's ability to perform heavy maintenance on its aircraft. In June 2000, Alaska submitted an Airworthiness and Operations Action Plan describing numerous steps Alaska would
take to address the FAA's concerns. In response to this plan the FAA withdrew its proposal. The FAA also requested that the Company submit a growth plan to demonstrate its ability to handle
operationally its planned fleet additions. In June 2000, Alaska submitted its growth plan to the FAA. In July 2000, Alaska responded in writing to each of the FAA's findings from its
April audit. The FAA has issued a number of LOIs stemming from the resulting increased FAA oversight. Alaska is investigating and responding to these LOIs. In December 2000, Alaska received
notices of proposed civil penalties, totaling approximately $1 million, relating to some of these LOIs. The Company has not been informed what further actions, if any, the FAA intends to take
with respect to these matters.

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The
Company cannot predict the outcome of any of the pending civil or potential criminal proceedings described above. As a result, the Company can give no assurance that these
proceedings, if determined adversely to Alaska, would not have a material adverse effect on the financial position or results of operations of the Company. However, while we cannot predict the outcome
of these matters, management believes their ultimate disposition 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.

PART II

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

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

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

Industry Conditions

The airline industry is cyclical. Generally speaking, economic conditions have been strong during the years covered by this discussion. 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 strong economy has increased employee turnover and put upward pressure on labor costs. Fuel prices
have been volatile in the last three years. For Alaska Airlines, fuel cost per gallon decreased 25% in 1998, increased 23% in 1999 and increased 54% in 2000.

In
recent years, airlines have reduced their ticket distribution costs by capping travel agent commissions, by decreasing commission rates from 10% to 5%, by partially eliminating
paper tickets and by selling tickets directly to passengers via the Internet.

RESULTS OF OPERATIONS

2000 Compared with 1999In 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 $56.9 million cumulative effect charge, net of income taxes of
$35.6 million, effective January 1, 2000. The loss before accounting change for 2000 was $7.4 million, compared with net income of $119.4 million in 1999. The 1999 results
(fourth quarter impact) included an after-tax gain on sale of shares in Equant N.V. of $2.2 million. The operating loss was $13.6 million in 2000 compared with an operating
income of $176.3 million in 1998. Higher fuel prices increased operating expenses by approximately $104 million. Airline financial and statistical data is shown following the financial
statements. A discussion of this data follows.

Revenues

Capacity increased 2.8% in the first quarter due to normal growth but decreased 1.3% in the second quarter due to maintenance delays. Capacity was then reduced
3.2% in the third quarter in order to improve schedule reliability. Finally, capacity increased 1.5% in the fourth quarter as schedule reliability returned to near-normal levels. For the
full year 2000, capacity was flat but traffic grew by 1.8%, resulting in a 1.3 point increase in passenger load factor. The Canada and Lower 48

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states-to-Alaska markets experienced the largest increases in load factor. Passenger yields were up 4.6% (3.2% excluding the impact of a new accounting method for the sale of
miles), primarily due to fuel-related fare increases. Yields were up in virtually all major markets. The higher traffic combined with the higher yield resulted in a 6.5% increase in
passenger revenue.

Freight
and mail revenues decreased 4.5%, primarily due to 6.7% lower freight volumes that resulted from 1.8% fewer flights operated, lower seafood shipments and more competition.

Other-net
revenues decreased $26.5 million (32.6%), due to the change in accounting for the sale of miles in Alaska's frequent flyer program. If the new accounting
method had been in effect in 1999, other-net revenues would have increased $3.7 million (7.3%).

Expenses

Operating expenses grew by 17.2% as a result of an 17.3% increase in cost per ASM. The increase in cost per ASM was largely due to higher fuel prices, higher
labor and aircraft maintenance costs and a special charge related to Mileage Plan estimates. Explanations of significant year-over-year changes in the components of operating
expenses are as follows:



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Nonoperating Income (Expense)Net nonoperating income decreased $14.7 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 sale of shares in Equant N.V. (a telecommunication network company
owned by many airlines) was recorded in December 1999.

Liquidity and Capital Resources

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

|                                                                                                  |  | December 31, 1999 |         | December 31, 2000 |   | Change 
|------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | ----------------- | - | -------
|
|Cash and marketable securities                                                                    |  | $                 | 328.8   |                   | $ | 461.6  
|Working capital (deficit)                                                                         |  |                   | (116.3  | )                 |   | 159.4  
|Long-term debt and capital lease obligations                                                      |  |                   | 337.0   |                   |   | 609.2  
|Shareholder's equity                                                                              |  |                   | 668.9   |                   |   | 703.6  
|Debt-to-capital                                                                                   |  |                   | 34%:66% |                   |   | 46%:54%
|Debt-to-capital assuming aircraft operating leases are capitalized at seven times annualized rent |  |                   | 67%:33% |                   |   | 70%:30%

2000 Financial ChangesThe Company's cash and marketable securities portfolio increased by $132.8 million during
2000. Operating activities provided $197.7 million of cash during this period. Additional cash was provided by the issuance of $338.2 million of new debt. Another $37.2 million
was provided by insurance proceeds from an aircraft accident and other asset dispositions. Cash was used for $373.4 million of capital expenditures, including the purchase of seven new Boeing
737 aircraft, flight
equipment deposits and airframe and engine overhauls, and for $65.8 million of debt and capital lease repayment.

Shareholder's
equity increased $34.7 million due to a $99.0 million capital contribution from Alaska Air Group, which was partly offset by the net loss of
$64.3 million.

Financing ActivitiesDuring 2000, Alaska issued $238.2 million of 12-year debt secured by flight
equipment. $148.2 million of the new debt has fixed interest rates of approximately 7.6%. Interest rates on the other $90.0 million varies with LIBOR. Alaska also issued
$100.0 million of unsecured debt, which is expected to be repaid in 2003 and 2004 and has an interest rate that varies with LIBOR.

Aircraft AccidentOn January 31, 2000, Alaska Airlines Flight 261 from Puerto Vallarta en route to San
Francisco, went down in the water off the coast of California near Point Mugu. The flight carried 83 passengers and five crew members. There were no survivors. At present, 82 wrongful death lawsuits
have been filed against Alaska. The plaintiffs seek unspecified compensatory and punitive damages. Because the Company cannot predict the outcome of this litigation, it can give no assurance that
these proceedings, if determined adversely to Alaska, would not have a material adverse effect on the financial position or results of operations of the Company. While we cannot predict or quantify
the

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outcome of these matters, management believes their ultimate disposition is not likely to materially affect the Company's financial position or results of operations. Consistent with industry
standards, the Company maintains insurance against aircraft accidents. The Company expects substantially all accident response and civil litigation costs to be covered by insurance.

Safety ActivitiesIn March 2000, to enhance existing lines of communication, Alaska established a "safety
hotline" for employees to contact the chairman's office directly regarding any safety concern. In April 2000, an independent team of outside safety experts began a full audit of the
maintenance, flight operations, hazardous materials handling and security areas of Alaska. The team presented its final report to Alaska in June 2000 and Alaska is implementing those
recommendations. In November 2000, the team returned to review progress on its recommendations and to assist Alaska in focusing its ongoing safety efforts. Alaska has also hired a vice
president of safety, who reports directly to the chairman.

CommitmentsAs of December 31, 2000, the Company had firm orders for 16 aircraft requiring aggregate payments of
approximately $365 million, as set forth below. In addition, Alaska has options to acquire
26 more B737s. Alaska expects to finance the new planes with leases, long-term debt or internally generated cash.

Delivery PeriodFirm OrdersAircraft

2001

2002

TotalBoeing B737-700


3





3Boeing B737-900


5


8
*

13Total


8


8


16Payments (Millions)

$
239

$
126

$
365


*
Seven of these firm orders may be converted to other Next Generation Boeing 737 aircraft.

Deferred TaxesAt December 31, 2000, net deferred tax liabilities were $107 million, which includes
$156 million of net temporary differences offset by $49 million of deferred tax assets.

New Accounting StandardsEffective January 1, 2001, the Company will adopt Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. SFAS 133 requires companies to record derivatives on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge
accounting. If the derivative qualifies as a hedge, the change in its fair value will be recognized in other comprehensive income until the hedged item is recognized in earnings. At
December 31, 2000, the Company's fuel hedge contracts had an estimated fair value of $1.6 million, with unrealized losses of $1.0 million.

Market RiskThe Company does not purchase or hold any derivative financial instruments for trading purposes. The
Company has material market 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 last half of 2000 resulted in a
gain of $3.8 million. At December 31, 2000, the Company had purchased crude oil call options in place to hedge approximately 23% of its 2001 expected jet fuel requirements. A
hypothetical 10% increase in jet fuel prices would increase 2001 fuel expense by approximately $25 million. This analysis includes the effect of the fuel hedging contracts in place at
December 31, 2000.

10

---

ITEM 8. FINANCIAL STATEMENTS

See Item 14.

ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

PART IV

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

|                                                                                                                             |  | Page(s)
|---------------------------------------------------------------------------------------------------------------------------- |  | -------
|Balance Sheet as of December 31, 1999 and 2000                                                                               |  | 13-14  
|Statement of Income for the years ended December 31, 1998, 1999 and 2000                                                     |  | 15     
|Statement of Shareholder's Equity for the years ended December 31, 1998, 1999 and 2000                                       |  | 16     
|Statement of Cash Flows for the years ended December 31, 1998, 1999 and 2000                                                 |  | 17     
|Notes to Financial Statements                                                                                                |  | 18-29  
|Report of Independent Public Accountants                                                                                     |  | 31     
|(2) Financial Statement Schedule II, Valuation and Qualifying Accounts,
for the years ended December 31, 1998, 1999 and 2000 |  | 32     

See
Exhibit Index on page 33.

11

---

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/JOHN F. KELLYJohn F. Kelly Chairman and Chief Executive Officer

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on February 13, 2001 on behalf of the registrant
and in the capacities indicated.

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

12

---



BALANCE SHEETS        Alaska Airlines, Inc.

ASSETS

|As of December 31
(In Millions)                                             |  | 1999 |         | 2000
|--------------------------------------------------------------------------- |  | ---- | ------- | ----
|Current Assets                                                              |  |      |         |     
|Cash and cash equivalents                                                   |  | $    | 132.3   |     
|Marketable securities                                                       |  |      | 196.5   |     
|Receivables from related companies                                          |  |      | 27.1    |     
|Receivablesless allowance for doubtful accounts (1999  $0.9; 2000  $1.7) |  |      | 70.9    |     
|Inventories and supplies                                                    |  |      | 29.9    |     
|Prepaid expenses and other assets                                           |  |      | 120.5   |     
|                                                                            |  |      |         |     
|Total Current Assets                                                        |  |      | 577.2   |     
|                                                                            |  |      |         |     
|Property and Equipment                                                      |  |      |         |     
|Flight equipment                                                            |  |      | 1,286.2 |     
|Other property and equipment                                                |  |      | 280.1   |     
|Deposits for future flight equipment                                        |  |      | 163.8   |     
|                                                                            |  |      |         |     
|                                                                            |  |      | 1,730.1 |     
|Less accumulated depreciation & amortization                                |  |      | 421.6   |     
|                                                                            |  |      |         |     
|                                                                            |  |      | 1,308.5 |     
|                                                                            |  |      |         |     
|Capital leases:                                                             |  |      |         |     
|Flight and other equipment                                                  |  |      | 44.4    |     
|Less accumulated amortization                                               |  |      | 31.6    |     
|                                                                            |  |      |         |     
|                                                                            |  |      | 12.8    |     
|                                                                            |  |      |         |     
|Total Property and EquipmentNet                                            |  |      | 1,321.3 |     
|                                                                            |  |      |         |     
|Intangible Assets                                                           |  |      | 13.5    |     
|                                                                            |  |      |         |     
|Other Assets                                                                |  |      | 69.2    |     
|                                                                            |  |      |         |     
|Total Assets                                                                |  | $    | 1,981.2 |     
|                                                                            |  |      |         |     

See
accompanying notes to financial statements.

13

---

BALANCE SHEETS        Alaska Airlines, Inc.

LIABILITIES AND SHAREHOLDER'S EQUITY

|As of December 31
(In Millions Except Share Amounts)                                 |  | 1999 |         | 2000
|------------------------------------------------------------------------------------ |  | ---- | ------- | ----
|Current Liabilities                                                                  |  |      |         |     
|Accounts payable                                                                     |  | $    | 88.3    |     
|Payables to related companies                                                        |  |      | 126.9   |     
|Accrued aircraft rent                                                                |  |      | 68.3    |     
|Accrued wages, vacation and payroll taxes                                            |  |      | 70.7    |     
|Other accrued liabilities                                                            |  |      | 89.6    |     
|Air traffic liability                                                                |  |      | 183.2   |     
|Current portion of long-term debt and capital lease obligations                      |  |      | 66.5    |     
|                                                                                     |  |      |         |     
|Total Current Liabilities                                                            |  |      | 693.5   |     
|                                                                                     |  |      |         |     
|Long-Term Debt & Capital Lease Obligations                                           |  |      | 337.0   |     
|                                                                                     |  |      |         |     
|Other Liabilities and Credits                                                        |  |      |         |     
|Deferred income taxes                                                                |  |      | 143.3   |     
|Deferred revenue                                                                     |  |      | 34.2    |     
|Other liabilities                                                                    |  |      | 104.3   |     
|                                                                                     |  |      |         |     
|                                                                                     |  |      | 281.8   |     
|                                                                                     |  |      |         |     
|Commitments                                                                          |  |      |         |     
|                                                                                     |  |      |         |     
|Shareholder's Equity                                                                 |  |      |         |     
|Common stock, $1 par value Authorized: 1,000 shares Issued: 1999 and 2000500 shares |  |      |        |     
|Capital in excess of par value                                                       |  |      | 225.8   |     
|Retained earnings                                                                    |  |      | 443.1   |     
|                                                                                     |  |      |         |     
|                                                                                     |  |      | 668.9   |     
|                                                                                     |  |      |         |     
|Total Liabilities and Shareholder's Equity                                           |  | $    | 1,981.2 |     
|                                                                                     |  |      |         |     

See
accompanying notes to financial statements.

14

---



STATEMENTS OF INCOME        Alaska Airlines, Inc.

|Year Ended December 31
(In Millions)                                         |  | 1998 |         | 1999 |   | 2000    |  
|---------------------------------------------------------------------------- |  | ---- | ------- | ---- | - | ------- | -
|Operating Revenues                                                           |  |      |         |      |   |         |  
|Passenger                                                                    |  | $    | 1,410.4 |      | $ | 1,519.6 |  
|Freight and mail                                                             |  |      | 83.7    |      |   | 80.0    |  
|Othernet                                                                    |  |      | 72.2    |      |   | 81.2    |  
|                                                                             |  |      |         |      |   |         |  
|Total Operating Revenues                                                     |  |      | 1,566.3 |      |   | 1,680.8 |  
|                                                                             |  |      |         |      |   |         |  
|Operating Expenses                                                           |  |      |         |      |   |         |  
|Wages and benefits                                                           |  |      | 485.8   |      |   | 523.9   |  
|Contracted services                                                          |  |      | 48.7    |      |   | 55.6    |  
|Aircraft fuel                                                                |  |      | 162.3   |      |   | 205.2   |  
|Aircraft maintenance                                                         |  |      | 77.6    |      |   | 96.0    |  
|Aircraft rent                                                                |  |      | 158.9   |      |   | 157.2   |  
|Food and beverage service                                                    |  |      | 49.1    |      |   | 49.1    |  
|Commissions                                                                  |  |      | 94.4    |      |   | 91.0    |  
|Other selling expenses                                                       |  |      | 75.2    |      |   | 82.2    |  
|Depreciation and amortization                                                |  |      | 61.9    |      |   | 67.9    |  
|Loss (gain) on disposition of assets                                         |  |      | 1.0     |      |   | 0.4     |  
|Landing fees and other rentals                                               |  |      | 59.4    |      |   | 66.5    |  
|Other                                                                        |  |      | 98.0    |      |   | 109.5   |  
|Special chargeMileage Plan                                                  |  |      |        |      |   |        |  
|                                                                             |  |      |         |      |   |         |  
|Total Operating Expenses                                                     |  |      | 1,372.3 |      |   | 1,504.5 |  
|                                                                             |  |      |         |      |   |         |  
|Operating Income (Loss)                                                      |  |      | 194.0   |      |   | 176.3   |  
|                                                                             |  |      |         |      |   |         |  
|Nonoperating Income (Expense)                                                |  |      |         |      |   |         |  
|Interest income                                                              |  |      | 23.2    |      |   | 21.7    |  
|Interest expense                                                             |  |      | (17.4   | )    |   | (16.3   | )
|Interest capitalized                                                         |  |      | 5.1     |      |   | 8.3     |  
|Othernet                                                                    |  |      | (14.4   | )    |   | 6.4     |  
|                                                                             |  |      |         |      |   |         |  
|                                                                             |  |      | (3.5    | )    |   | 20.1    |  
|                                                                             |  |      |         |      |   |         |  
|Income (loss) before income tax and accounting change                        |  |      | 190.5   |      |   | 196.4   |  
|Income tax expense (credit)                                                  |  |      | 74.0    |      |   | 77.0    |  
|                                                                             |  |      |         |      |   |         |  
|Income (loss) before accounting change                                       |  |      | 116.5   |      |   | 119.4   |  
|Cumulative effect of accounting change, net of income taxes of $35.6 million |  |      |        |      |   |        |  
|                                                                             |  |      |         |      |   |         |  
|Net Income (Loss)                                                            |  | $    | 116.5   |      | $ | 119.4   |  
|                                                                             |  |      |         |      |   |         |  

See
accompanying notes to financial statements.

15

---

STATEMENTS OF SHAREHOLDER'S EQUITY        Alaska Airlines, Inc.

|(In Millions)                              |  | Common
Stock |   | Capital in
Excess of
Par Value |   | Retained
Earnings |  | Total |      
|------------------------------------------ |  | ------------ | - | ------------------------------ | - | ----------------- |  | ----- | -----
|Balances at December 31, 1997              |  |              |  |                                | $ | 225.8             |  | $     | 207.2
|1998 net income                            |  |              |   |                                |   |                   |  |       | 116.5
|                                           |  |              |   |                                |   |                   |  |       |      
|Balances at December 31, 1998              |  | $            |  |                                |   | 225.8             |  |       | 323.7
|1999 net income                            |  |              |   |                                |   |                   |  |       | 119.4
|                                           |  |              |   |                                |   |                   |  |       |      
|Balances at December 31, 1999              |  | $            |  |                                |   | 225.8             |  |       | 443.1
|Capital contribution from Alaska Air Group |  |              |   |                                |   | 99.0              |  |       |      
|2000 net loss                              |  |              |   |                                |   |                   |  |       | (64.3
|                                           |  |              |   |                                |   |                   |  |       |      
|Balances at December 31, 2000              |  | $            |  |                                | $ | 324.8             |  | $     | 378.8
|                                           |  |              |   |                                |   |                   |  |       |      

See
accompanying notes to financial statements.

16

---



STATEMENTS OF CASH FLOWS        Alaska Airlines, Inc.

|Year Ended December 31
(In Millions)                      |                                               | 1998 |        | 1999  |   | 2000   |      
|--------------------------------------------------------- | --------------------------------------------- | ---- | ------ | ----- | - | ------ | -----
|Cash flows from operating activities:                     |                                               |      |        |       |   |        |      
|Net income (loss)                                         |                                               | $    | 116.5  |       | $ | 119.4  |      
|Adjustments to reconcile net income to cash:              |                                               |      |        |       |   |        |      
|                                                          | Cumulative effect of accounting change        |      |        |      |   |        |     
|                                                          | Special chargeMileage Plan                   |      |        |      |   |        |     
|                                                          | Depreciation and amortization                 |      |        | 61.9  |   |        | 67.9 
|                                                          | Amortization of airframe and engine overhauls |      |        | 34.7  |   |        | 43.5 
|                                                          | Loss on sale of assets                        |      |        | 1.0   |   |        | 0.4  
|                                                          | Increase in deferred income taxes             |      |        | 26.0  |   |        | 45.1 
|                                                          | Increase in accounts receivable               |      |        | (3.2  | ) |        | (25.0
|                                                          | Increase in other current assets              |      |        | (14.2 | ) |        | (23.0
|                                                          | Increase in air traffic liability             |      |        | 11.7  |   |        | 5.5  
|                                                          | Increase in other current liabilities         |      |        | 35.6  |   |        | 56.3 
|                                                          | Other-net                                     |      |        | 2.4   |   |        | 4.4  
|                                                          |                                               |      |        |       |   |        |      
|Net cash provided by operating activities                 |                                               |      | 272.4  |       |   | 294.5  |      
|                                                          |                                               |      |        |       |   |        |      
|Cash flows from investing activities:                     |                                               |      |        |       |   |        |      
|Proceeds from disposition of assets                       |                                               |      | 0.6    |       |   | 0.3    |      
|Purchases of marketable securities                        |                                               |      | (323.4 | )     |   | (137.8 | )    
|Sales and maturities of marketable securities             |                                               |      | 156.3  |       |   | 218.5  |      
|Restricted deposits                                       |                                               |      | (1.6   | )     |   | 5.6    |      
|Additions to flight equipment deposits                    |                                               |      | (143.4 | )     |   | (149.2 | )    
|Additions to property and equipment                       |                                               |      | (276.7 | )     |   | (333.6 | )    
|                                                          |                                               |      |        |       |   |        |      
|Net cash used in investing activities                     |                                               |      | (588.2 | )     |   | (396.2 | )    
|                                                          |                                               |      |        |       |   |        |      
|Cash flows from financing activities:                     |                                               |      |        |       |   |        |      
|Proceeds from sale and leaseback transactions             |                                               |      | 288.0  |       |   |       |      
|Proceeds from issuance of long-term debt                  |                                               |      |       |       |   | 232.0  |      
|Long-term debt and capital lease payments                 |                                               |      | (45.4  | )     |   | (27.1  | )    
|                                                          |                                               |      |        |       |   |        |      
|Net cash provided by financing activities                 |                                               |      | 242.6  |       |   | 204.9  |      
|                                                          |                                               |      |        |       |   |        |      
|Net change in cash and cash equivalents                   |                                               |      | (73.2  | )     |   | 103.2  |      
|Cash and cash equivalents at beginning of year            |                                               |      | 102.3  |       |   | 29.1   |      
|                                                          |                                               |      |        |       |   |        |      
|Cash and cash equivalents at end of year                  |                                               | $    | 29.1   |       | $ | 132.3  |      
|                                                          |                                               |      |        |       |   |        |      
|Supplemental disclosure of cash paid during the year for: |                                               |      |        |       |   |        |      
|                                                          | Interest (net of amount capitalized)          |      | $      | 13.1  |   | $      | 7.0  
|                                                          | Income taxes                                  |      |        | 48.5  |   |        | 34.9 

Noncash investing and financing activities:

|1998 |  | A $54.0 million note payable to Alaska Air Group was exchanged for a non-interest bearing payable to Alaska Air Group.                                                         
|---- | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1999 |  | A flight simulator was transferred to Alaska Air Group Leasing in exchange for an $8.8 million note receivable and a $2.2 million reduction in its payable to Alaska Air Group.
|2000 |  | A $99.0 million capital contribution from Alaska Air Group was used to reduce a non-interest bearing payable to Alaska Air Group.                                              
|     |   | A flight simulator was transferred to Alaska Air Group Leasing in exchange for a $2.4 million note receivable and a $0.8 million reduction in its payable to Alaska Air Group. 

See accompanying notes to financial statements.

17

---



NOTES TO FINANCIAL STATEMENTS        Alaska Airlines, Inc.        December 31, 2000

Note 1. Summary of Significant Accounting Policies

Organization and Nature of Operations

Alaska Airlines, Inc. (Alaska or the Company), an Alaska corporation, is a wholly owned subsidiary of Alaska Air Group, Inc. (Air Group), a
Delaware corporation. Air Group is also the parent company of Alaska Air Group Leasing (AAGL) and Horizon Air Industries, Inc. (Horizon). Alaska is a major airline serving Alaska; Vancouver,
Canada; the U.S. West Coast and Mexico. It operates an all jet fleet and its average passenger trip is 886 miles.

Basis of Presentation

Preparation of financial statements 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 2000 presentation.

Cash and Cash Equivalents

Cash equivalents consist of highly liquid investments with purchase maturities of three months or less. They are carried at cost, which approximates market.
The Company reduces its cash balance when checks are disbursed. Due to the time delay in checks clearing the banks, the Company normally maintains a negative cash balance on its books which is
reported as a current liability. The amount of the negative cash balance was $19.0 million and $27.1 million at December 31, 1999 and 2000, respectively.

Inventories and Supplies

Expendable and repairable aircraft parts, as well as other materials and supplies, are stated at average cost. An allowance for obsolescence of flight
equipment expendable and repairable parts is accrued based on estimated disposal date and salvage value. Surplus inventories are carried at their net realizable value. The allowance at
December 31, 1999 and 2000 for all inventories was $18.5 million and $19.7 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

12/31/05*Boeing 737-400/700

20 yearsBoeing MD-80

20 yearsBuildings

10-30 yearsCapitalized leases and leasehold improvements

Term of leaseOther equipment

3-15 years


*
Estimated final aircraft retirement date

18

---

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 cost of
major airframe overhauls, engine overhauls, and other modifications which extend the life or improve the usefulness of aircraft are capitalized and amortized over their estimated period of use. Other
repair and maintenance costs are expensed when incurred. The Company periodically reviews long-lived assets for impairment.

Intangible Assets-Subsidiaries

The excess of the purchase price over the fair value of net assets acquired is recorded as an intangible asset and is amortized over 40 years.
Accumulated amortization at December 31, 1999 and 2000 was $6.9 million and $7.4 million, respectively.

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 these proceeds as revenue when the award transportation is provided. The deferred proceeds are recognized as passenger revenue for awards issued on Alaska and as other
revenue-net for awards issued on other airlines. See Note 10 for more information.

Deferred Revenue

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

Leased Aircraft Return Costs

The costs associated with returning leased aircraft are accrued over the lease periods. As leased aircraft are retired, the costs are charged against the
established reserve. The reserve is part of other liabilities, and at December 31, 1999 and 2000 was $43.2 million and $52.1 million, respectively.

Passenger Revenues

Passenger revenues are recognized when the passenger travels. Tickets sold but not yet used are reported as air traffic liability.

Contracted Services

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

19

---

Other Selling Expenses

Other selling expenses includes credit card commissions, computerized reservations systems (CRS) charges, Mileage Plan free travel awards, advertising and
promotional costs. Advertising production costs are expensed the first time the advertising takes place. Advertising expense was $15.5 million, $14.6 million, and $17.5 million,
respectively, in 1998, 1999 and 2000.

Capitalized Interest

Interest is capitalized on flight equipment purchase deposits and ground facility progress payments as a cost of the related asset and is depreciated over the
estimated useful life of the asset.

Income Taxes

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

Derivative Financial Instruments

The Company enters into foreign exchange forward contracts, generally with maturities of less than one month, to manage 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.
The differential to be paid or received from these agreements is accrued as interest rates change and is recognized currently in the income statement. At December 31, 2000, there were no
foreign currency contracts or interest rate swap agreements outstanding. The Company periodically enters into hedge agreements to reduce its exposure to fluctuations in the price of jet fuel.
Resulting gains and losses are recognized currently in fuel expense.

Effective
January 1, 2001, the Company will adopt Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as
amended. SFAS 133 requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. If the derivative qualifies as a hedge, the change in its fair value will be
recognized in other comprehensive income until the hedged item is recognized in earnings. At December 31, 2000, the Company's fuel hedge contracts for 75 million gallons of projected jet
fuel usage had an estimated fair value of $1.6 million, with unrealized losses of $1.0 million.

20

---

Note 2. Marketable Securities

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

1999

2000Cost:U.S. government securities

$
146.7

$
245.5Asset backed obligations


19.3


79.1Other corporate obligations


30.5


36.0$
196.5

$
360.6Fair value:U.S. government securities

$
146.2

$
246.3Asset backed obligations


19.1


79.5Other corporate obligations


29.9


36.4$
195.2

$
362.2


There
were no material unrealized holding gains or losses at December 31, 1999 or 2000.

Of
the marketable securities on hand at December 31, 2000, 57% are expected to mature in 2001, 42% in 2002 and 1% in 2003.

Based
on specific identification of securities sold, the following occurred in 1998, 1999 and 2000 (in millions):

1998

1999

2000Proceeds from sales

$
156.3

$
218.5

$
300.0Gross realized gains


0.2


0.4


0.3Gross realized losses





0.3


0.6


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

Note 3. Other Assets

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

1999

2000Restricted deposits

$
62.8

$
25.6Deferred costs and other


6.4


10.3$
69.2

$
35.9


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. The certificates had an estimated fair value of $2 million. Alaska's carrying value of the certificates wasde
minimis.

21

---

Note 4. Related Company Transactions

During 2000, Alaska transferred a flight simulator to AAGL in exchange for an $2.4 million note receivable from AAGL and a $0.6 million reduction
in its payable to Air Group. The loan has repayment terms of 12 years at 8.2% interest. AAGL is leasing the simulator to Alaska for 12 years.

In
October 2000, Air Group made a $99.0 million capital contribution to Alaska by reducing Alaska's payable to Air Group.

At
December 31, 2000, the receivables from related companies included $40.2 million from Horizon, $11.0 million from AAGL and $1.8 million from Air Group.

Note 5. Long-Term Debt and Capital Lease Obligations

At December 31, 1999 and 2000, long-term debt and capital lease obligations were as follows (in millions):

1999

20007.9%* fixed rate notes payable due through 2015

$
309.5

$
406.46.7%* variable rate notes payable due through 2012


73.5


251.7Long-term debt


383.0


658.1Capital lease obligations


20.5


17.8Less current portion


(66.5
)

(66.7
)$
337.0

$
609.2


*
weighted average for 2000

At
December 31, 2000, borrowings of $558.1 million are secured by flight equipment and real property. During 2000, Alaska issued $238.2 million of
12-year debt secured by flight equipment. $148.2 million of the new debt has fixed interest rates of approximately 7.6%. Interest rates on the other $90.0 million varies with
LIBOR. Alaska also issued $100.0 million of unsecured debt, which is expected to be repaid in 2003 and 2004, and has an interest rate which varies with LIBOR.

At
December 31, 2000, Alaska had a credit facility with commercial banks that allows it to borrow up to $150 million until December 2004. Borrowings under this
facility bear interest at a rate that varies based on LIBOR. At December 31, 2000, no borrowings were outstanding under this credit facility.

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, 2000 the Company was in compliance with all loan provisions, and under the most restrictive loan provisions, Alaska had
$301 million of net worth above the minimum.

22

---

At December 31, 2000, long-term debt principal payments for the next five years were (in millions):

2001

$
62.82002

$
31.22003

$
52.82004

$
122.42005

$
24.9


Note 6. Commitments

Lease Commitments

Lease contracts for 51 aircraft have remaining lease terms of one to 16 years. The majority of airport and terminal facilities are also leased. Total
rent expense was $193.6 million, $192.5 million and $188.1 million, in 1998, 1999 and 2000, respectively. Future minimum lease payments under long-term operating
leases and capital leases as of December 31, 2000 are shown below (in millions):

Operating
Aircraft

Leases
Facilities

Capital
Leases2000

$
128.9

$
20.7

$
4.12001


129.5


11.0


4.12002


113.7


9.0


4.12003


89.6


7.5


8.42004


85.0


7.2


0.2Thereafter


715.6


70.4


0.2Total lease payments

$
1,262.3

$
126.1


21.1Less amount representing interest








(3.3
)Present value of capital lease payments







$
17.8


Aircraft Commitments

The Company has firm orders for 16 Boeing 737 series aircraft to be delivered between 2001 and 2002. The firm orders require payments of approximately
$365 million between 2001 and 2002. As of December 31, 2000, deposits of $181 million related to the firm orders had been made. In addition to the ordered aircraft, the Company
holds purchase options on 26 Boeing 737s.

23

---

Note 7. Employee Benefit Plans

Pension Plans

Four defined benefit and four defined contribution retirement plans cover essentially all employees. The defined benefit plans provide benefits based on an
employee's term of service and average compensation for a specified period of time before retirement. Pension plans are funded as required by the Employee Retirement Income Security Act of 1974
(ERISA). The defined benefit plan assets consist primarily of marketable equity and fixed income securities.. The following table sets forth the status of the plans for 1999 and 2000 (in millions):

1999

2000Projected benefit obligationBeginning of year

$
371.8

$
369.3Service cost


25.8


24.0Interest cost


25.3


28.5Amendments


9.8


0.7Change in assumptions


(54.9
)

16.0Actuarial gain


(1.9
)

0.9Benefits paid


(6.6
)

(9.2
)End of year

$
369.3

$
430.2Plan assets at fair valueBeginning of year

$
373.0

$
437.1Actual return on plan assets


27.8


5.8Employer contributions


42.9


5.0Benefits paid


(6.6
)

(9.2
)End of year

$
437.1

$
438.7Funded status


67.8


8.5Unrecognized loss (gain)


(40.7
)

13.9Unrecognized transition asset


(0.1
)

(0.1
)Unrecognized prior service cost


54.8


51.0Prepaid pension cost

$
81.8

$
73.3Weighted average assumptions as of December 31Discount rate


7.75
%

7.50
%Expected return on plan assets


10.0
%

10.0
%Rate of compensation increase


5.4
%

5.4
%


24

---

Net
pension expense for the defined benefit plans included the following components for 1998, 1999 and 2000 (in millions):

1998

1999

2000Service cost

$
22.4

$
25.8

$
24.0Interest cost


21.9


25.3


28.5Expected return on assets


(28.7
)

(36.7
)

(43.4
)Amortization of prior service cost


3.8


4.4


4.5Recognized actuarial Loss (gain)





0.1


(0.1
)Amortization of transition asset


(0.2
)

(0.2
)

Net pension expense

$
19.2

$
18.7

$
13.5


Alaska
and Horizon also maintain an unfunded, noncontributory benefit plan for certain elected officers. The $26 million unfunded accrued pension cost for this plan was accrued
as of December 31, 2000.

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 $6.7 million, $8.0 million and $10.7 million, respectively, in 1998, 1999 and 2000.

Profit Sharing Plans

Alaska has an employee profit sharing plan. Profit sharing expense for 1998, 1999 and 2000 was $19.7 million, $18.4 million and
$0.0 million, respectively.

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 at December 31, 1999 and 2000 was $25.4 million and $28.7 million, respectively. The APBO is unfunded and is included with other
liabilities on the Consolidated Balance Sheet. Annual expense related to this subsidy is not considered material to disclose.

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.

25

---

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):

1999

2000Excess of tax over book depreciation

$
190.1

$
203.0Employee benefits


5.7


8.2Othernet


3.3


5.6Gross deferred tax liabilities


199.1


216.8Loss carryforward


(0.1
)

Alternative minimum tax


(3.5
)

(0.1
)Capital leases


(3.4
)

(2.4
)Ticket pricing adjustments


(1.6
)

(1.5
)Frequent flyer program


(14.9
)

(70.8
)Aircraft return provisions


(13.0
)

(13.8
)Deferred gains


(12.7
)

(11.6
)Capitalized interest


(0.9
)

(1.5
)Inventory obsolescence


(7.6
)

(8.0
)Gross deferred tax assets


(57.7
)

(109.7
)Net deferred tax liabilities

$
141.4

$
107.1Current deferred tax asset

$
(1.9
)
$
(49.3
)Noncurrent deferred tax liability


143.3


156.4Net deferred tax liabilities

$
141.4

$
107.1


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

1998

1999

2000Current tax expense (credit):Federal

$
38.0

$
20.8

$
(1.4
)State


7.7


6.7


0.1Total current


45.7


27.5


(1.3
)Deferred tax expense (credit):Federal


27.0


46.3


0.9State


1.3


3.2


(0.4
)Total deferred


28.3


49.5


0.5Total before acctg. change


74.0


77.0


(0.8
)Deferred tax credit, cumulative effect of acctg. change








(35.6
)Total tax expense (credit)

$
74.0

$
77.0

$
(36.4
)


26

---

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

|                                                      |  | 1998 |       | 1999 |   | 2000  |  
|----------------------------------------------------- |  | ---- | ----- | ---- | - | ----- | -
|Income (loss) before income tax and accounting change |  | $    | 190.5 |      | $ | 196.4 |  
|                                                      |  |      |       |      |   |       |  
|Expected tax expense (credit)                         |  | $    | 66.7  |      | $ | 68.7  |  
|Nondeductible expenses                                |  |      | 2.0   |      |   | 1.6   |  
|State income tax                                      |  |      | 6.1   |      |   | 6.6   |  
|Othernet                                             |  |      | (0.8  | )    |   | 0.1   |  
|                                                      |  |      |       |      |   |       |  
|Actual tax expense                                    |  | $    | 74.0  |      | $ | 77.0  |  
|                                                      |  |      |       |      |   |       |  
|Effective tax rate                                    |  |      | 38.8  | %    |   | 39.2  | %
|                                                      |  |      |       |      |   |       |  

After
consideration of temporary differences, taxable income for 2000 was approximately $12 million.

Note 9. Financial Instruments

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

December 31, 1999Carrying Amount

Fair
ValueCash and cash equivalents

$
132.3

$
132.3Marketable securities


196.5


195.2Restricted deposits and depository certificates


62.8


69.8Long-term debt


383.0


383.0


December 31, 2000Carrying
Amount

Fair
ValueCash and cash equivalents

$
101.0

$
101.0Marketable securities


360.6


362.2Fuel hedge contracts


2.6


1.6Restricted deposits and depository certificates


25.6


27.6Long-term debt


658.1


678.1


The
fair value of cash equivalents approximates carrying value due to the short maturity of these instruments. The fair value of marketable securities is based on quoted market
prices. The fair value of fuel hedge contracts is based on commodity exchange prices. The fair value of restricted deposits approximates the carrying amount. At December 31, 1999, the fair
value of restricted depository certificates convertible into the common stock of Equant N.V. was $7 million based on sales of Equant N.V. stock in 1999. At December 31, 2000, the fair
value of these certificates was $2 million based on a purchase offer from an independent organization. The fair value of long-term debt is based on a discounted cash flow analysis.

27

---

Note 10. Frequent Flyer Program

Change in Accounting Principle

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

Proforma Results (Unaudited)

The change in accounting for the sale of miles, if applied to prior years, would have produced these pro forma results (in millions).

1998

1999

2000Income (loss) before acctg. change:As reported

$
116.5

$
119.4

$
(7.4
)Pro forma


109.4


114.1


(7.4
)


Special ChargeMileage Plan

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

Balance Sheet Classification of Liabilities

Alaska's Mileage plan liabilities are included under the following balance sheet captions at December 31 (in millions):

1999

2000Current Liabilities:Other accrued liabilities

$
40.0

$
59.5Other Liabilities and Credits:Deferred revenue





94.0Other liabilities





45.0Total

$
40.0

$
198.5


28

---

Note 11. Contingencies

In
December 1998, search warrants and a grand jury subpoena (for the U.S. District Court for the Northern District of California) were served on Alaska, initiating an
investigation into the Company's Oakland maintenance base by the U.S. Attorney for the Northern District of California. Alaska has cooperated with the U.S. Attorney's initial and subsequent requests
for information concerning the Company's maintenance operations. In addition, the Federal Aviation Administration (FAA) issued a letter of investigation (LOI) to Alaska relating to maintenance
performed on an MD-80 aircraft. In April 1999, the FAA issued a notice of proposed civil penalty for $44,000. In July 1999, Alaska responded informally to the notice,
disputing that any violation occurred, and to date the FAA has not taken any further action. The Company understands that information developed by the National Transportation Safety Board in
connection with the crash of Flight 261 on January 31, 2000 is being shared with the U.S. Attorney and that the U.S. Attorney is using this information, along with other records relating to the
aircraft Alaska has produced, to evaluate whether any crimes were committed in connection with Flight 261. To the Company's knowledge, no charges have been filed as a result of the grand jury
investigation.

Alaska
is currently a defendant in a number of lawsuits relating to Flight 261. The Company is unable to predict the amount of claims that may ultimately be made against it or how
those claims might be resolved. Consistent with industry standards, the Company maintains insurance against aircraft accidents.

In
April 2000, the FAA began an audit of Alaska's maintenance and flight operations departments to ensure adherence to mandated procedures. During the audit, the FAA requested
that Alaska take a number of actions, which Alaska has done or is currently implementing. In June 2000, the FAA informed Alaska that it was proposing to amend Alaska's operations specification
to suspend the Company's ability to perform heavy maintenance on its aircraft. In June 2000, Alaska submitted an Airworthiness and Operations Action Plan describing numerous steps Alaska would
take to address the FAA's concerns. In response to this plan the FAA withdrew its proposal. The FAA also requested that the Company submit a growth plan to demonstrate its ability to handle
operationally its planned fleet additions. In June 2000, Alaska submitted its growth plan to the FAA. In July 2000, Alaska responded in writing to each of the FAA's findings from its
April audit. The FAA has issued a number of LOIs stemming from the resulting increased FAA oversight. Alaska is investigating and responding to these LOIs. In December 2000, Alaska received
notices of proposed civil penalties, totaling approximately $1 million, relating to some of these LOIs. The Company has not been informed what further actions, if any, the FAA intends to take
with respect to these matters.

The
Company cannot predict the outcome of any of the pending civil or potential criminal proceedings described above. As a result, the Company can give no assurance that these
proceedings, if determined adversely to Alaska, would not have a material adverse effect on the financial position or results of operations of the Company. However, while we cannot predict or quantify
the outcome of these matters, management believes their ultimate disposition is not likely to materially affect the Company's financial position or results of operations. This forward-looking
statement is based on management's current understanding of the relevant law and facts; it is subject to various contingencies, including the potential costs and risks associated with litigation and
the actions of judges and juries.

29

---



Alaska Airlines Financial and Statistical Data

|                                                      |  | Quarter Ended December 31 |       | Year Ended December 31 |  
|----------------------------------------------------- |  | ------------------------- | ----- | ---------------------- | -
|
|Operating Revenues:                                   |  |                           |       |                        |  
|Passenger                                             |  | $                         | 362.5 |                        | $
|Freight and mail                                      |  |                           | 19.4  |                        |  
|Othernet                                             |  |                           | 22.3  |                        |  
|                                                      |  |                           |       |                        |  
|Total Operating Revenues                              |  |                           | 404.2 |                        |  
|                                                      |  |                           |       |                        |  
|Operating Expenses:                                   |  |                           |       |                        |  
|Wages and benefits                                    |  |                           | 131.1 |                        |  
|Employee profit sharing                               |  |                           | 2.3   |                        |  
|Contracted services                                   |  |                           | 14.9  |                        |  
|Aircraft fuel                                         |  |                           | 61.0  |                        |  
|Aircraft maintenance                                  |  |                           | 26.9  |                        |  
|Aircraft rent                                         |  |                           | 36.7  |                        |  
|Food and beverage service                             |  |                           | 12.1  |                        |  
|Commissions                                           |  |                           | 17.8  |                        |  
|Other selling expenses                                |  |                           | 20.5  |                        |  
|Depreciation and amortization                         |  |                           | 18.7  |                        |  
|Loss on sale of assets                                |  |                           | 0.0   |                        |  
|Landing fees and other rentals                        |  |                           | 14.8  |                        |  
|Other                                                 |  |                           | 28.6  |                        |  
|Special chargeMileage Plan                           |  |                           | 0.0   |                        |  
|                                                      |  |                           |       |                        |  
|Total Operating Expenses                              |  |                           | 385.4 |                        |  
|                                                      |  |                           |       |                        |  
|Operating Income (Loss)                               |  |                           | 18.8  |                        |  
|                                                      |  |                           |       |                        |  
|Interest income                                       |  |                           | 5.4   |                        |  
|Interest expense                                      |  |                           | (5.2  | )                      |  
|Interest capitalized                                  |  |                           | 2.5   |                        |  
|Othernet                                             |  |                           | 3.4   |                        |  
|                                                      |  |                           |       |                        |  
|                                                      |  |                           | 6.1   |                        |  
|                                                      |  |                           |       |                        |  
|Income (Loss) Before Income Tax and Accounting Change |  | $                         | 24.9  |                        | $
|                                                      |  |                           |       |                        |  
|Operating Statistics:                                 |  |                           |       |                        |  
|Revenue passengers (000)                              |  |                           | 3,296 |                        |  
|RPMs (000,000)                                        |  |                           | 2,834 |                        |  
|ASMs (000,000)                                        |  |                           | 4,316 |                        |  
|Passenger load factor                                 |  |                           | 65.7  | %                      |  
|Breakeven load factor                                 |  |                           | 61.7  | %                      |  
|Yield per passenger mile                              |  |                           | 12.79 | ¢                      |  
|Operating revenue per ASM                             |  |                           | 9.36  | ¢                      |  
|Operating expenses per ASM                            |  |                           | 8.93  | ¢                      |  
|Fuel cost per gallon                                  |  |                           | 80.4  | ¢                      |  
|Fuel gallons (000,000)                                |  |                           | 75.9  |                        |  
|Average number of employees                           |  |                           | 9,182 |                        |  
|Aircraft utilization (blk hrs/day)                    |  |                           | 10.9  |                        |  
|Operating fleet at period-end                         |  |                           | 89    |                        |  

NM = Not Meaningful

30

---

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

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

We
have audited the accompanying balance sheet of Alaska Airlines, Inc. (an Alaska corporation) as of December 31, 2000 and 1999, and the related statements of income,
shareholder's equity and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on our audits.

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

In
our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Alaska Airlines, Inc. as of December 31,
2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States.

As
explained in Notes 1 and 10 to the financial statements, effective January 1, 2000, the Company changed its method of accounting for the sale of airline miles in its Mileage
Plan.

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

| |  |  |  | /s/ARTHUR ANDERSEN LLPArthur Andersen LLP
| |  |  |  | -----------------------------------------

Seattle,
Washington
January 25, 2001

31

---



Schedule II

VALUATION AND QUALIFYING ACCOUNTS  Alaska Airlines, Inc.

|(In Millions)                                        |                                                         | Beginning
Balance |   | Additions
Charged
to Expense |  | (A)
Deductions |     | Ending
Balance
|---------------------------------------------------- | ------------------------------------------------------- | ----------------- | - | ---------------------------- |  | -------------- | --- | --------------
|Year Ended December 31, 1998                         |                                                         |                   |   |                              |  |                |     |               
|(a) Reserve deducted from asset to which it applies: |                                                         |                   |   |                              |  |                |     |               
|                                                     | Allowance for doubtful accounts                         |                   | $ | 1.2                          |  | $              | 1.1 |               
|                                                     |                                                         |                   |   |                              |  |                |     |               
|                                                     | Obsolescence allowance for flight equipment spare parts |                   | $ | 12.6                         |  | $              | 4.5 |               
|                                                     |                                                         |                   |   |                              |  |                |     |               
|(b) Reserve recorded as other long-term liabilities: |                                                         |                   |   |                              |  |                |     |               
|                                                     | Leased aircraft return provision                        |                   | $ | 40.4                         |  | $              | 9.2 |               
|                                                     |                                                         |                   |   |                              |  |                |     |               
|Year Ended December 31, 1999                         |                                                         |                   |   |                              |  |                |     |               
|(a) Reserve deducted from asset to which it applies: |                                                         |                   |   |                              |  |                |     |               
|                                                     | Allowance for doubtful accounts                         |                   | $ | 0.9                          |  | $              | 1.2 |               
|                                                     |                                                         |                   |   |                              |  |                |     |               
|                                                     | Obsolescence allowance for flight equipment spare parts |                   | $ | 15.6                         |  | $              | 4.2 |               
|                                                     |                                                         |                   |   |                              |  |                |     |               
|(b) Reserve recorded as other long-term liabilities: |                                                         |                   |   |                              |  |                |     |               
|                                                     | Leased aircraft return provision                        |                   | $ | 45.2                         |  | $              | 9.5 |               
|                                                     |                                                         |                   |   |                              |  |                |     |               
|Year Ended December 31, 2000                         |                                                         |                   |   |                              |  |                |     |               
|(a) Reserve deducted from asset to which it applies: |                                                         |                   |   |                              |  |                |     |               
|                                                     | Allowance for doubtful accounts                         |                   | $ | 1.0                          |  | $              | 1.8 |               
|                                                     |                                                         |                   |   |                              |  |                |     |               
|                                                     | Obsolescence allowance for flight equipment spare parts |                   | $ | 18.4                         |  | $              | 1.5 |               
|                                                     |                                                         |                   |   |                              |  |                |     |               
|(b) Reserve recorded as other long-term liabilities: |                                                         |                   |   |                              |  |                |     |               
|                                                     | Leased aircraft return provision                        |                   | $ | 43.2                         |  | $              | 9.9 |               
|                                                     |                                                         |                   |   |                              |  |                |     |               

32

---



EXHIBIT INDEX

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

|3.1   |  | Articles of Incorporation of Alaska Airlines, Inc. as amended through March 7, 1991                                                                                                                                                                                                        
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*3.2  |  | Bylaws of Alaska Airlines, Inc. as amended and in effect November 4, 1997                                                                                                                                                                                                                  
|4.1   |  | Trust Indentures and Security Agreement for Alaska Airlines Equipment Trust Certificates, Series A and B (Exhibit No. 4(a)(1) to Form S-3, Amendment No. 1, Registration No. 33-46668)                                                                                                     
|4.2   |  | Trust Indentures and Security Agreement for Alaska Airlines Equipment Trust Certificates, Series C and D (Exhibit No. 4(a)(1) to Form S-3, Amendment No. 2, Registration No. 33-46668)                                                                                                     
|4.3   |  | Participation Agreement for Alaska Airlines Equipment Trust Certificates, Series A and B (Exhibit No. 4(b)(1) to Form S-3, Amendment No. 1, Registration No. 33-46668)                                                                                                                     
|4.4   |  | Participation Agreement for Alaska Airlines Equipment Trust Certificates, Series C and D (Exhibit No. 4(b)(1) to Form S-3, Amendment No. 2, Registration No. 33-46668)                                                                                                                     
|4.5   |  | Lease Agreement for Alaska Airlines Equipment Trust Certificates (Exhibit No. 4(b)(2) to Form S-3, Registration No. 33-46668)                                                                                                                                                              
|10.1  |  | Lease and Assignment of Sublease Agreement dated February 1, 1979 between Alaska Airlines, Inc. and the Alaska Industrial Development Authority                                                                                                                                            
|10.2  |  | Lease and Assignment and Sublease Agreement dated April 1, 1978 between Alaska Airlines, Inc. and the Alaska Industrial Development Authority                                                                                                                                              
|10.3  |  | Management Incentive Plan (2000 Alaska Air Group, Inc. Proxy Statement)                                                                                                                                                                                                                    
|10.4  |  | Loan Agreement dated as of December 1, 1984, between Alaska Airlines, Inc. and the Industrial Development Corporation of the Port of Seattle                                                                                                                                               
|#10.5 |  | 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)
|#10.6 |  | 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)                                                                                                                       
|10.7  |  | Alaska Air Group, Inc. 1981 Supplementary Retirement Plan for Elected Officers (Exhibit 10.7 to 1997 10-K)                                                                                                                                                                                 
|10.8  |  | Alaska Air Group, Inc. 1995 Supplementary Retirement Plan for Elected Officers (Exhibit 10.8 to 1997 10-K)                                                                                                                                                                                 

33

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