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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549


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, 2002

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

ALASKA AIRLINES, INC.

(Exact name of registrant as specified in its charter)


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

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

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

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

Title of Class
Common Stock, $1.00 Par Value

As of December 31, 2002, 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.





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TABLE OF CONTENTS



|               |                                                                                               |  |  |  |  |  |  | 
|-------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I        
|               | ITEM 1. BUSINESS                                                                             
|               | ITEM 2. PROPERTIES                                                                           
|               | ITEM 3. LEGAL PROCEEDINGS                                                                    
|PART II       
|               | ITEM 5. MARKET PRICE FOR THE REGISTRANTS COMMON STOCK AND RELATED STOCKHOLDER MATTERS       
|               | ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|               | ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK                           
|               | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                          
|               | ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 
|               | ITEM 14. CONTROLS AND PROCEDURES                                                             
|PART IV       
|               | ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K                    
|SIGNATURES    
|CERTIFICATIONS
|EXHIBIT INDEX 
|EXHIBIT 3.2   
|EXHIBIT 12    
|EXHIBIT 23    
|EXHIBIT 99.1  
|EXHIBIT 99.2  



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ALASKA AIRLINES, INC.
Annual Report on Form 10-K for the year ended December 31, 2002

TABLE OF CONTENTS

|                                  |          |  |                                                                                       |  |  |  | 
|--------------------------------- | -------- |  | ------------------------------------------------------------------------------------- |  |  |  | 
|Part I                            |          |  |                                                                                       |  | 
|                                  | Item 1.  |  | Business                                                                              |  |  |  | 
|                                  | Item 2.  |  | Properties                                                                            |  |  |  | 
|                                  | Item 3.  |  | Legal Proceedings                                                                     |  |  |  | 
|Part II                           |          |  |                                                                                       |  | 
|                                  | Item 5.  |  | Market for Registrant's Common Equity and Related Stockholder Matters                 |  |  |  | 
|                                  | Item 7.  |  | Management's Discussion and Analysis of Financial Condition and Results Of Operations |  |  |  | 
|                                  | Item 7a. |  | Quantitative And Qualitative Disclosures About Market Risk                            |  |  |  | 
|                                  | Item 8.  |  | Financial Statements and Supplementary Data                                           |  |  |  | 
|                                  | Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  |  |  |  | 
|Part III                          |          |  |                                                                                       |  | 
|                                  | Item 14. |  | Controls and Procedures                                                               |  |  |  | 
|                                  | Item 15. |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                      |  |  |  | 
|Signatures And Powers Of Attorney |          |  |                                                                                       | 
|Certifications                    |          |  |                                                                                       | 
|Exhibit Index                     |          |  |                                                                                       | 

Cautionary Note regarding Forward-Looking Statements

In addition to historical information, this Annual Report on Form 10-K contains
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act. Forward-looking statements are those
that predict or describe future events or trends and that do not relate solely
to historical matters. You can generally identify forward-looking statements as
statements containing the words believe, expect, will, anticipate,
intend, estimate, project, assume or other similar expressions,
although not all forward-looking statements contain these identifying words.
All statements in this report regarding our future strategy, future operations,
projected financial position, estimated future revenues, projected costs,
future prospects, and results that might be obtained by pursuing managements
current plans and objectives are forward-looking statements. You should not
place undue reliance on our forward-looking statements because the matters they
describe are subject to known and unknown risks, uncertainties and other
unpredictable factors, many of which are beyond our control. Our
forward-looking statements are based on the information currently available to
us and speak only as of the date on which this report was filed with the SEC.
We expressly disclaim any obligation to issue any updates or revisions to our
forward-looking statements, even if subsequent events cause our expectations to
change regarding the matters discussed in those statements. Over time, our
actual results, performance or achievements will likely differ from the
anticipated results, performance or achievements that are expressed or implied
by our forward-looking statements, and such differences might be significant
and materially adverse to our stockholder. Many important factors that could
cause such a difference are described in this Annual Report under the caption
Business Risks, which you should review carefully. Please consider our
forward-looking statements in light of those risks as you read this report.





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PART I




ITEM 1.BUSINESS

GENERAL INFORMATION

Alaska Airlines, Inc. (Alaska or the Company), an Alaska corporation, is a
wholly owned subsidiary of Alaska Air Group, Inc. (Air Group), a Delaware
corporation. Air Group is also the parent company of Alaska Air Group Leasing
(AAGL) and Horizon Air Industries, Inc. (Horizon). Alaska is a major airline
that was organized in 1932 and incorporated in the state of Alaska in 1937.
Alaska became a wholly owned subsidiary of Air Group in 1985 pursuant to a
reorganization of Alaska into a holding company structure. Air Group is a
registrant pursuant to Section 12(b) of the Securities and Exchange Act of 1934
(Commission File No. 1-8957). Air Groups filings with the Securities and
Exchange Commission, including its annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to those
reports are accessible free of charge at www.alaskaair.com. Alaskas executive
offices are located at 19300 Pacific Highway South, Seattle, Washington 98188.
In 2002, Alaska accounted for 82% of Air Groups total operating revenues.

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

As used in this Form 10-K, the terms our and we refer to the Company,
unless the content indicates otherwise.

Operations

Alaska is a major airline, operates an all-jet fleet, and its average passenger
trip length is 932 miles. Alaska principally serves 38 cities in six western
states (Alaska, Washington, Oregon, California, Nevada, and Arizona) and Canada
and six cities in Mexico. Alaska also provides non-stop service between
Seattle and four eastern cities (Washington, D.C., Boston, Miami, and Newark),
between Seattle and Denver, and between Anchorage and Chicago. In each year
since 1973, Alaska has carried more passengers between Alaska and the U.S.
mainland than any other airline. In 2002, Alaska carried 14.2 million revenue
passengers. Passenger traffic within Alaska and between Alaska and the U.S.
mainland accounted for 23% of Alaskas 2002 revenue passenger miles, West Coast
traffic (including Canada) accounted for 56%, the Mexico markets 11% and other
markets 10%. Based on passenger enplanements, Alaskas leading airports are
Seattle, Portland, Los Angeles, and Anchorage. Based on 2002 revenues, its
leading nonstop routes are Seattle-Anchorage, Seattle-Los Angeles, and
Seattle-San Diego. At December 31, 2002, Alaskas operating fleet consisted of
102 jet aircraft.

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

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Industry Conditions

On September 11, 2001, the United States was attacked by terrorists using four
hijacked jets of two U.S. airlines. These attacks and a weakened U.S. economy
during 2002 have resulted in lower demand for air service. Throughout 2002,
several major carriers (excluding the Company) have reduced service, grounded
aircraft and furloughed employees. United Airlines and US Airways have sought
relief from financial obligations in bankruptcy. Other smaller carriers have
ceased operations entirely. America West Airlines, US Airways and others have
received federal loan guarantees (or conditional approval for guarantees)
authorized by federal law and additional airlines may do so in the future. In
addition, credit rating agencies continue to downgrade the long-term credit
ratings of most U.S. airlines and their related entities, including
the Company.

On September 22, 2001, the U.S. Government passed the Air Transportation Safety
and System Stabilization Act (the Act) to provide $5 billion of cash
compensation and $10 billion of loan guarantees to U.S. airlines. The purpose
of the Act was to compensate the airlines for direct and incremental losses for
the period September 11 through December 31, 2001 as a result of the September
11 terrorist attacks. As of December 31, 2001, Alaska had recognized $71.6
million of the $5 billion cash compensation. During the third quarter of 2002,
the United States Department of Transportation (DOT) completed its review
procedures and remitted final compensation to Alaska of $0.2 million.

The current U.S. domestic airline environment continues to be difficult. The
Company has reported annual losses since 2000, and current trends in the
airline industry make it likely that it will post additional losses before
returning to profitability. The revenue environment continues to be weak in
light of vigorous competition, excess capacity in the market, reduced corporate
travel spending and other issues. In addition, fuel prices have significantly
escalated due to supply and demand trends as well as political tensions in
several regions of the world.

We believe that our liquidity and access to cash will be sufficient to fund our
current operations at least through 2003, although adverse factors outside our
control such as further economic recession, additional terrorist attacks, a war
affecting the United States, decreased consumer demand or sustained high fuel
prices could affect this projection.

See Item 1, Business  Risk Factors, and Item 7, Managements Discussion and
Analysis of Financial Condition and Results of Operations  Overview, for
further discussion of perceived trends and factors affecting us and our
industry.

MARKETING AND COMPETITION

Alliances with Other Airlines

Alaska has 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
revenues by offering our customers more travel destinations and
better mileage accrual/redemption opportunities, gaining us access to more
connecting traffic from other airlines, and providing members of our alliance
partners frequent flyer programs an opportunity to travel on Alaska
while earning mileage credit in our partners programs. Alaskas marketing agreements have various termination dates and at any time,
one or more may be in the process of renegotiation. If a significant

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agreement
were terminated, it could adversely impact revenues and increase the costs of
the
Companys other marketing agreements. Most of the Companys codeshare
relationships are free-sell codeshares, where the marketing carrier sells seats
on the operating carriers flights from the operating carriers inventory, but
takes no inventory risk. The table below identifies the Companys marketing
alliances with other airlines as of February 28, 2003.

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

Competition

Competition in the airline industry is intense. The Company believes the
principal competitive factors in the industry are fare pricing, customer
service, routes served, flight schedules, type of aircraft, safety record and
reputation, code-sharing relationships, and frequent flyer programs. Any
domestic air carrier deemed fit by the DOT is allowed to operate scheduled
passenger service in the United States. Alaska carries approximately 2.5% of
all U.S. domestic passenger traffic. Alaska competes with one or more domestic
or foreign airlines on most of their 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 computer reservation systems (CRS). Airlines, including Alaska,
are charged fees to have their flight schedules included in the various CRS
displays used by travel agencies and airlines. These systems are currently the
predominant means of distributing airline tickets. In order to reduce
anti-competitive practices, the DOT regulates the display of all airline
schedules and fares in CRS. Air carriers are increasingly distributing their
services on the Internet through various airline joint venture or independent
websites. The Company currently participates in a number of these distribution
channels, but it cannot predict the terms on which it may be able to continue
to

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participate in these or other sites, or their effect on the Companys
ability to compete with other airlines.

REGULATION

General

The Airline Deregulation Act of 1978, as amended, eliminated most domestic
economic regulation of passenger and freight transportation. However, the DOT
and the Federal Aviation Administration (FAA) still exercise regulatory
authority over air carriers. In order to provide passenger and cargo air
transportation in the U.S., a domestic airline is required to hold a
certificate of public convenience and necessity issued by the DOT. Subject to
certain individual airport capacity, noise and other restrictions, this
certificate permits an air carrier to operate between any two points in the
U.S. A certificate is of unlimited duration, but may be revoked for failure to
comply with federal aviation statutes, regulations, orders or the terms of the
certificate itself. In addition, the DOT maintains jurisdiction over the
approval of international codeshare agreements, alliance agreements between
domestic major airlines, international route authorities and certain consumer
protection matters, such as advertising, denied boarding compensation and
baggage liability.

The FAA regulates aircraft operations generally, including establishing
personnel, maintenance and flight operation standards. Domestic airlines are
required to hold a valid air carrier operating certificate issued by the FAA.
Pursuant to these regulations, we have established, and the FAA has approved, a
maintenance program for each type of aircraft we operate that provides for the
ongoing maintenance of such aircraft, ranging from frequent routine inspections
to major overhauls. In addition, the FAA has issued a number of directives
that the Company is incorporating into its aircraft. These relate to, among
other things, enhanced ground proximity warning systems, cockpit door security
enhancements, McDonnell Douglas MD-80 insulation blanket replacement, MD-80
main landing gear piston improvements and Boeing 737 rudder and elevator
improvements. Based on its current implementation schedule, the Company is or
expects to be in compliance with the applicable requirements within the
required time periods.

The Department of Justice (DOJ) has jurisdiction over airline antitrust
matters. The U.S. Postal Service has jurisdiction over certain aspects of the
transportation of mail and related services. Labor relations in the air
transportation industry are regulated under the Railway Labor Act, which vests
in the National Mediation Board (NMB) certain functions with respect to
disputes between airlines and labor unions relating to union representation and
collective bargaining agreements. To the extent the Company continues to pursue
alliances with international carriers, the Company may be subject to certain
regulations of foreign agencies.

In November 2001, the Aviation and Transportation Security Act (the Security
Act) was enacted. The Security Act created a new government agency, the
Transportation Security Administration (TSA), which is part of the DOT and is
responsible for aviation security. The Security Act mandates that the TSA shall
provide for the screening of all passengers and property, including U.S. mail,
cargo, carry-on and checked baggage, and other articles that will be carried
aboard a passenger aircraft. The TSA assumed most passenger screening functions
in February 2002, largely by contracting with private-sector security
providers; however, in November 2002, the TSA began performing these functions
with its own federal employees. On December 31, 2002,

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the TSA began explosive
detection screening of all checked baggage.The TSA also provides for
increased security on flight decks of aircraft and requires federal air
marshals to be present on certain flights.

Effective February 1, 2002, the Security Act imposed a $2.50 per enplanement
security service fee (maximum $5.00 one-way maximum fee) which is collected by
the air carriers and submitted to the government to pay for these enhanced
security measures. Additionally, to the extent the TSA determines that such fee
is insufficient to pay for the cost of providing the security measures as
mentioned in the previous paragraph, in each of the years 2002, 2003 and 2004,
air carriers may be required to submit to the government an amount equal to the
amount the air carriers paid for screening passengers and property in 2000.
After that, this fee may be assessed based on the air carriers market share.
In 2002, the TSA began assessing payments under this feature of the Security
Act. The Company paid $7.1 million to the TSA for this security charge in
2002.

In addition, the Security Act requires air carriers to honor tickets, on a
standby basis, from other air carriers that are insolvent or bankrupt and
suspend service within 18 months of the passage of the Security Act. To be
eligible, a passenger must make arrangements with the air carrier within 60
days after the date on which the passengers air transportation was suspended.
Because this provision is so recent, the Company has little history to
determine its impact. If a major U.S. air carrier were to declare bankruptcy
and cease operations, this feature of the Security Act could have an impact on
the Company. To the extent the Company is not fully reimbursed for the costs
of honoring such tickets, the impact could be adverse.

The DOT, under its authority to prevent unfair competitive practices in the
industry, has considered the issuance of pricing and capacity rules that would
limit major air carriers competitive response to new entrant carriers.
Although the DOT as recently as 2001 declined to issue specific competitive
guidelines, it reiterated its intent to prevent what it considers to be unfair
competitive practices in the industry, and to pursue enforcement actions on a
case-by-case basis. To the extent that future DOT enforcement actions either
directly or indirectly impose restrictions upon the Companys ability to
respond to competitors, the Companys business may be adversely impacted.

Airline Fares

Airlines are permitted to establish their own domestic fares without
governmental regulation, and the industry is characterized by substantial price
competition. The DOT maintains authority over international fares, rates and
charges. International fares and rates are also subject to the jurisdiction of
the governments of the foreign countries the Company serves. While air carriers
are required to file and adhere to international fare and rate tariffs,
substantial commissions, overrides and discounts to travel agents, brokers and
wholesalers characterize many international markets.

Legislation (sometimes referred to as the Passengers Bill of Rights) has
been discussed in various legislatures (including the Congress). This
legislation could, if enacted, (i) place various limitations on airline fares
and/or (ii) affect operating practices such as baggage handling and
overbooking. Effective December 15, 1999, the Company, as well as other
domestic airlines, implemented a Customer Service Plan to address a number of
service goals, including, but not

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limited to goals relating to (i) lowest fare
availability, (ii) delays, cancellations and diversion events, (iii) baggage
delivery and liability, (iv) guaranteed fares, (v) ticket refunds, (vi)
accommodation of customers with special needs, (vii) essential customer needs
during extraordinary delays, (viii) flight oversales, (ix) frequent flyer
program, (x) other travel policies, (xi) service with domestic code share
partners, and (xii) handling of customer issues. In February
2001, the DOT Inspector General issued a report on the various air carriers
performance of their Customer Service Plans. The report included a number of
recommendations which could limit the Companys flexibility with respect to
various operational practices. In February 2001, a bill proposing an Airline
Customer Service Improvement Act was introduced in the U.S. Senate. In
addition, other items of legislation have been introduced that would limit hub
concentration, reallocate slots at certain airports and impose higher landing
fees at certain hours. To the extent legislation is enacted that would inhibit
the Companys flexibility with respect to fares, its revenue management system,
its operations or other aspects of its customer service operations, the
Companys financial results could be adversely affected.

Fare discounting by competitors has historically had a negative effect on the
Companys financial results because the Company is generally required to match
competitors fares to maintain passenger traffic. During recent years, a number
of new low-cost airlines have entered the domestic market and several major
airlines, including the Company, implemented efforts to lower their cost
structures. Further fare reductions, domestic and international, may occur in
the future. If fare reductions are not offset by increases in passenger
traffic, cost reductions or changes in the mix of traffic that improves yields,
the Companys operating results will be negatively impacted.

Airport Access

Many heavily used airports have restrictions with respect to the number of
permitted take-offs and landings, the total permitted annual seat capacity to
be operated at an airport, the use or allocation of airport slots, or other
restrictions. The Company currently has sufficient slot authorizations to
operate its existing flights and has generally been able to obtain slots to
expand its operations and change its schedules. However, there is no assurance
that the Company will be able to obtain slots for these purposes in the future
because, among other factors, domestic slot allocations are subject to changes
in government policies.

Environmental Matters

The Company is subject to various laws and government regulations concerning
environmental matters and employee safety and health in the U.S. and other
countries. U.S. federal laws that have a particular impact on the Company
include the Airport Noise and Capacity Act of 1990 (ANCA), the Clean Air Act,
the Resource Conservation and Recovery Act, the Clean Water Act, the Safe
Drinking Water Act, and the Comprehensive Environmental Response, Compensation
and Liability Act (CERCLA or the Superfund Act). The Company is also subject to
the oversight of the Occupational Safety and Health Administration (OSHA)
concerning employee safety and health matters. The U.S. Environmental
Protection Agency (EPA), OSHA, and other federal agencies have been authorized
to promulgate regulations that have an impact on the Companys operations. In
addition to these federal activities, various states have been delegated
certain authorities under the aforementioned federal statutes. Many state and
local governments have adopted environmental and employee safety and health
laws and regulations, some of which are

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similar to federal requirements. As a
part of its continuing safety, health and environmental program, the Company
anticipates that it will comply with such requirements without any material
adverse effect on its business.

The ANCA recognizes the rights of airport operators with noise problems to
implement local noise abatement programs so long as they do not interfere
unreasonably with interstate or foreign
commerce or the national air transportation system. Authorities in several
cities have promulgated aircraft noise reduction programs, including the
imposition of nighttime curfews. The ANCA generally requires FAA approval of
local noise restrictions on aircraft. While the Company has had sufficient
scheduling flexibility to accommodate local noise restrictions imposed to date,
the Companys operations at those airports could be adversely affected if such
regulations become more restrictive or widespread.

The Company does not expect these regulatory matters, individually or
collectively, to have a material impact on its financial condition, results of
operations or cash flows.

EMPLOYEES

The airline business is labor intensive. Alaska had 11,039 active full-time
and part-time employees at December 31, 2002. Wages, salaries and benefits
represented approximately 37% of the Companys total operating expenses in
2002.

At December 31, 2002, labor unions represented 83% of Alaskas employees. The
Companys relations with such labor organizations are governed by the Railway
Labor Act (RLA). Under this act, the collective bargaining agreements among the
Company and these organizations do not expire but instead become amendable as
of a stated date. If either party wishes to modify the terms of any such
agreement, it must notify the other party in the manner described in the
agreement. After receipt of such notice, the parties must meet for direct
negotiations, and if no agreement is reached, either party may request the NMB
to appoint a federal mediator. If no agreement is reached in mediation, the NMB
may declare at some time that an impasse exists, at which point the NMB
proffers binding arbitration to the parties. Either party may decline to submit
to arbitration. If arbitration is rejected by either party, a 30-day cooling
off period commences. During that period, a Presidential Emergency Board
(PEB) may be established, which examines the parties positions and recommends
a solution. The PEB process lasts for 30 days and is followed by a cooling
off period of 30 days. At the end of a cooling off period, unless an
agreement is reached or action is taken by Congress, the labor organization may
strike and the airline may resort to self-help, including the imposition of
any or all of its proposed amendments and the hiring of workers to replace
strikers.

A number of Alaskas collective bargaining agreements contain provisions for
interest arbitration. Under interest arbitration, if the parties have not
negotiated the contract by a predetermined date, each side may submit a limited
number of issues to binding arbitration. The arbitrators decision on those
open points then becomes part of the collective bargaining agreement, and no
strike or company self-help will occur. The union contract with the Alaska
pilots, among others, contains an interest arbitration provision. Alaska is
currently in negotiations with the Aircraft Mechanics Fraternal Association and
the International Association of Machinists and Aerospace Workers Union,
representing its clerical, office and passenger service work group.

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Alaskas union contracts at December 31, 2002 were as follows:

|                                                              |  |                                                                     |  |           |            |                 |  |                                 
|------------------------------------------------------------- |  | ------------------------------------------------------------------- |  | --------- | ---------- | --------------- |  | --------------------------------
|                                                              |  |                                                                     |  | Number of |            |                
|Union                                                         |  | Employee Group                                                      |  | Employees |            | Contract Status
|                                                              |  |                                                                     |  |           |            |                
|Air Line Pilots
Association International                     |  | Pilots                                                              |  |           | 1,476      |                 |  | Amendable 4/30/05*              
|Association of
Flight Attendants (AFA)                        |  | Flight attendants                                                   |  |           | 2,079      |                 |  | Amendable 10/19/03              
|International
Association of Machinists and
Aerospace Workers |  | Rampservice
and stock clerks
Clerical, office and
passenger service |  |           | 1,1643,094 |                 |  | Amendable 1/10/04In Negotiations
|Aircraft Mechanics
Fraternal Association (AMFA)               |  | Mechanics, inspectors
and cleaners                                  |  |           | 1,297      |                 |  | Amendable 12/25/04*             
|Mexico Workers
Association
of Air Transport                   |  | Mexico airport
personnel                                            |  |           | 78         |                 |  | Amendable 2/28/05               
|Transport Workers
Union of America (TWU)                      |  | Dispatchers                                                         |  |           | 28         |                 |  | Amendable 6/30/07*              

* Collective bargaining agreement contains interest arbitration provision. The
agreement coming out of the current AMFA interest arbitration may not continue
to contain an interest arbitration provision.

FUEL

The Companys operations are significantly affected by the availability and
price of jet fuel. Fuel costs were 13.5% of the Companys total operating
expenses in 2002. Fuel prices, which can be volatile and which are 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 $3.2 million. The Company believes that
operating fuel-efficient aircraft is an effective hedge against high fuel
prices. The Company also purchases fuel hedge contracts to reduce its exposure
to fluctuations in the price of jet fuel. Due to the competitive nature of the
airline industry, in the event of continuing increases in the price of jet
fuel, there can be no assurance that the Company will be able to pass on
increased fuel prices to its customers by increasing its fares. Likewise, any
potential benefit of lower fuel prices may be offset by increased fare
competition and lower revenues for all air carriers.

While the Company does not currently anticipate a significant reduction in fuel
availability, dependency on foreign imports of crude oil and the possibility of
changes in government policy on jet fuel production, transportation and
marketing make it impossible to predict the future availability of jet fuel. In
the event there was an outbreak of hostilities or other conflicts in oil
producing areas, there could be reductions in the production and/or importation
of crude oil. If there were major reductions in the availability of jet fuel,
the Companys business would be

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adversely affected. See Item 7, Managements
Discussion and Analysis of Financial Condition and Results of Operations, for
a discussion of the Companys fuel hedging activities.

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.
Mileage Plan miles do not expire. As of December 31, 2001 and 2002, Alaska
estimated that 1,740,000 and 2,067,000, respectively, round-trip flight awards
were eligible for redemption by Mileage Plan members who have mileage credits
exceeding the 20,000-mile free round-trip domestic ticket award threshold. Of
those eligible awards, Alaska estimated that 1,618,000 and 1,931,000,
respectively, would ultimately be redeemed. For the years 2000, 2001 and 2002,
approximately 281,000, 310,000, and 441,000 round-trip flight awards were
redeemed and flown on Alaska and Horizon. Those awards represent approximately
4.8% for 2000, 5.2% for 2001 and 6.8% for 2002 of the total passenger miles
flown for each period. For the years 2000, 2001 and 2002, approximately
137,000, 154,000 and 174,000 round-trip flight awards were redeemed and flown
on airline partners.

For miles earned by flying on Alaska and travel partners, the estimated
incremental cost of providing free travel awards is recognized as a selling
expense and accrued as a liability as miles are accumulated. The incremental
cost does not include a contribution to overhead, aircraft cost, or profit.
Alaska also sells mileage credits to non-airline partners, such as hotels, car
rental agencies and a credit card company. Alaska defers a majority of the
sales proceeds, and recognizes these proceeds as revenue when the award
transportation is provided. The deferred proceeds are recognized as passenger
revenue for awards issued on Alaska and as other revenue-net for awards issued
on other airlines. At December 31, 2001 and 2002, the deferred revenue and the
total liability for miles outstanding and for estimated payments to partner
airlines was $248.3 million and $303.0 million, respectively.

OTHER INFORMATION

Seasonality and Other Factors

The Companys results of operations for any interim period are not necessarily
indicative of those for the entire year, since the air transportation business
is subject to seasonal fluctuations. The business of the Company is somewhat
seasonal. Quarterly operating income tends to peak during the third quarter.

The results of operations in the air transportation business have also
significantly fluctuated in the past in response to general economic
conditions. In addition, fare initiatives, fluctuations in fuel prices, labor
actions and other factors could impact this seasonal pattern.

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No material part of the business of the Company and its subsidiaries is
dependent upon a single customer or very few customers. Consequently, the loss
of the Companys largest few customers would not have a materially adverse
effect upon the Company.

Insurance

The Company carries insurance for public liability, passenger liability,
property damage and all-risk coverage for damage to its aircraft in amounts
which, in the opinion of management, are adequate.

As a result of the September 11, 2001 events, aviation insurers have
significantly reduced the maximum amount of insurance coverage available to
commercial air carriers for liability to persons other than employees or
passengers for claims resulting from acts of terrorism, war or similar events
(war-risk coverage). At the same time, they significantly increased the
premiums for such coverage as well as for aviation insurance in general.

Pursuant to authority granted in the Act, the federal government has offered,
and the Company has accepted, war risk insurance to replace commercial
insurance for renewable 60-day periods until August 31, 2003. In the event the
federal government fails to renew war-risk insurance and the Company is unable
to replace such insurance in the commercial market, the Companys business,
financial condition and results of operations would be adversely impacted.

Other Government Matters

The Company has elected to participate in the Civil Reserve Air Fleet (CRAF)
program, whereby it has agreed to make available to the federal government a
certain number of aircraft in the event of a military call-up. The government
would reimburse the Company for the use of such aircraft.

BUSINESS RISKS

The Companys operations and financial results are subject to various
uncertainties, such as global and industry instability, 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.

The September 11, 2001 terrorist attacks negatively impacted the Companys
business and further threatened or actual terrorist attacks or hostilities
involving the U.S. may harm the Companys business in the future.

The terrorist attacks of September 11, 2001 and their aftermath have negatively
impacted the Company and the airline industry generally. Since a substantial
portion of airline travel, for both business and leisure, is discretionary,
further terrorist activity connected with air travel, or the threat of further
terrorist activity, could result in travelers canceling or deferring their
plans for air travel and have a material adverse effect on the Companys
revenues. In the fourth quarter of 2001, the temporary shutdown of domestic
passenger air travel and reduced demand for air travel led Alaska to reduce its
flight schedule by approximately 13%. Because a substantial portion of the
Companys costs are fixed in the short term, however, Alaska was unable to
offset the reduction in customer demand through cost savings, and the Companys
operating results were

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harmed to a proportionately greater degree. In
addition, actual or threatened terrorist activity could:



| |  |  | result in a grounding of commercial air traffic by the
FAA,                                                                          
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | significantly reduce passenger traffic and yields due
to a potentially dramatic drop in demand for air travel,                       
|
| |  |  | increase security and insurance costs,                                                                                               
|
| |  |  | make it more difficult for the Company to obtain war risk or other insurance, and                                                    
|
| |  |  | increase costs from airport shutdowns, flight
cancellations and delays resulting from security breaches and
perceived safety threats.

Additional terrorist attacks, the fear of such attacks, increased hostilities
or U.S. military involvement in Iraq, the Middle East or other regions could
have a further negative impact on the airline industry and further enhance the
risks described above and may also lead to increased cost and volatility in fuel
prices. The occurance of any of these events could significantly harm the
Companys business and results of operations.

Continued weakness in the general economy, and in the airline industry in
particular, could have an adverse effect on the Companys business.

The Company believes that airline traffic, including business traffic, is
particularly sensitive to changes in economic growth and expectations. In
2002, weak economic growth contributed to the airline industry suffering
significant losses, which are expected to continue in 2003. During 2002, both
U.S. Airways and United Airlines filed for bankruptcy. Because airlines
operating under bankruptcy protection receive increased flexibility to reduce
their costs by voiding contracts and renegotiating existing business
obligations, current and future airline bankruptcies could have a substantial
impact on industry competition. In the event airlines who have received
bankruptcy protection choose to apply some or all of the cost savings they
obtain toward reduced fares, bankruptcy by airlines who compete with the
Company may cause the Company to reduce its fares and result in a substantial
reduction in revenue and operating margin. Continued weakness in the airline
industry may also result in additional industry consolidation, greater reliance
on industry alliances, such as code-sharing and frequent flyer reciprocity
arrangements, and increased price competition among existing carriers, each of
which could dramatically alter the competitive environment in the markets the
Company serves and harm the Companys operating results. Continued weak
economic performance in the airline industry may also result in a further
reduction in Air Groups credit rating and make it more difficult for Air Group
to raise capital on economical terms. Any general reduction in airline
passenger traffic as a result of a soft economy would harm the Companys
business.

The Company incurred operating losses in each year since 2000 and may incur
substantial operating losses in the future.

For the year ended December 31, 2002, the Company incurred an operating loss
of $74.5 million. Prior to that, the Company incurred operating losses of
$71.6 million and $26.0 million for the years ended December 31, 2001 and
December 31, 2000, respectively. The inability to achieve or

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sustain
profitability may hinder the Companys ability to honor its existing
obligations as they become due, to obtain future equity or debt financing or to
do so on economical terms, and to sustain and expand its business.

The Companys indebtedness could increase the volatility of its earnings and
otherwise restrict its activities.

The Company, like many airlines, has, and will continue to have for the
foreseeable future, a significant amount of indebtedness. Due to its high fixed
costs, including aircraft lease
commitments and debt service, a decrease in revenues results in a
disproportionately greater decrease in earnings. As of December 31, 2002, the
Company had approximately $905.3 million of indebtedness outstanding, comprised
of approximately $893.5 million in debt and approximately $11.8 million of
capital lease obligations.

The Companys outstanding indebtedness could have important consequences. For
example, it could:



| |  |  | limit the Companys ability to obtain additional financing
to fund its growth strategy, capital expenditures, acquisitions,
working capital or other purposes,                                                            
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | require the Company to dedicate a material portion of its
operating cash flow to fund interest payments on indebtedness,
thereby reducing funds available for other purposes, and                                         
|
| |  |  | limit the Companys ability to withstand competitive
pressures and reduce its flexibility in responding to changing
business and economic conditions, including reacting to any
economic slowdown in the airline industry.

In addition, the Company has an ongoing need to finance new aircraft
deliveries, and there is no assurance that such financing will be available to
the Company in sufficient amounts or on acceptable terms. Alaskas credit
facility also contains financial and other restrictive covenants that limit the
Companys ability to engage in activities that may be in its long-term best
interests. The Companys failure to comply with those covenants could result in
an event of default, which, if not cured or waived, could result in the
acceleration of the repayment of all of the Companys debts. See Item 7,
Managements Discussion and Analysis of Financial Condition and Results of
Operations, for further discussion of liquidity and capital resources.

If Alaska fails to comply with financial covenants, some of its financing
agreements may be terminated.

Alaska is required to comply with specific financial covenants in certain
agreements, primarily its $150 million revolving credit facility. The Company
cannot ensure that it will be able to comply with these covenants or provisions
or that these requirements will not limit the Companys ability to finance its
future operations or capital needs. Alaskas inability to comply with the
required financial maintenance covenants or provisions could result in default
under these financing agreements and would result in a cross default under its
other financing agreements. In the event of any such default and Alaska or Air
Groups inability to obtain a waiver of the default, all amounts outstanding
under the agreements could be declared to be immediately due and

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payable. If
Alaska did not have sufficient available cash to pay all amounts that become
due and payable, it would have to seek additional debt or equity financing,
which may not be available on acceptable terms, or at all. If such financing
were not available, Alaska would have to sell assets in order to obtain the
funds required to make accelerated payments or risk its aircraft becoming
subject to repossession, which could harm the Companys business.

The Companys quarterly results can fluctuate substantially.

The airline industry is characterized generally by low profit margins and high
fixed costs, primarily for personnel, aircraft fuel, debt service and rent. The
expenses of an aircraft flight do
not vary significantly with the number of passengers carried and, as a result,
a relatively small change in the number of passengers or in pricing could have
a disproportionate effect on an airlines operating and financial results.
Accordingly, a minor shortfall in expected revenue levels could cause a
disproportionately negative impact on the Companys operating results. In
addition to passenger loads, factors that could cause the Companys quarterly
operating results to vary include:



| |  |  | the timing and success of the Companys growth plans as
it increases flights in existing markets and enters new markets,           
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | changes in fuel, security and insurance costs,                                                                                     
|
| |  |  | increases in personnel, marketing, aircraft ownership
and other operating expenses to support the Companys anticipated
growth, and
|
| |  |  | the timing and amount of maintenance expenditures.                                                                                 

In addition, seasonal variations in traffic, various expenditures and weather
affect the Companys operating results from quarter to quarter. The Company
tends to experience the highest levels of traffic and revenue during the third
quarter of each year. Given the Companys high proportion of fixed costs,
seasonality can affect its profitability from quarter to quarter. Many of the
Companys areas of operations experience bad weather conditions in the winter,
causing increased costs associated with deicing aircraft, canceled flights and
accommodating displaced passengers. Due to its geographic area of operations,
the Company can be more susceptible to adverse weather conditions than some of
its competitors, which may be better able to spread weather-related risks over
larger route systems.

Due to the factors described above, quarter-to-quarter comparisons of the
Companys operating results may not be good indicators of its future
performance. In addition, it is possible that in any future quarter the
Companys operating results could be below the expectations of investors and
any published reports or analyses regarding Air Group. In that event, the
price of Air Groups common stock could decline, perhaps substantially.

Increases in fuel costs would harm Alaskas business.

Fuel costs constitute a significant portion of the Companys total operating
expenses, comprising 13.5% of total operating expenses for the year ended
December 31, 2002. Significant increases in fuel costs would harm the
Companys financial condition and results of operations. The Company estimates
that for the year ended December 31, 2002, a one-cent increase in the price per

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gallon of fuel expense would have increased its fuel expenses by $3.2 million.

Historically, fuel costs have been subject to wide price fluctuations based on
geopolitical issues and supply and demand. Fuel availability is also subject to
periods of market surplus and shortage and is affected by demand for both home
heating oil and gasoline. Because of the effect of these events on the price
and availability of fuel, the cost and future availability of fuel cannot be
predicted with any degree of certainty. In the event of a fuel supply shortage,
higher fuel prices or the curtailment of scheduled service could result. Some
of the Companys competitors may have more leverage in obtaining fuel. The
Company may be unable to offset increases in the price of fuel through higher
fares. To hedge its exposure to fuel price fluctuations, the Company began
purchasing hedging instruments, primarily crude oil swaps during 2000. At
December 31, 2002, Air Group had swap agreements for crude oil contracts in
place to hedge approximately 35% of its 2003 expected jet fuel requirements.
The Company cannot be certain, however, that its fuel hedging contracts will be
sufficient to adequately protect it against fuel price increases.

Many of the Companys employees are covered by collective bargaining
agreements. A failure to negotiate new agreements, or to do so on terms
competitive with the labor costs and practices of the Companys competitors,
could disrupt the Companys business and increase its costs.

As of December 31, 2002, labor unions represented 83% of Alaskas employees.
Alaska is currently in negotiations with the International Association of
Machinists and Aerospace Workers union, representing its clerical, office and
passenger service work group. Labor costs generally are a significant component of
the Companys total expenses, comprising 37% of its total operating expenses in
2002. Each of the Companys different employee groups may require separate
collective bargaining agreements, and may make demands that would increase the
Companys operating expenses and adversely affect its profitability. If the
Company were unable to reach agreement on the terms of any collective
bargaining agreement with any group of its employees or the Company were to
experience widespread employee dissatisfaction, the Company could be subject to
work slowdowns or stoppages. The Company could also become subject to protests
or picketing by organized labor groups representing its employees. Any of these
events would be disruptive to the Companys operations and could harm its
business. In the event any agreement the Company reaches with an organized
labor group requires it to pay wages or to incur costs that are materially
higher than those it currently pays or the Company is unable to fully offset
such increased costs through fare increases, its expenses would increase and
its operating margin would be harmed.

The airline industry is highly competitive and subject to rapid environmental
change. The Company may be unable to compete effectively against other
airlines with greater financial resources or lower operating costs, or to
adjust rapidly enough in the event the basis of competition in its markets
changes.

The airline industry is highly competitive as to fares, flight frequency,
frequent flyer benefits, routes and service. The industry is particularly
susceptible to price discounting because airlines incur only nominal costs to
provide service to passengers occupying otherwise unsold seats. The Company
currently competes with one or more other airlines on all of its routes. Many
of these

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airlines are larger and have significantly greater financial
resources, name recognition or lower operating costs than the Company. Some of
these competitors have chosen from time to time to add service, reduce their
fares or both, in the Companys markets. The Company may be unable to compete
effectively against other airlines that introduce service or discounted fares
in the markets that it serves.

In recent years, and particularly since its deregulation in 1978, the airline
industry has undergone substantial consolidation, and it may undergo additional
consolidation in the future. For example, in April 2001, American Airlines
acquired the majority of Trans World Airlines assets. In addition, many
airlines, including the Company, have marketing alliances with other airlines.
Among other things, they share the use of two-letter flight designator codes to
identify their flights and fares in the computerized reservation systems and
permit reciprocity in their frequent flyer programs. Any consolidation or
significant alliance activity within the airline industry, or the Companys
loss of key alliance relationships, could result in the Companys competitors
having access to larger route networks and resources than the Company, which,
in turn, could increase the risks of competition described above.

The airline industry also faces competition from ground transportation
alternatives, such as the bus, train or automobile. Video teleconferencing and
other methods of electronic communication may add a new dimension of
competition to the industry as business travelers seek lower-cost substitutes
for air travel.

Changes in government regulation imposing additional requirements and
restrictions on the Companys operations could increase its operating costs and
result in service delays and disruptions.

Airlines are subject to extensive regulatory and legal requirements, both
domestically and internationally, that involve significant compliance costs. In
the last several years, Congress has passed laws, and the DOT and the FAA have
issued regulations relating to the operation of airlines that have required
significant expenditures. For example, on November 19, 2001, the President
signed into law the Aviation and Transportation Security Act (the Security
Act). This law federalizes substantially all aspects of civil aviation
security and requires, among other things, the implementation of certain
security measures by airlines and airports, such as the requirement that all
passenger bags be screened for explosives. Funding for airline and airport
security under the law is primarily provided by a new $2.50 per enplanement
ticket tax, with authority granted to the TSA to impose additional fees on the
air carriers if necessary to cover additional federal aviation security costs.
Implementation of the requirements of the Security Act will result in increased
costs for the Company and its passengers. In addition to increased costs, the
security measures required to be implemented under the Security Act as well as
additional security measures issued by the FAA have on occasion resulted in a
longer check-in process for passengers and caused delays and disruptions in
airline service, which has led to customer frustration and may reduce the
demand for airline travel. Additional laws, regulations, taxes and airport
rates and charges have been proposed from time to time that could significantly
increase the cost of airline operations or reduce the demand for air travel.
If adopted, these measures could have the effect of raising ticket prices,
reducing revenue and increasing costs.

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The Companys insurance costs have increased substantially as a result of the
September 11th terrorist attacks, and further increases in insurance costs
would harm its business, financial condition and results of operations.

Following the September 11th terrorist attacks, aviation insurers dramatically
increased airline insurance premiums and significantly reduced the maximum
amount of insurance coverage available to airlines for liability to persons
other than passengers for claims resulting from acts of terrorism, war or
similar events to $50 million per event and in the aggregate. In light of this
development, under the Stabilization Act, the government is currently offering
domestic airlines either (i) excess third-party liability war risk coverage
above $50 million or (ii) in lieu of private war risk insurance, full hull and
passenger and third-party liability coverage. Either of these
coverages can be obtained with limits up to twice the carriers pre-9/11
limits, up to $3.0 billion. The Company has obtained the latter coverage at
twice its prior limit.

Aviation insurers could increase their premiums even further in the event of
additional terrorist attacks, hijackings, airline crashes or other events
adversely affecting the airline industry. Furthermore, the full hull and
passenger and third-party liability coverage provided by the government is
available for renewable 60-day periods until August 31, 2003. While the
government may extend the deadline for when it will stop providing such
coverage, the Company cannot be certain that any extension will occur, or if it
does, how long the extension will last. It is expected that should the
government stop providing such coverage to the airline industry, the premiums
charged by aviation insurers for this coverage will be substantially higher
than the premiums currently charged by the government. Significant increases in
insurance premiums would adversely impact the Companys business, financial
condition and results of operations.

The Companys failure to successfully expand its business could harm its
financial condition and results of operations.

A part of the Companys current profitability strategy involves increasing the
frequency of flights in markets it currently serves, expanding the number of
markets served and increasing flight connection opportunities. The Company
believes that growth will allow it to achieve additional economies of scale and
to manage unit costs. Increasing the number of markets the Company serves
depends on its ability to access suitable airports, facilities and in some
cases regulatory approvals. Any condition that would deny, limit or delay
access to such airports, facilities or approvals would constrain the Companys
ability to grow. In addition, successful growth depends on the Companys
ability to maintain yields and load factors at profitable levels. Inadequate
revenues in new markets may require the Company to revise its current growth
strategy. The Company cannot be certain that it will be able to successfully
expand its existing markets or establish new markets, and the failure to do so
could harm the Companys financial condition and results of operations.

The Companys reputation and financial results could be harmed in the event of
an airline accident or incident.

An accident or incident involving one of the Companys aircraft, such as the
loss of Alaska Flight

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261 off the coast of California in January 2000, could
involve a significant loss of life and result in a loss of faith in the
Companys airlines by the flying public. In addition, the Company could
experience significant potential claims from injured passengers and surviving
relatives, as well as costs for the repair or replacement of a damaged aircraft
and its consequential temporary or permanent loss from service. Airlines are
required by the DOT to carry liability insurance. Although the Company believes
it currently maintains liability insurance in amounts and of the type generally
consistent with industry practice, the amount of such coverage may not be
adequate and the Company may be forced to bear substantial losses from an
accident. Substantial claims resulting from an accident in excess of the
Companys related insurance coverage would harm the Companys business and
financial results. Moreover, any aircraft accident or incident, even if fully
insured and even if it does not involve one of the Companys airlines, could
cause a public perception that the Company airline or the equipment it flies is
less safe or reliable than
other transportation alternatives, which would harm the Companys business.

The Companys operations are often affected by factors beyond its control,
including traffic congestion at airports, weather conditions and increased
security measures, any of which could harm its financial condition and results
of operations.

Like other airlines, the Companys operations are subject to delays caused by
factors beyond its control, including air traffic congestion at airports,
adverse weather conditions and increased security measures. Delays frustrate
passengers, reduce aircraft utilization and increase costs, all of which in
turn affect profitability. During periods of fog, snow, rain, storms or other
adverse weather conditions, flights may be cancelled or significantly delayed.
Cancellations or delays due to weather conditions, traffic control problems and
breaches in security could harm the Companys financial condition and results
of operations.

The Companys business could be harmed if it is unable to attract and retain
qualified personnel at reasonable costs.

The Companys business is labor intensive, with labor costs representing 37% of
operating expenses for the year ended December 31, 2002. The Company expects
salaries, wages and benefits to increase on a gross basis and that these costs
could increase as a percentage of its overall costs, which could harm its
business. The Company competes against the major U.S. airlines for labor in
many highly skilled positions. Many of the major U.S. airlines offer wage and
benefit packages that exceed the Companys wage and benefit packages. As a
result, in the future, the Company may have to significantly increase wages and
benefits in order to attract and retain qualified personnel or risk
considerable employee turnover. If the Company is unable to hire, train and
retain qualified employees at a reasonable cost, it may be unable to grow or
sustain its business and its operating results and business prospects could be
harmed or if it loses the services of key personnel. The Company may also have
difficulty replacing management or other key personnel who leave and,
therefore, the loss of any of these individuals could harm its business.

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ITEM 2.PROPERTIES

Aircraft

The following table describes the aircraft operated and their average age at
December 31, 2002.

|                |  |           |     |       |  |        |    |       |  |          |    |  |  |  |     |             |  |  |      | 
|--------------- |  | --------- | --- | ----- |  | ------ | -- | ----- |  | -------- | -- |  |  |  | --- | ----------- |  |  | ---- | 
|                |  | Passenger |     |       |  |        |    |       |  |          |    |  |  |  |     | Average Age
|Aircraft Type   |  | Capacity  |     | Owned |  | Leased |    | Total |  | in Years
|                |  |           |     |       |  |        |    |       |  |         
|Boeing 737-200C |  |           | 111 |       |  |        | 8  |       |  |          | 1  |  |  |  | 9   |             |  |  | 21.9 | 
|Boeing 737-400  |  |           | 138 |       |  |        | 9  |       |  |          | 31 |  |  |  | 40  |             |  |  | 7.7  | 
|Boeing 737-700  |  |           | 120 |       |  |        | 16 |       |  |          |   |  |  |  | 16  |             |  |  | 2.6  | 
|Boeing 737-900  |  |           | 172 |       |  |        | 6  |       |  |          |   |  |  |  | 6   |             |  |  | 1.3  | 
|Boeing MD-80    |  |           | 140 |       |  |        | 15 |       |  |          | 16 |  |  |  | 31  |             |  |  | 12.0 | 
|                |  |           |     |       |  |        |    |       |  |          |    |  |  |  |     |             |  |  |      | 
|                |  |           |     |       |  |        | 54 |       |  |          | 48 |  |  |  | 102 |             |  |  | 9.1  | 
|                |  |           |     |       |  |        |    |       |  |          |    |  |  |  |     |             |  |  |      | 

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

Forty-six of the 54 aircraft owned by Alaska as of December 31, 2002 are
subject to liens securing long-term debt. Alaskas leased 737-200C, 737-400,
and MD-80 aircraft have lease expiration dates in 2003, between 2004 and 2016,
and between 2003 and 2013, respectively. Alaska has the option to extend most
of the leases for additional periods, or the right to purchase the aircraft at
the end of the lease term, usually at the then fair market value of the
aircraft. For information regarding obligations under capital leases and
long-term operating leases, see Note 6 to the financial statements.

At December 31, 2002, all of the Company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, San Jose and Palm Springs.
In addition, Orange County, Reagan National and Long Beach airports restrict
the type of aircraft and number of flights.

Ground Facilities and Services

Alaska leases ticket counters, gates, cargo and baggage, office space, and
other support areas at the majority of the airports it serves. Alaska also
owns terminal buildings at various Alaska cities.

Alaska has centralized operations in several buildings located at or near
Seattle-Tacoma International Airport (Sea-Tac) in Seattle, Washington. The
owned buildings, including land unless located on leased airport property,
include a three-bay hangar facility with maintenance shops, a flight operations
and training center, an air cargo facility, a reservations and office facility,
several office buildings, its corporate headquarters, and two storage
warehouses. Alaska also leases a two-bay hangar/office facility at Sea-Tac.
Alaskas other major facilities include a regional headquarters building, an
air cargo facility, and a leased hangar/office facility in Anchorage; a Phoenix
reservations center; and a leased two-bay maintenance facility in Oakland.

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ITEM 3.LEGAL PROCEEDINGS

Oakland Maintenance Investigation

In December 1998, the U.S. Attorney for the Northern District of California
initiated a grand jury investigation concerning certain 1998 maintenance
activities at Alaskas Oakland maintenance base. The investigation was
expanded to include the aircraft involved in the loss of Flight 261 in January
2000. The FAA separately proposed a civil penalty in connection with the 1998
maintenance activities, which Alaska and the FAA have settled for an agreed
amount. In December 2001, the U.S. Attorney notified Alaska that the evidence
it had gathered relative to the 1998 maintenance activities did not warrant the
filing of criminal charges, and closed that part of the investigation. The
U.S. Attorney also placed the portion of its investigation related to Flight
261 on inactive status, with the possibility of reactivating and reviewing the
matter when the NTSB issued its final report on the accident. Accordingly,
following the final NTSB hearing on the Flight 261 investigation in December
2002, the U.S. Attorneys Office reactivated the matter in order to review it
in light of the final NTSB report.

Flight 261 Litigation

Alaska is a defendant in a number of lawsuits relating to the loss of Flight
261 on January 31, 2000. Representatives of all 88 passengers and crew on board
have filed cases against Alaska, the Boeing Company, and others. The suits
were originally filed in various state and federal courts in Alaska,
California, Washington and Illinois. Since then, they have all been
consolidated in the U.S. District Court for the Northern District of
California. The suits seek unspecified compensatory and punitive damages. In
May 2001, the judge presiding over the majority of the cases ruled that
punitive damages are not available against Alaska. Alaska has settled 48 of
these cases and continues in its efforts to settle the remaining ones. Trial
on the remaining cases is set for July 2003. Consistent with industry
standards, the Company maintains insurance against aircraft accidents.

Flight 261 NTSB Proceeding

In January 2003, the NTSB issued its final report on the Flight 261 accident.
The report contained the NTSBs findings, conclusions, probable cause of the
accident and safety recommendations. NTSB staffs draft report included
language that the Board recommend a new FAA inspection of Alaska due to
perceived deficiencies in recent maintenance practices. The Board rejected
that recommendation.

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

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

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PART II




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

All of Alaskas outstanding common stock is held by Air Group 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 Air Group.




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

The following discussion should be read in conjunction with our financial
statements and the related notes contained elsewhere in this Annual Report on
Form 10-K. All statements in the following discussion which are not reports of
historical information or descriptions of current accounting policy are
forward-looking statements. Please consider our forward-looking statements in
light of the risks referred to in this reports introductory cautionary note.
There can be no assurance that actual developments will be those anticipated by
the Company. Actual results could differ materially from those projected as a
result of a number of factors, some of which the Company cannot predict or
control. For a discussion of these factors, see Item 1, Business Risks.

Industry Conditions

The airline industry is cyclical. Generally speaking, economic conditions were
strong during 2000, but weakened during 2001 and 2002. Because the industry
has high fixed costs in relation to revenues, a small change in load factors or
fare levels has a large impact on profits. For most airlines, labor and fuel
account for almost half of operating expenses. The relatively strong economy
in the late 90s put upward pressure on labor costs. Fuel prices have been
volatile in the last three years. Fuel cost per gallon increased 54% in 2000,
and decreased 14% in 2001 and 10% in 2002.

On September 11, 2001, the United States was attacked by terrorists using
hijacked jets of two U.S. airlines. The FAA shut down all commercial airline
flight operations for September 11 and 12. Airlines resumed flight operations
at reduced levels on September 13. These events, combined with continued
slowing economic conditions in 2002, have had a significant negative impact on
demand for airline travel. Throughout the industry, airlines continue to cut
capacity and have instituted a variety of cost-saving measures. In addition,
credit rating agencies have downgraded the long-term credit ratings of most
U.S. airlines and their related entities, including Air Group. On September
22, 2001, the U.S. Government passed the Air Transportation Safety and System
Stabilization Act (the Act) to provide $5 billion of cash compensation and $10
billion of loan guarantees to U.S. airlines. The purpose of the Act was to
compensate the airlines for direct and incremental losses for the period
September 11 through December 31, 2001 as a result of the September 11
terrorist attacks. As of December 31, 2001, Alaska had recognized $71.6
million of the $5 billion cash compensation. During the third quarter of 2002,
the United States Department of Transportation (DOT) completed its review
procedures and remitted final compensation to Alaska of $0.2 million.

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RESULTS OF OPERATIONS

2002 Compared with 2001

The loss before accounting change for 2002 was $57.0 million compared with a
loss of $11.8 million in 2001. The operating loss was $74.5 million in 2002
compared with an operating loss of $71.6 million in 2001. Results in 2001 and
2002 include $71.6 million and $0.3 million, respectively, of government
compensation recognized resulting from the Act. Results for 2002 include a
$12.5 million charge in connection with write-off of all of the Companys
goodwill. (See Note 12 to the financial statements.) Financial and
statistical data for Alaska is shown following the financial statements. A
discussion of this data follows.

Revenues

Operating revenue increased 4.0% during 2002 as compared to 2001. Available
seat miles (ASMs or capacity) increased during each quarter of 2002 as compared
to 2001 due to the addition of service to five cities (Calgary, Boston, Denver,
Newark and Miami) and due to the negative impact of the terrorist attacks on
4th quarter 2001 capacity. For the full year 2002, capacity was up 8.0% while
revenue passenger miles (RPMs or traffic) increased at a slightly lower rate
(7.6%), resulting in a 0.3 point decrease in passenger load factor (RPMs
divided by ASMs). In our largest market, Southern California, capacity was
slightly higher in 2002 compared to 2001, and traffic was slightly lower,
resulting in a decrease in load factor of 1.1 points. Capacity and traffic
gains experienced in the last two quarters in this market were offset by
decreases in the first two quarters. In our second largest market,
Anchorage/Fairbanks to the U.S. mainland, both capacity and traffic increased
when compared to 2001; traffic increased at a higher rate than capacity,
resulting in a increase in load factor of 1.8 points for the year. The average
load factor for our newest five cities was better than the system average.

Yield per passenger mile was down in each quarter of the year: 5.0% in the
first quarter, 2.5% in the second quarter, 3.9% in the third quarter and 3.0%
in the fourth quarter. The decrease in passenger yield was due to a
combination of fewer business passengers, a drop off in demand due to the
events of September 11, fare sales offered to stimulate demand, and the sagging
economy. For the full year 2002, yields were down 3.6%. The higher traffic
combined with the lower yield resulted in a 3.7% increase in passenger revenue.

Freight and mail revenues decreased 7.8%. After September 11, new security
measures had a negative impact on our freight and mail volumes, resulting in a
negative impact on revenues.

Other-net revenues increased 20.7%, largely due to increased revenue from the
sale of miles in Alaskas frequent flyer program, and redemption of miles on
partner airlines (Alaska recognizes revenue for the difference between the
funds received for the sale of miles to third parties and the cost of the award
redemptions on partner airlines).

Expenses

Excluding fuel, operating expenses grew by $85.5 million, or 5.5%, as a result
of an 8.0% increase in ASMs and a 2.4% decrease in cost per ASM. The cost per
ASM excluding fuel increased slightly by 0.2% during the first nine months of
2002 when compared to the same period in 2001, but decreased by 8.9% in the
fourth quarter, primarily due to the impact of the terrorist attacks in

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2001. Explanations of significant year-over-year changes in the components of
operating expenses are as follows:



| |  |  | Wages and benefits increased 9.7% due to a 9.5% increase in
average wages and benefits per employee and a 0.3% increase in the
number of employees. The 2002 results include a full year of a pilot
wage increase which occurred in June 2001, step increases for union
employees, and annual merit raises for management employees.
Additionally, benefits expense significantly increased due to
increases in defined benefit plan costs and increases in health
insurance for all employees.     
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Contracted services increased 6.2%, primarily due to higher rates
for ground handling services and a slightly higher volume of services
due to capacity growth. Increased airport security screening costs
subsequent to September 11 also contributed to the increase.                                                                                                                                                                                                                             
|
| |  |  | Aircraft fuel expense decreased 4.6% due to a 9.9% decrease in
the cost per gallon of fuel, offset by a 5.8% increase in gallons
consumed. Fuel consumption rate per flight hour decreased slightly by
0.1%. The lower fuel prices saved $28.1 million.                                                                                                                                                                                                                                             
|
| |  |  | Aircraft maintenance expense increased 12.0% as a result of more
airframe checks in 2002. In addition, the 2001 results reflect a
reduced flight schedule as a result of the September 11 terrorist
attacks which resulted in the deferring of certain C checks and heavy
checks into 2002.                                                                                                                                                                                                         
|
| |  |  | Commission expense decreased 24.8% due to the elimination of
travel agent base commissions and the continuing shift to direct sales
channels. In June 2002, the Company changed its travel agent
commissions program to eliminate base commissions and move to a 100%
incentive-based program. In 2002, 55.9% of Air Group ticket sales
were made through travel agents, versus 59.9% in 2001. In 2002, 21.0%
of the ticket sales were made through Alaskas Internet web site
versus 16.3% in 2001.
|
| |  |  | Other selling expense consists of credit card commissions,
computer reservation systems fees, Mileage Plan award costs for miles
earned by flying on Alaska or Horizon, and advertising expenses. The
slight decrease in 2002 as compared to the same period in 2001 is
primarily due to increases in credit card commissions partially offset
by decreases in CRS Fees, advertising expense and Mileage Plan awards.                                                                               
|
| |  |  | Depreciation and amortization increased 7.6% in 2002 as compared
to 2001, primarily due to the addition of nine owned aircraft during
2001.                                                                                                                                                                                                                                                                                                                                                         
|
| |  |  | Landing fees and other rentals increased 11.1%, exceeding the
3.1% increase in landings, due to higher landing fee and rental rates
at airports throughout the system. The higher rates reflect the
airports increased cost of operations due to new security directives
and expansion of their facilities.                                                                                                                                                                                        

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| |  |  | Other expense increased 3.4%, primarily due to higher
expenditures for insurance, flight crew hotels and utilities, partly
offset by lower property taxes, recruiting, passenger remuneration,
uninsured losses and legal costs. Subsequent to the events of
September 11, the Company experienced significant increases in hull,
liability and war risk insurance rates, and was also subject to
surcharges for war risk coverage. As a result of these increases,
Alaska incurred $37.4 million in aircraft insurance expense in 2002,
compared to $13.1 million in 2001.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Nonoperating Income (Expense)

Net nonoperating loss was $12.8 million in 2002 compared to nonoperating income
of $55.2 million in 2001. The $68.0 million decrease was primarily due to U.S.
government compensation of $71.6 million recognized in 2001 compared to $0.3
million in 2002.

In 2001, Alaska recognized $71.6 million of U.S. government compensation.
During the third quarter of 2002, the DOT completed its review procedures and
remitted final compensation to Alaska of $0.2 million. Interest expense, net
of capitalized interest, totaled $39.9 million in 2001 which compares to $44.2
million in 2002.

The Company has fuel hedge contracts that are carried on the balance sheet at
fair value. Each period, the contracts are measured and adjusted to fair
market value. The change in the value of the fuel hedge contracts that
perfectly offsets the change in the value of the aircraft fuel being hedged is
recorded as other comprehensive income/loss until the hedged contract is
settled and is then recognized in earnings. To the extent the change in the
value of the fuel hedge contracts does not perfectly offset the change in the
value of the aircraft fuel purchase being hedged, that portion of the hedge is
recognized in earnings. In 2001 and 2002, $5.9 million of expense and $5.1
million of income, respectively, was recorded as part of other nonoperating
income (expense) to recognize the hedge ineffectiveness on the contracts. As
detailed in Note 1 to the financial statements, at December 31, 2002, Air Group
had fuel hedge contracts for 140 million gallons of projected jet fuel usage in
2003, which represents approximately 35% of projected usage. Of these
contracts, approximately 85% of projected fuel usage relates to the
Company.

Cumulative Effect of Accounting Change

Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets.
Under this statement, the Companys goodwill will no longer be amortized, but
instead will be tested for impairment on a minimum of an annual basis. During
the second quarter of 2002, the Company completed the first step of its
impairment test related to its $12.5 million of goodwill. In the fourth
quarter of 2002, the Company completed the second step of its impairment test
and determined that all of the Companys goodwill was impaired. As a result,
the Company recorded a one-time, non-cash charge, effective January 1, 2002, of
$12.5 million to write-off all of its goodwill. This charge is reflected as a
cumulative effect of accounting change in the statement of operations for 2002.

2001 Compared with 2000

The net loss for 2001 was $11.8 million compared with a loss before accounting
change of $14.8 million in 2000. The operating loss was $71.6 million in 2001
compared with an operating loss of $26.0 million in 2000. The larger operating
loss was primarily due to the weakening economy,

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partially offset by a decrease in fuel costs, and also due to the negative
impact of the terrorist attacks, for which the Company has been partially
compensated by the U.S. government.

Revenues

Capacity increased 6.7% during the first nine months of 2001 due to normal
growth, but decreased 5.9% in the fourth quarter due to the impact of the
terrorist attacks. Alaska operated approximately 87% of its previously planned
schedule in the fourth quarter. For the full year 2001, capacity was up 3.5%,
but traffic grew by only 2.2%, resulting in a 0.8 point decrease in passenger
load factor. In our largest market, Southern California, capacity was slightly
lower in 2001 compared to 2000, resulting in flat traffic and a slight increase
in load factor (0.2 points). Capacity and traffic gains experienced in the
second quarter in this market were offset by decreases in the fourth quarter.
In our second largest market, Anchorage/Fairbanks to the U.S. mainland,
capacity increased in the upper-single digits, but traffic increases were not
as high, resulting in a decrease in load factor of 2.3 points for the year. Our
newest market, Seattle to Washington D.C., which operated primarily in the
fourth quarter, had an average load factor for the fourth quarter that was
better than the system average.

Passenger yields were up 2.8% in the first quarter due to fuel-related fare
increases implemented in late 2000. In the second and third quarters, yield
was down 2.4% and 5.7%, respectively, due to a decline in business passengers
and fare sales. Yields were down 7.0% in the fourth quarter due to a
combination of fewer business passengers, a drop off in demand due to the
events of September 11, and fares sales offered to stimulate demand. For the
full year 2001, yields were down 3.2%. The higher traffic combined with the
lower yield resulted in a 1.1% decrease in passenger revenue.

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

Other-net revenues increased 19.9%, largely due to increased revenue from the
sale of miles in Alaskas frequent flyer program.

Expenses

Excluding fuel, operating expenses grew by $85.7 million, or 5.8%, as a result
of a 3.5% increase in ASMs and a 2.3% increase in cost per ASM. The cost per
ASM excluding fuel remained constant during the first nine months of 2001 when
compared to the same period in 2000, but increased by 10.1% in the fourth
quarter, primarily due to the impact of the terrorist attacks and labor costs.
Explanations of significant year-over-year changes in the components of
operating expenses are as follows:

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| |  |  | Wages and benefits increased 11.4% due to a 5.2% increase in the
number of employees combined with a 5.9% increase in average wages and
benefits per employee. Employees were added in most areas to support
the net addition of six aircraft to the operating fleet. The 2000
results include a $1.8 million charge for a flight attendant early
retirement program. The 2001 results include approximately $13.4
million of added expense for a pilot pay increase that was effective
June 2001. Excluding these items, average wages and benefits per
employee increased 4.0%, which was due to increases for union
employees, annual merit raises for management employees, and higher
pension and health insurance costs for all employees.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Contracted services increased 11.3%, primarily due to higher
rates for ground handling services and a slightly higher volume of
services due to capacity growth. Increased airport security screening
costs subsequent to September 11 also contributed to the increase.                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  |  | Aircraft fuel expense decreased 13.8% due to a 14.6% decrease in
the cost per gallon of fuel, offset by a 0.9% increase in gallons
consumed. The fuel consumption rate decreased 2.8% due to the use of
more fuel-efficient B737-700 and B737-900 aircraft. The lower fuel
prices saved $46.2 million.                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  |  | Aircraft maintenance expense decreased 0.9% as a result of fewer
airframe checks in 2001. We also incurred lower outside engine repair
costs in 2001 compared to 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  |  | Commission expense decreased 1.4%, consistent with the 1.1%
decrease in passenger revenue, and also due to a smaller proportion of
sales being made through travel agents. In 2001, 59.9% of Air Group
ticket sales were made through travel agents, versus 63.9% in 2000.
In 2001, 16.3% of the ticket sales were made through Alaskas Internet
web site versus 10.4% in 2000.                                                                                                                                                                                                                                                                                                                                                                
|
| |  |  | Other selling expense consists of credit card commissions,
computer reservation systems fees, Mileage Plan award costs, and
advertising expenses. The decrease in 2001 compared to the same
period in 2000 is primarily due to a $40.2 million charge in 2000 due
to a change in estimate for the cost of travel awards earned by
Mileage Plan members flying on travel partners and an increase in the
number of awards that will ultimately be redeemed for travel. Higher
costs are a result of increasing the estimated costs Alaska incurs to
acquire awards on other airlines for its Mileage Plan members, as well
as lower assumed forfeiture miles.                                                                                    
|
| |  |  | Depreciation and amortization increased 23.5%, primarily due to
the addition of eight owned aircraft during the first and second
quarters of 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  |  | Landing fees and other rentals increased 33.7%, exceeding the
2.5% increase in landings, due to higher landing fee and rental rates
at airports throughout the system. The higher rates reflect the
airports increased cost of operations due to new security directives,
expansion of their facilities, and increased costs for utilities. Due
to the events of September 11, airports are experiencing fewer
landings and lower receipts from                                                                                                                                                                                                                                                                                                

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| |   |  | concessionaires. Therefore, the Company anticipates that these revenue
shortfalls will be passed through to airlines via increased landing fees
and terminal rents. In the fourth quarter of 2001, the Company expensed
$5.1 million for estimated shortfalls related to 2001.                                                                                                                    
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Other expense increased 2.4%, primarily due to higher
expenditures for insurance, flight crew hotels and utilities, partly
offset by lower recruiting, passenger remuneration, and legal costs.
Subsequent to the events of September 11, the Company experienced
significant increases in hull, liability and war risk insurance rates,
and was also subject to surcharges for war risk coverage.

Nonoperating Income (Expense)

Net nonoperating income was $55.2 million in 2001 compared to $5.9 million in
2000. The $49.3 million increase was primarily due to U.S. government
compensation, partially offset by interest expense.

In 2001, Alaska recognized $71.6 million of U.S. government compensation, under
the Air Transportation Safety and System Stabilization Act described above
under Industry Conditions. During the third quarter of 2002, the DOT completed
its review procedures and remitted final compensation to Alaska of $0.2
million. Interest expense, net of capitalized interest, increased $17.7
million due to new debt incurred during the year ended December 31, 2001.

Effective January 1, 2001, the Company adopted SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended. The cumulative
effect of adoption of SFAS No. 133 was not material to the Companys financial
position or results of operations. SFAS No. 133 requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. The Company has fuel hedge contracts that are carried on the balance
sheet at fair value. Each period, the contracts are measured and adjusted to
fair market value. The change in the value of the fuel hedge contracts that
perfectly offsets the change in the value of the aircraft fuel purchase being
hedged is recorded as comprehensive income/loss until the hedged contract is
settled and is then recognized in earnings. To the extent the change in the
value of the fuel hedge contracts does not perfectly offset the change in the
value of the aircraft fuel purchase being hedged, that portion of the hedge is
recognized in earnings. In 2001, $5.9 million of charges were recorded as part
of other nonoperating income (expense) to recognize the hedge ineffectiveness
on the fuel contracts.

Critical Accounting Policies

The Company has three critical accounting policies that require a more
significant amount of management judgment than other accounting policies the
Company employs. They are described below.

Mileage Plan

Air Group has a loyalty program that awards miles to passengers who fly on
Alaska or Horizon and our travel partners. Additionally, the Company sells
miles to third parties, such as our credit card partner, for cash. In either
case, the outstanding miles may be redeemed for travel on Alaska, Horizon, or
any of our alliance partners. The Company has an obligation to provide this

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future travel; therefore, for awards to passengers who fly on Alaska, Horizon
or our travel
partners, the Company recognizes a liability and the corresponding expense for
this future obligation. For miles sold to third parties, the sales proceeds
related to future travel are recorded as deferred revenue and recognized when
the award transportation is provided.

At December 31, 2002, the Company had 72 billion miles outstanding,
representing a liability of $303 million. The liability is computed based on
several assumptions that require management judgment to estimate and formulate.
There are uncertainties inherent in estimates; therefore, an incorrect
assumption impacts the amount and/or timing of revenue recognition or Mileage
Plan expenses. The most significant assumptions in accounting for the Mileage
Plan are described below.



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

The Company reviews all Mileage Plan estimates each quarter, and changes
certain assumptions based on historical trends. In 2000, the Company recorded
a charge of $40.2 million, primarily due to a change in estimate for the cost
of travel awards earned by Mileage Plan members flying on travel partners and
an increase in the number of awards that will ultimately be redeemed for
travel.

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Pension Plans

The Company accounts for the defined benefit pension plans using SFAS No. 87,
Employers Accounting for Pensions. Under SFAS No. 87, pension expense is
recognized on an accrual basis over employees approximate service periods.
Pension expense calculated under SFAS No. 87 is generally independent of
funding decisions or requirements. The Company recognized expense for its
defined benefit pension plans of $13.5 million, $20.0 million and $40.0 million
in 2000, 2001 and 2002, respectively.

The calculation of pension expense and the corresponding liability requires
the use of a number of critical assumptions, including the expected long-term
rate of return on plan assets and the assumed discount rate. Changes in these
assumptions can result in different expense and liability amounts, and future
actual experience can differ from these assumptions. At December 31, 2002, the
fair value of the Companys pension plan assets totaled $418.1 million. Lower
investment returns, benefit payments and declining discount rates have resulted
in an under-funded plan of $87.2 million (net of tax of $52.5 million) as of
December 31, 2002. The Company anticipates making a cash contribution of
approximately $37.8 million during 2003.

Pension expense increases as the expected rate of return on pension plan assets
decreases. At December 31, 2002, the Company estimates that the pension plan
assets will generate a long-term rate of return of 8.0%. This rate is lower
than the assumed rate of 10.0% used at both December 31, 2000 and 2001 and was
developed by evaluating input from consultants and economists as well as
long-term inflation assumptions. The Company regularly reviews the actual
asset allocation and periodically rebalances investments as considered
appropriate. This expected long-term rate of return on plan assets at December
31, 2002 is based on an allocation of U.S. equities and U.S. fixed income
securities. Decreasing the expected long-term rate of return by 0.5% (from
8.0% to 7.5%) would increase the Companys estimated 2003 pension expense by
approximately $2.2 million.

Pension liability and future pension expense increase as the discount rate is
reduced. The Company discounted future pension obligations using a rate of
7.50%, 7.25% and 6.75% at December 31, 2000, 2001 and 2002, respectively. The
discount rate is determined based on the current rates earned on high quality
long-term bonds. Decreasing the discount rate by 0.5% (from 6.75% to 6.25%)
would increase the Companys accumulated benefit obligation at December 31,
2002 by approximately $35.2 million and increase the estimated 2003 pension
expense by approximately $6.4 million.

Future changes in plan asset returns, assumed discount rates and various other
factors related to the participants in our pension plans will impact the
Companys future pension expense and liabilities. The Company cannot predict
with certainty what these factors will be in the future.

Long-lived Assets

In accounting for long-lived assets, the Company must make estimates about the
expected useful lives of the assets, the expected residual values of the
assets, and the potential for impairment based on the fair value of the assets
and the cash flows they generate. Factors indicating potential impairment
include, but are not limited to, significant decreases in the market value of
the long-lived assets, a significant change in the long-lived assets condition,
and operating cash flow losses

29



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##### Table of Contents



associated with the use of the long-lived asset.
Due to the events of September 11 and the impact
on the airline industry, in 2001 the Company evaluated whether the book value
of its aircraft was impaired in accordance with SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of. The Company performed an impairment test, as required by SFAS No. 121,
which was based on the estimated future undiscounted cash flows to be generated
by the Companys aircraft. Based on this test, the Company determined that
no impairment write-down was necessary for the Companys fleet.

In 2002, due to the sagging economy and its impact on the airline industry, the
Company evaluated whether the book value of its aircraft was impaired in
accordance with SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. (This statement supercedes SFAS No. 121.) No impairment
was necessary based on the results of the evaluation.

There is inherent risk in estimating the future cash flows used in the
impairment test. If cash flows do not materialize as estimated, there is a
risk the impairment charges recognized to date may be inaccurate, or further
impairment charges may be necessary in the future.

Liquidity and Capital Resources

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

|                                                                                                   |  |                                                             |         |                   |  |        |         |  |  |    |        |  
|-------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------- | ------- | ----------------- |  | ------ | ------- |  |  | -- | ------ | -
|                                                                                                   |  | December 31, 2001                                           |         | December 31, 2002 |  | Change
|                                                                                                   |  |                                                             |         |                   |  |       
|                                                                                                   |  | (In millions, except debt-to-capital and per-share amounts) |         |                   |  |       
|Cash and marketable securities                                                                     |  | $                                                           | 660.5   |                   |  | $      | 635.7   |  |  | $  | (24.8  | )
|Working capital                                                                                    |  |                                                             | 225.8   |                   |  |        | 240.0   |  |  |    | 14.2   |  
|Unused credit facility                                                                             |  |                                                             | 0.0     |                   |  |        | 0.0     |  |  |    | (0.0   | )
|Long-term debt and
capital lease obligations*                                                      |  |                                                             | 852.2   |                   |  |        | 856.7   |  |  |    | 4.5    |  
|Shareholders equity                                                                               |  |                                                             | 719.0   |                   |  |        | 569.7   |  |  |    | (149.3 | )
|Debt-to-capital*                                                                                   |  |                                                             | 54%:46% |                   |  |        | 60%:40% |  |  | NA
|Debt-to-capital assuming aircraft
operating leases are capitalized
at seven times annualized rent* |  |                                                             | 72%:28% |                   |  |        | 75%:25% |  |  | NA

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

The Company has various options available to meet its capital and operating
commitments in 2003, including cash and marketable securities on hand at
December 31, 2002 of $635.7 million and internally generated funds from
operations. In addition, to supplement cash requirements, the Company
periodically considers various borrowing or leasing options. The Company
believes current cash resources will enable the Company to fund operations
through 2003.

2002 Financial Changes

Net cash provided by operating activities was $119.6 million in 2002, compared
to $282.9 million in 2001. The decrease in 2002 is partially due to $71.6
million of U. S. government cash compensation received in 2001. Additional
cash in 2002 was provided by the issuance of $58.0 million of new debt. The
Company used cash generated from operations and the issuance of $58.0 million
of debt to purchase $146.2 million of capital equipment, including one new
Boeing

30



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737 aircraft, spare parts and airframe and engine overhauls. Cash was
also used to repay $43.8 million of debt.
Shareholders equity decreased $149.3 million due principally to the loss
before accounting change of $57.0 million, the cumulative effect of an
accounting change related to goodwill of $12.5 million (Note 12 to the
financial statements), and a non-cash charge to equity of $87.2 million, net of
tax, in connection with the defined benefit plans that the Company sponsors for
eligible employees (Note 7 to the financial statements).

2001 Financial Changes

The Companys cash and marketable securities portfolio increased by $201.5
million during 2001. Operating activities provided $282.9 million of cash in
2001. Additional cash was provided by the issuance of new debt ($388.8
million). Cash was used for $401.0 million of capital expenditures, including
the purchase of eight new and one used Boeing 737 aircraft, spare parts and
engine overhauls, and for $69.2 million of debt repayment.

2000 Financial Changes

The Companys cash and marketable securities portfolio increased by $131.5
million during 2000. Operating activities provided $202.0 million of cash in
2000. Additional cash was provided by the issuance of new debt ($238.1 million)
and insurance proceeds from an aircraft accident ($37 million). Cash was used
for $279.4 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 repayment.

Financing Activities- During 2002, Alaska issued $58 million of debt secured
by flight equipment. This debt was issued with varying interest rates based on
LIBOR and payment terms of 12 years.

Commitments- At December 31, 2002, Alaska had firm orders for 14 aircraft
requiring aggregate payments of approximately $295 million. In addition,
Alaska has options to acquire 26 more B737s. Alaska expects to finance its new
aircraft with leases, long-term debt, or internally generated cash. As
previously mentioned, as a result of the events of September 11, credit rating
agencies downgraded the long-term credit ratings of most U.S. airlines and
their related entities. The events of September 11 combined with the sagging
economy and its affect on the airline industry have had a negative impact on
the availability of credit to the Company. We anticipate that it will be more
difficult to obtain credit in the future, and it will be at higher rates with
more collateral requirements than in the past.

|                    |  |                               |     |      |  |       |     |  |  |   |     | 
|------------------- |  | ----------------------------- | --- | ---- |  | ----- | --- |  |  | - | --- | 
|                    |  | Delivery Period - Firm Orders
|                    |  |                              
|Aircraft            |  | 2003                          |     | 2004 |  | Total
|                    |  |                               |     |      |  |      
|Boeing 737-700      |  |                               | 6   |      |  |       |    |  |  |   | 6   | 
|Boeing 737-900      |  |                               | 5   |      |  |       | 3   |  |  |   | 8   | 
|                    |  |                               |     |      |  |       |     |  |  |   |     | 
|Total               |  |                               | 11  |      |  |       | 3   |  |  |   | 14  | 
|                    |  |                               |     |      |  |       |     |  |  |   |     | 
|Payments (Millions) |  | $                             | 192 |      |  | $     | 103 |  |  | $ | 295 | 
|                    |  |                               |     |      |  |       |     |  |  |   |     | 

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Alaska is party to a purchase agreement with an aircraft manufacturer. Under
the agreement, upon commitment to purchase the aircraft, Alaska must make
deposits to the manufacturer for a portion of the purchase price of the
aircraft, with the remainder of the purchase price due at delivery. Concurrent
with this agreement, the manufacturer has an agreement with a trust
wherein the trust makes deposits to the manufacturer of additional pre-delivery
deposits for the aircraft. Under certain specified events, including default
by the trust, Alaska may be required to pay the manufacturer the amounts paid
by the trust in order to retain the right to purchase the aircraft. Alaska
makes monthly payments to the trust related to the advances made by the trust
to the manufacturer, and such payments are capitalized as part of the aircraft
cost. The trust is reimbursed for its advances on or before the delivery of
the applicable aircraft.

New Accounting Standards In August 2001, the Financial Accounting Standards
Board (FASB) issued SFAS No. 143, Accounting for Asset Retirement
Obligations, which requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The statement also requires that
the associated asset retirement costs be capitalized as part of the carrying
amount of the long-lived asset. This statement is effective for financial
statements issued for fiscal years beginning after January 1, 2003. The
adoption of this statement is not expected to have a material impact on the
Companys financial position, results of operations or cash flows.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
This statement requires that only certain debt extinguishment transactions be
classified as an extraordinary item. Additionally, under this statement,
capital leases that are modified so that the resulting agreement is an
operating lease, shall be accounted for under the sale-leaseback provisions of
SFAS No. 98. SFAS No. 145 also includes minor modifications to existing U.S.
Generally Accepted Accounting Principles literature. SFAS No. 145 is generally
effective for financial statements issued for fiscal years beginning after May
15, 2002. The adoption of this statement did not have a material impact on the
Companys financial position, results of operations or cash flows.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. This statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies EITF Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). This statement requires that a liability
for a cost associated with an exit or disposal activity be recognized when the
liability is incurred. The statement is effective for the Company on January
1, 2003 and is not expected to have a material impact on the Companys
financial position, results of operations or cash flows.

In November 2002, the FASB issued Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. Interpretation No. 45 elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees. Additionally,
Interpretation No. 45 clarifies the requirements for recognizing a liability at
the inception of the guarantee equal to the fair value of the obligation
undertaken in issuing the guarantee and incorporates the guidance in FASB
Interpretation No. 34, Disclosure of Indirect

32



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Guarantees of Indebtedness of
Others. Disclosures under Interpretation No. 45 are effective for financial
statements issued after December 15, 2002. While the Company has various
guarantees included in contracts in the normal course of business, primarily
in the form of indemnities, these
guarantees would only result in immaterial increases in future costs, but do
not represent significant commitments or contingent liabilities of the
indebtedness of others.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, which requires the consolidation of variable
interest entities, as defined. Interpretation No. 46 is effective for the
Company on January 1, 2003 and is not expected to have a material impact on the
Companys financial position, results of operations or cash flows.

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




ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Company does not purchase or hold any derivative financial instruments for
trading purposes. The Company has significant commodity price risk exposure to
jet fuel price increases. Currently, a one-cent change in the fuel price per
gallon affects annual fuel costs by approximately $3.2 million. To help manage
this exposure, the Company began purchasing hedge instruments, primarily crude
oil swap agreements during 2000. Ineffectiveness of contracts resulted in
nonoperating expense of $5.9 million for 2001 and nonoperating income of $5.1
million for 2002. At December 31, 2002, the Company had swap agreements for
crude oil contracts in place to hedge approximately 35% of its 2003 expected
jet fuel requirements. In 2002, these contracts had unrealized gains, net of
tax of $8.0 million. A hypothetical 10% increase in jet fuel prices would
increase 2003 fuel expense by approximately $22.2 million. A hypothetical 10%
decrease in jet fuel prices would decrease 2003 fuel expense by approximately
$22.3 million. This analysis includes the effect of the fuel hedging contracts
in place at December 31, 2002. A hypothetical 10% change in the average
interest rates incurred on variable rate debt during 2002 would correspondingly
change the Companys net earnings and cash flows associated with these items by
approximately $2.8 million.

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##### Table of Contents






ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See Item 15.

Selected Unaudited Quarterly Financial Information (in millions):

|                                       |  |             |       |             |  |             |       |             |  |      |       |      |  |      |       |      |  |   |       |  |  |   |       |  |  |   |       |   |  |   |       |  
|-------------------------------------- |  | ----------- | ----- | ----------- |  | ----------- | ----- | ----------- |  | ---- | ----- | ---- |  | ---- | ----- | ---- |  | - | ----- |  |  | - | ----- |  |  | - | ----- | - |  | - | ----- | -
|                                       |  | 1st Quarter |       | 2nd Quarter |  | 3rd Quarter |       | 4th Quarter
|                                       |  |             |       |             |  |             |       |            
|                                       |  | 2001        |       | 2002        |  | 2001        |       | 2002        |  | 2001 |       | 2002 |  | 2001 |       | 2002
|                                       |  |             |       |             |  |             |       |             |  |      |       |      |  |      |       |     
|Operating revenues                     |  | $           | 418.6 |             |  | $           | 412.2 |             |  | $    | 474.7 |      |  | $    | 478.7 |      |  | $ | 484.2 |  |  | $ | 512.4 |  |  | $ | 385.5 |   |  | $ | 429.8 |  
|Operating income (loss)                |  |             | (37.8 | )           |  |             | (39.0 | )           |  |      | 10.2  |      |  |      | (0.2  | )    |  |   | 17.0  |  |  |   | 18.7  |  |  |   | (61.0 | ) |  |   | (54.0 | )
|Income (loss) before
accounting change |  |             | (24.7 | )           |  |             | (26.8 | )           |  |      | 4.6   |      |  |      | (0.8  | )    |  |   | 22.3  |  |  |   | 8.9   |  |  |   | (14.0 | ) |  |   | (38.3 | )
|Net income (loss)                      |  |             | (24.7 | )           |  |             | (39.3 | )           |  |      | 4.6   |      |  |      | (0.8  | )    |  |   | 22.3  |  |  |   | 8.9   |  |  |   | (14.0 | ) |  |   | (38.3 | )




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

None.




ITEM 14.CONTROLS AND PROCEDURES

In the 90-day period before the filing of this report, the chief executive
officer and chief financial officer of the Company (collectively, the
certifying officers) have evaluated the effectiveness of the Companys
disclosure controls and procedures. These disclosure controls and procedures
are designed to ensure that the information required to be disclosed by the
Company in its periodic reports filed with the Securities and Exchange
Commission (the Commission) is recorded, processed, summarized and reported,
within the time periods specified by the Commissions rules and forms, and that
the information is communicated to the certifying officers on a timely basis.

The certifying officers concluded, based on their evaluation, that the
Companys disclosure controls and procedures are effective for the Company,
taking into consideration the size and nature of the Companys business and
operations.

No significant changes in the Companys internal controls or in other factors
were detected that could significantly affect the Companys internal controls
subsequent to the date when the internal controls were evaluated.

34



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##### Table of Contents






PART IV




ITEM 15.EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)  Financial Statements:

|                                                                                                                         |  |         |       | 
|------------------------------------------------------------------------------------------------------------------------ |  | ------- | ----- | 
|                                                                                                                         |  | Page(s)
|                                                                                                                         |  |        
|Selected Quarterly Financial Information (Unaudited)                                                                     |  |         | 34    | 
|Balance Sheets as of December 31, 2001 and 2002                                                                          |  |         | 39-40 | 
|Statements of Operations for the years ended
December 31, 2000, 2001 and 2002                                            |  |         | 41    | 
|Statements of Shareholders Equity for the years ended
December 31, 2000, 2001 and 2002                                  |  |         | 42    | 
|Statements of Cash Flows for the years ended
December 31, 2000, 2001 and 2002                                            |  |         | 43    | 
|Notes to Financial Statements                                                                                            |  |         | 44-55 | 
|Independent Auditors Report                                                                                             |  |         | 57    | 
|Financial Statement Schedule II, Valuation and Qualifying Accounts,
for the years ended December 31, 2000, 2001 and 2002 |  |         | 58    | 

See Exhibit Index on page 59.

(b)  No reports on Form 8-K were filed during the fourth quarter of 2002.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

|                      |  |                                                        |  |                     
|--------------------- |  | ------------------------------------------------------ |  | --------------------
|ALASKA AIRLINES, INC. |  |                                                       
|                      |  |                                                        |  |                     
|By:                   |  | /s/ William S. Ayer                                    |  | Date: March 28, 2003
|                      |  |                                                        |  |                     
|                      |  | William S. Ayer, Chief Executive Officer and President |  |                     

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on March 28, 2003 on
behalf of the registrant and in the capacities indicated.

|                                                      |  |                                                                                           
|----------------------------------------------------- |  | ------------------------------------------------------------------------------------------
|/s/ John F. Kelly

      John F. Kelly                |  | Chairman and Director                                                                     
|                                                      |  |                                                                                           
|/s/ Bradley D. Tilden

      Bradley D. Tilden        |  | Executive Vice President/Finance and Chief Financial Officer
(Principal Financial Officer)
|                                                      |  |                                                                                           
|/s/ Terri K. Maupin

      Terri K. Maupin            |  | Staff Vice President/Finance and Controller
(Principal Accounting Officer)                
|                                                      |  |                                                                                           
|/s/ William S. Ayer

      William S. Ayer            |  | Chief Executive Officer, President and Director                                           
|                                                      |  |                                                                                           
|/s/ Phyllis J. Campbell

      Phyllis J. Campbell    |  | Director                                                                                  
|                                                      |  |                                                                                           
|/s/ Ronald F. Cosgrave

      Ronald F. Cosgrave      |  | Director                                                                                  
|                                                      |  |                                                                                           
|/s/ Mary Jane Fate

      Mary Jane Fate              |  | Director                                                                                  
|                                                      |  |                                                                                           
|/s/ Mark R. Hamilton

      Mark R. Hamilton          |  | Director                                                                                  
|                                                      |  |                                                                                           
|/s/ Bruce R. Kennedy

      Bruce R. Kennedy          |  | Director                                                                                  
|                                                      |  |                                                                                           
|/s/ Jessie J. Knight, Jr.

      Jessie J. Knight, Jr |  | Director                                                                                  
|                                                      |  |                                                                                           
|/s/ R. Marc Langland

      R. Marc Langland          |  | Director                                                                                  
|                                                      |  |                                                                                           
|/s/ Byron I. Mallott

      Byron I. Mallott          |  | Director                                                                                  
|                                                      |  |                                                                                           
|/s/ John V. Rindlaub

      John V. Rindlaub          |  | Director                                                                                  
|                                                      |  |                                                                                           
|/s/ J. Kenneth Thompson

      J. Kenneth Thompson    |  | Director                                                                                  
|                                                      |  |                                                                                           
|/s/ Richard A. Wien

      Richard A. Wien            |  | Director                                                                                  

36



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CERTIFICATIONS

I, William S. Ayer, certify that:



|1. |  | I have reviewed this Annual report on Form 10-K of Alaska Airlines, Inc.;                                                                                                                                                                                                                                                                                                             
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;                                                              
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;                                                                                 
|  
|4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:                                                                                                                                                             
|  
|   |  | a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;                                                                                       
|  
|   |  | b) evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this
annual report (the Evaluation Date); and                                                                                                                                                                                         
|  
|   |  | c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                                                                                                               
|  
|5. |  | The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):                                                                                                                                        
|  
|   |  | a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and                                                                                     
|  
|   |  | b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal
controls; and                                                                                                                                                                                                                             
|  
|6. |  | The registrants other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.

|               |  |    |  |                                       
|-------------- |  | -- |  | --------------------------------------
|March 28, 2003 |  | By |  | /s/  William S. Ayer                  
|               |  |    |  |                                       
|               |  |    |  | William S. AyerChief Executive Officer

37



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##### Table of Contents



I, Bradley D. Tilden, certify that:



|1. |  | I have reviewed this annual report on Form 10-K of Alaska Airlines, Inc.;                                                                                                                                                                                                                                                                                                             
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;                                                              
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;                                                                                 
|  
|4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:                                                                                                                                                             
|  
|   |  | a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;                                                                                       
|  
|   |  | b) evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the Evaluation Date); and                                                                                                                                                                                         
|  
|   |  | c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                                                                                                               
|  
|5. |  | The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):                                                                                                                                        
|  
|   |  | a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and                                                                                     
|  
|   |  | b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal
controls; and                                                                                                                                                                                                                             
|  
|6. |  | The registrants other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.

|               |  |    |  |                                         
|-------------- |  | -- |  | ----------------------------------------
|March 28, 2003 |  | By |  | /s/  Bradley D. Tilden                  
|               |  |    |  |                                         
|               |  |    |  | Bradley D. TildenChief Financial Officer

38



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BALANCE SHEETS
Alaska Airlines, Inc.

ASSETS

|                                                                              |  |      |         |      |  |   |         | 
|----------------------------------------------------------------------------- |  | ---- | ------- | ---- |  | - | ------- | 
|As of December 31 (In Millions)                                               |  | 2001 |         | 2002
|                                                                              |  |      |         |     
|Current Assets                                                                |  |      |         |      |  |   |         | 
|Cash and cash equivalents                                                     |  | $    | 490.7   |      |  | $ | 268.9   | 
|Marketable securities                                                         |  |      | 169.8   |      |  |   | 366.8   | 
|Receivables from related companies                                            |  |      | 71.2    |      |  |   | 126.7   | 
|Receivables  less allowance for doubtful accounts
(2001 - $1.8; 2002 - $1.9) |  |      | 67.3    |      |  |   | 81.8    | 
|Inventories and supplies  net                                                |  |      | 36.6    |      |  |   | 38.3    | 
|Prepaid expenses and other assets                                             |  |      | 85.2    |      |  |   | 107.7   | 
|                                                                              |  |      |         |      |  |   |         | 
|Total Current Assets                                                          |  |      | 920.8   |      |  |   | 990.2   | 
|                                                                              |  |      |         |      |  |   |         | 
|Property and Equipment                                                        |  |      |         |      |  |   |         | 
|Flight equipment                                                              |  |      | 1,888.7 |      |  |   | 1,945.5 | 
|Other property and equipment                                                  |  |      | 333.7   |      |  |   | 359.3   | 
|Deposits for future flight equipment                                          |  |      | 71.8    |      |  |   | 64.7    | 
|                                                                              |  |      |         |      |  |   |         | 
|                                                                              |  |      | 2,294.2 |      |  |   | 2,369.5 | 
|Less accumulated depreciation & amortization                                  |  |      | 606.2   |      |  |   | 709.4   | 
|                                                                              |  |      |         |      |  |   |         | 
|Total Property and Equipment  Net                                            |  |      | 1,688.0 |      |  |   | 1,660.1 | 
|                                                                              |  |      |         |      |  |   |         | 
|Intangible Assets                                                             |  |      | 12.5    |      |  |   | 50.9    | 
|                                                                              |  |      |         |      |  |   |         | 
|Other Assets                                                                  |  |      | 134.7   |      |  |   | 49.9    | 
|                                                                              |  |      |         |      |  |   |         | 
|Total Assets                                                                  |  | $    | 2,756.0 |      |  | $ | 2,751.1 | 
|                                                                              |  |      |         |      |  |   |         | 

See accompanying notes to financial statements.

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##### Table of Contents



BALANCE SHEETS
Alaska Airlines, Inc.

LIABILITIES AND SHAREHOLDERS EQUITY

|                                |  |      |  |  |     
|------------------------------- |  | ---- |  |  | ----
|As of December 31 (In Millions) |  | 2001 |  |  | 2002
|                                |  |      |  |  |     

|                                                                |                                    |   |         |       |  |   |         |       | 
|--------------------------------------------------------------- | ---------------------------------- | - | ------- | ----- |  | - | ------- | ----- | 
|Current Liabilities                                             |                                    |   |         |       |  |   |         |      
|Accounts payable                                                |                                    | $ | 98.8    |       |  | $ | 118.5   |      
|Payables to related companies                                   |                                    |   | 4.4     |       |  |   | 1.7     |      
|Accrued aircraft rent                                           |                                    |   | 71.9    |       |  |   | 67.5    |      
|Accrued wages, vacation and payroll taxes                       |                                    |   | 68.0    |       |  |   | 76.3    |      
|Other accrued liabilities                                       |                                    |   | 192.3   |       |  |   | 226.5   |      
|Air traffic liability                                           |                                    |   | 216.4   |       |  |   | 211.1   |      
|Current portion of long-term debt and
capital lease obligations |                                    |   | 43.2    |       |  |   | 48.6    |      
|                                                                |                                    |   |         |       |  |   |         |      
|Total Current Liabilities                                       |                                    |   | 695.0   |       |  |   | 750.2   |      
|                                                                |                                    |   |         |       |  |   |         |      
|Long-Term Debt & Capital Lease Obligations                      |                                    |   | 852.2   |       |  |   | 856.7   |      
|                                                                |                                    |   |         |       |  |   |         |      
|Other Liabilities and Credits                                   |                                    |   |         |       |  |   |         |      
|Deferred income taxes                                           |                                    |   | 182.3   |       |  |   | 153.7   |      
|Deferred revenue                                                |                                    |   | 193.5   |       |  |   | 224.5   |      
|Other liabilities                                               |                                    |   | 114.0   |       |  |   | 196.3   |      
|                                                                |                                    |   |         |       |  |   |         |      
|                                                                |                                    |   | 489.8   |       |  |   | 574.5   |      
|                                                                |                                    |   |         |       |  |   |         |      
|Commitments and Contingencies                                   |                                    |   |         |       |  |   |         |      
|Shareholders Equity                                            |                                    |   |         |       |  |   |         |      
|Common stock, $1 par value
Authorized: 1,000 shares             |                                    |   |         |       |  |   |         |      
|                                                                | Issued: 2001 and 2002 - 500 shares |   |         |      |  |   |         | -     | 
|                                                                | Capital in excess of par value     |   |         | 324.8 |  |   |         | 324.8 | 
|Accumulated other comprehensive loss                            |                                    |   | (2.2    | )     |  |   | (82.0   | )    
|Retained earnings                                               |                                    |   | 396.4   |       |  |   | 326.9   |      
|                                                                |                                    |   |         |       |  |   |         |      
|                                                                |                                    |   | 719.0   |       |  |   | 569.7   |      
|                                                                |                                    |   |         |       |  |   |         |      
|Total Liabilities and Shareholders Equity                      |                                    | $ | 2,756.0 |       |  | $ | 2,751.1 |      
|                                                                |                                    |   |         |       |  |   |         |      

See accompanying notes to financial statements.

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##### Table of Contents



STATEMENTS OF OPERATIONS
Alaska Airlines, Inc.

|                                                    |  |      |         |      |  |      |         |   |  |   |         |  
|--------------------------------------------------- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|Year Ended December 31                              |  |      |         |      |  |      |         |   |  |   |         |  
|(In Millions)                                       |  | 2000 |         | 2001 |  | 2002
|                                                    |  |      |         |      |  |     
|Operating Revenues                                  |  |      |         |      |  |      |         |   |  |   |         |  
|Passenger                                           |  | $    | 1,625.4 |      |  | $    | 1,607.6 |   |  | $ | 1,667.8 |  
|Freight and mail                                    |  |      | 76.4    |      |  |      | 78.2    |   |  |   | 72.1    |  
|Other  net                                         |  |      | 64.4    |      |  |      | 77.2    |   |  |   | 93.2    |  
|                                                    |  |      |         |      |  |      |         |   |  |   |         |  
|Total Operating Revenues                            |  |      | 1,766.2 |      |  |      | 1,763.0 |   |  |   | 1,833.1 |  
|                                                    |  |      |         |      |  |      |         |   |  |   |         |  
|Operating Expenses                                  |  |      |         |      |  |      |         |   |  |   |         |  
|Wages and benefits                                  |  |      | 577.0   |      |  |      | 642.9   |   |  |   | 705.5   |  
|Contracted services                                 |  |      | 68.3    |      |  |      | 76.0    |   |  |   | 80.7    |  
|Aircraft fuel                                       |  |      | 313.1   |      |  |      | 269.8   |   |  |   | 257.3   |  
|Aircraft maintenance                                |  |      | 130.9   |      |  |      | 129.7   |   |  |   | 145.2   |  
|Aircraft rent                                       |  |      | 144.3   |      |  |      | 137.6   |   |  |   | 128.2   |  
|Food and beverage service                           |  |      | 51.0    |      |  |      | 55.5    |   |  |   | 63.5    |  
|Commissions                                         |  |      | 65.0    |      |  |      | 64.1    |   |  |   | 48.2    |  
|Other selling expenses                              |  |      | 138.7   |      |  |      | 102.7   |   |  |   | 101.9   |  
|Depreciation and amortization                       |  |      | 85.9    |      |  |      | 106.1   |   |  |   | 114.2   |  
|Loss on sale of assets                              |  |      | 1.3     |      |  |      | 5.0     |   |  |   | 1.7     |  
|Landing fees and other rentals                      |  |      | 74.4    |      |  |      | 99.5    |   |  |   | 110.5   |  
|Other                                               |  |      | 142.3   |      |  |      | 145.7   |   |  |   | 150.7   |  
|                                                    |  |      |         |      |  |      |         |   |  |   |         |  
|Total Operating Expenses                            |  |      | 1,792.2 |      |  |      | 1,834.6 |   |  |   | 1,907.6 |  
|                                                    |  |      |         |      |  |      |         |   |  |   |         |  
|Operating Loss                                      |  |      | (26.0   | )    |  |      | (71.6   | ) |  |   | (74.5   | )
|                                                    |  |      |         |      |  |      |         |   |  |   |         |  
|Nonoperating Income (Expense)                       |  |      |         |      |  |      |         |   |  |   |         |  
|Interest income                                     |  |      | 27.6    |      |  |      | 26.0    |   |  |   | 23.2    |  
|Interest expense                                    |  |      | (36.0   | )    |  |      | (47.4   | ) |  |   | (46.3   | )
|Interest capitalized                                |  |      | 13.8    |      |  |      | 7.5     |   |  |   | 2.1     |  
|U.S. government compensation                        |  |      |        |      |  |      | 71.6    |   |  |   | 0.3     |  
|Other  net                                         |  |      | 0.5     |      |  |      | (2.5    | ) |  |   | 7.9     |  
|                                                    |  |      |         |      |  |      |         |   |  |   |         |  
|                                                    |  |      | 5.9     |      |  |      | 55.2    |   |  |   | (12.8   | )
|                                                    |  |      |         |      |  |      |         |   |  |   |         |  
|Loss before income tax and accounting change        |  |      | (20.1   | )    |  |      | (16.4   | ) |  |   | (87.3   | )
|Income tax benefit                                  |  |      | (5.3    | )    |  |      | (4.6    | ) |  |   | (30.3   | )
|                                                    |  |      |         |      |  |      |         |   |  |   |         |  
|Loss before accounting change                       |  |      | (14.8   | )    |  |      | (11.8   | ) |  |   | (57.0   | )
|Cumulative effect of accounting change,             |  |      |         |      |  |      |         |   |  |   |         |  
|net of income taxes of $29.5 in 2000 and $0 in 2002 |  |      | (46.8   | )    |  |      |        |   |  |   | (12.5   | )
|                                                    |  |      |         |      |  |      |         |   |  |   |         |  
|Net Loss                                            |  | $    | (61.6   | )    |  | $    | (11.8   | ) |  | $ | (69.5   | )
|                                                    |  |      |         |      |  |      |         |   |  |   |         |  

See accompanying notes to financial statements.

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##### Table of Contents



STATEMENTS OF SHAREHOLDERS EQUITY
Alaska Airlines, Inc.

|                                                              |                          |                              |   |           |  |               |       |               |  |          |       |             |      |   |       |   |  |   |        |       |      |  
|------------------------------------------------------------- | ------------------------ | ---------------------------- | - | --------- |  | ------------- | ----- | ------------- |  | -------- | ----- | ----------- | ---- | - | ----- | - |  | - | ------ | ----- | ---- | -
|                                                              |                          |                              |   |           |  |               |       |               |  |          |       | Accumulated |      |   |       |   |  |   |        |      
|                                                              |                          |                              |   |           |  |               |       | Capital in    |  | Other    |       |             |      |   |       |   |  |  
|                                                              |                          |                              |   | Common    |  | Excess of     |       | Comprehensive |  | Retained |       |             |      |  
|(In Millions)                                                 |                          | Stock                        |   | Par Value |  | Income (Loss) |       | Earnings      |  | Total   
|                                                              |                          |                              |   |           |  |               |       |               |  |         
|Balances at December 31, 1999                                 |                          | $                            |  |           |  | $             | 225.8 |               |  | $        | (1.7  | )           |      | $ | 469.8 |   |  | $ | 693.9  |      
|                                                              |                          |                              |   |           |  |               |       |               |  |          |       |             |      |   |       |   |  |   |        |      
|2000 net loss                                                 |                          |                              |   |           |  |               |       |               |  |          |       |             |      |   | (61.6 | ) |  |   | (61.6  | )    
|Other comprehensive income (loss):                            |                          |                              |   |           |  |               |       |               |  |          |       |             |      |   |       |   |  |   |        |      
|Officers supplemental retirement plan                         |                          |                              |   |           |  |               |       |               |  |          |       |             |      |   |       |   |  |   |        |      
|                                                              |                          | net of $0.3 tax expense      |   |           |  |               |       |               |  |          |       |             | (0.4 | ) |       |   |  |   |        |       | (0.4 | )
|Related to marketable securities:                             |                          |                              |   |           |  |               |       |               |  |          |       |             |      |   |       |   |  |   |        |      
|                                                              |                          | Change in fair value         |   |           |  |               |       |               |  |          |       |             | 3.1  |   |       |   |  |   |        |       |      |  
|                                                              |                          | Reclassification to earnings |   |           |  |               |       |               |  |          |       |             | (0.3 | ) |       |   |  |   |        |       |      |  
|                                                              |                          | Income tax effect            |   |           |  |               |       |               |  |          |       |             | (1.1 | ) |       |   |  |   |        |       |      |  
|                                                              |                          |                              |   |           |  |               |       |               |  |          |       |             |      |   |       |   |  |   |        |       |      |  
|                                                              |                          |                              |   |           |  |               |       |               |  |          | 1.7   |             |      |   |       |   |  |   | 1.7    |      
|                                                              |                          |                              |   |           |  |               |       |               |  |          |       |             |      |   |       |   |  |   |        |      
|Total comprehensive loss                                      |                          |                              |   |           |  |               |       |               |  |          |       |             |      |   |       |   |  |   | (60.3  | )    
|Capital contribution from Alaska Air Group                    |                          |                              |   |           |  |               | 99.0  |               |  |          |       |             |      |   |       |   |  |   | 99.0   |      
|                                                              |                          |                              |   |           |  |               |       |               |  |          |       |             |      |   |       |   |  |   |        |      
|Balances at December 31, 2000                                 |                          |                              |  |           |  |               | 324.8 |               |  |          | (0.4  | )           |      |   | 408.2 |   |  |   | 732.6  |      
|                                                              |                          |                              |   |           |  |               |       |               |  |          |       |             |      |   |       |   |  |   |        |      
|2001 net loss                                                 |                          |                              |   |           |  |               |       |               |  |          |       |             |      |   | (11.8 | ) |  |   | (11.8  | )    
|Other comprehensive income (loss):                            |                          |                              |   |           |  |               |       |               |  |          |       |             |      |   |       |   |  |   |        |      
|Officers supplemental retirement plan
net of $0.4 tax benefit |                          |                              |   |           |  |               |       |               |  |          | (0.7  | )           |      |   |       |   |  |   | (0.7   | )    
|Related to marketable securities:                             |                          |                              |   |           |  |               |       |               |  |          |       |             |      |   |       |   |  |   |        |      
|                                                              |                          | Change in fair value         |   |           |  |               |       |               |  |          |       |             | 3.4  |   |       |   |  |   |        |       |      |  
|                                                              |                          | Reclassification to earnings |   |           |  |               |       |               |  |          |       |             | (3.5 | ) |       |   |  |   |        |       |      |  
|                                                              |                          | Income tax effect            |   |           |  |               |       |               |  |          |       |             |     |   |       |   |  |   |        |       |      |  
|                                                              |                          |                              |   |           |  |               |       |               |  |          |       |             |      |   |       |   |  |   |        |       |      |  
|                                                              |                          |                              |   |           |  |               |       |               |  |          | (0.1  | )           |      |   |       |   |  |   | (0.1   | )    
|Related to fuel hedges:                                       |                          |                              |   |           |  |               |       |               |  |          |       |             |      |   |       |   |  |   |        |      
|                                                              |                          | Change in fair value         |   |           |  |               |       |               |  |          |       |             | (1.7 | ) |       |   |  |   |        |       |      |  
|                                                              |                          | Income tax effect            |   |           |  |               |       |               |  |          |       |             | 0.7  |   |       |   |  |   |        |       |      |  
|                                                              |                          |                              |   |           |  |               |       |               |  |          |       |             |      |   |       |   |  |   |        |       |      |  
|                                                              |                          |                              |   |           |  |               |       |               |  |          | (1.0  | )           |      |   |       |   |  |   | (1.0   | )    
|Total comprehensive loss                                      |                          |                              |   |           |  |               |       |               |  |          |       |             |      |   |       |   |  |   | (13.6  | )    
|                                                              |                          |                              |   |           |  |               |       |               |  |          |       |             |      |   |       |   |  |   |        |      
|Balances at December 31, 2001                                 |                          |                              |  |           |  |               | 324.8 |               |  |          | (2.2  | )           |      |   | 396.4 |   |  |   | 719.0  |      
|                                                              |                          |                              |   |           |  |               |       |               |  |          |       |             |      |   |       |   |  |   |        |      
|2002 net loss                                                 |                          |                              |   |           |  |               |       |               |  |          |       |             |      |   | (69.5 | ) |  |   | (69.5  | )    
|Other comprehensive income (loss):                            |                          |                              |   |           |  |               |       |               |  |          |       |             |      |   |       |   |  |   |        |      
|Officers supplemental retirement plan                         |                          |                              |   |           |  |               |       |               |  |          |       |             |      |   |       |   |  |   |        |      
|                                                              |                          | net of $0.4 tax benefit      |   |           |  |               |       |               |  |          |       |             | (0.7 | ) |       |   |  |   |        |       | (0.7 | )
|Related to marketable securities:                             |                          |                              |   |           |  |               |       |               |  |          |       |             |      |   |       |   |  |   |        |      
|                                                              |                          | Change in fair value         |   |           |  |               |       |               |  |          |       |             | (0.4 | ) |       |   |  |   |        |       |      |  
|                                                              |                          | Reclassification to earnings |   |           |  |               |       |               |  |          |       |             | 0.6  |   |       |   |  |   |        |       |      |  
|                                                              |                          | Income tax effect            |   |           |  |               |       |               |  |          |       |             | (0.1 | ) |       |   |  |   |        |       |      |  
|                                                              |                          |                              |   |           |  |               |       |               |  |          |       |             |      |   |       |   |  |   |        |       |      |  
|                                                              |                          |                              |   |           |  |               |       |               |  |          | 0.1   |             |      |   |       |   |  |   | 0.1    |      
|Related to fuel hedges:                                       |                          |                              |   |           |  |               |       |               |  |          |       |             |      |   |       |   |  |   |        |      
|                                                              |                          | Change in fair value         |   |           |  |               |       |               |  |          |       |             | 22.5 |   |       |   |  |   |        |       |      |  
|                                                              |                          | Reclassification to earnings |   |           |  |               |       |               |  |          |       |             | (9.7 | ) |       |   |  |   |        |       |      |  
|                                                              |                          | Income tax effect            |   |           |  |               |       |               |  |          |       |             | (4.8 | ) |       |   |  |   |        |       |      |  
|                                                              |                          |                              |   |           |  |               |       |               |  |          |       |             |      |   |       |   |  |   |        |      
|                                                              |                          |                              |   |           |  |               |       |               |  |          | 8.0   |             |      |   |       |   |  |   | 8.0    |      
|Minimum pension liability adjustment                          |                          |                              |   |           |  |               |       |               |  |          |       |             |      |   |       |   |  |   |        |      
|                                                              | net of $52.5 tax benefit |                              |   |           |  |               |       |               |  |          |       | (87.2       | )    |   |       |   |  |   |        | (87.2 | )   
|                                                              |                          |                              |   |           |  |               |       |               |  |          |       |             |      |   |       |   |  |   |        |       |     
|Total comprehensive loss                                      |                          |                              |   |           |  |               |       |               |  |          |       |             |      |   |       |   |  |   | (149.3 | )    
|                                                              |                          |                              |   |           |  |               |       |               |  |          |       |             |      |   |       |   |  |   |        |      
|Balances at December 31, 2002                                 |                          | $                            |  |           |  | $             | 324.8 |               |  | $        | (82.0 | )           |      | $ | 326.9 |   |  | $ | 569.7  |      
|                                                              |                          |                              |   |           |  |               |       |               |  |          |       |             |      |   |       |   |  |   |        |      

See accompanying notes to financial statements.

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##### Table of Contents



STATEMENTS OF CASH FLOWS
Alaska Airlines, Inc.

|                                                                                |                                      |                                                  |        |      |       |      |        |       |       |   |        |       |       |   | 
|------------------------------------------------------------------------------- | ------------------------------------ | ------------------------------------------------ | ------ | ---- | ----- | ---- | ------ | ----- | ----- | - | ------ | ----- | ----- | - | 
|Year Ended December 31 (In Millions)                                            |                                      | 2000                                             |        | 2001 |       | 2002
|                                                                                |                                      |                                                  |        |      |       |     
|Cash flows from operating activities:                                           |                                      |                                                  |        |      |       |      |        |       |       |   |        |      
|Net loss                                                                        |                                      | $                                                | (61.6  | )    |       | $    | (11.8  | )     |       | $ | (69.5  | )    
|Adjustments to reconcile net loss to
net cash provided by operating activities: |                                      |                                                  |        |      |       |      |        |       |       |   |        |      
|                                                                                |                                      | Cumulative effect of accounting change           |        |      | 46.8  |      |        |       |      |   |        |       | 12.5  |  
|                                                                                |                                      | Depreciation and amortization                    |        |      | 85.9  |      |        |       | 106.1 |   |        |       | 114.2 |  
|                                                                                |                                      | Amortization of airframe and engine overhauls    |        |      | 51.6  |      |        |       | 56.7  |   |        |       | 59.8  |  
|                                                                                |                                      | Change in derivatives                            |        |      |      |      |        |       | 4.9   |   |        |       | (4.7  | )
|                                                                                |                                      | Loss on sale of assets                           |        |      | 1.3   |      |        |       | 5.0   |   |        |       | 1.7   |  
|                                                                                |                                      | Increase in deferred income tax liabilities      |        |      | 38.6  |      |        |       | 31.4  |   |        |       | 19.5  |  
|                                                                                |                                      | Increase (decrease) in accounts receivable  net |        |      | (3.9  | )    |        |       | 14.3  |   |        |       | (70.0 | )
|                                                                                |                                      | Increase in other current assets                 |        |      | (87.8 | )    |        |       | (6.4  | ) |        |       | (15.9 | )
|                                                                                |                                      | Increase in air traffic liability                |        |      | 18.8  |      |        |       | 7.7   |   |        |       | (5.3  | )
|                                                                                |                                      | Increase (decrease) in other current liabilities |        |      | (39.3 | )    |        |       | 44.0  |   |        |       | 20.9  |  
|                                                                                |                                      | Increase in deferred revenue and other-net       |        |      | 151.6 |      |        |       | 31.0  |   |        |       | 56.4  |  
|                                                                                |                                      |                                                  |        |      |       |      |        |       |       |   |        |      
|Net cash provided by operating activities                                       |                                      |                                                  | 202.0  |      |       |      | 282.9  |       |       |   | 119.6  |      
|                                                                                |                                      |                                                  |        |      |       |      |        |       |       |   |        |      
|Cash flows from investing activities:                                           |                                      |                                                  |        |      |       |      |        |       |       |   |        |      
|Proceeds from disposition of assets                                             |                                      |                                                  | 34.8   |      |       |      | 1.2    |       |       |   | 1.3    |      
|Purchases of marketable securities                                              |                                      |                                                  | (459.7 | )    |       |      | (258.5 | )     |       |   | (630.8 | )    
|Sales and maturities of marketable securities                                   |                                      |                                                  | 300.0  |      |       |      | 446.4  |       |       |   | 433.9  |      
|Flight equipment deposits returned                                              |                                      |                                                  | 100.0  |      |       |      | 9.0    |       |       |   | 22.4   |      
|Additions to flight equipment deposits                                          |                                      |                                                  | (121.7 | )    |       |      | (37.9  | )     |       |   | (22.1  | )    
|Additions to property and equipment                                             |                                      |                                                  | (257.7 | )    |       |      | (372.1 | )     |       |   | (146.5 | )    
|Restricted deposits                                                             |                                      |                                                  | (1.1   | )    |       |      | (1.1   | )     |       |   | (13.8  | )    
|                                                                                |                                      |                                                  |        |      |       |      |        |       |       |   |        |      
|Net cash used in investing activities                                           |                                      |                                                  | (405.4 | )    |       |      | (213.0 | )     |       |   | (355.6 | )    
|                                                                                |                                      |                                                  |        |      |       |      |        |       |       |   |        |      
|Cash flows from financing activities:                                           |                                      |                                                  |        |      |       |      |        |       |       |   |        |      
|Proceeds from issuance of long-term debt                                        |                                      |                                                  | 238.1  |      |       |      | 388.8  |       |       |   | 58.0   |      
|Long-term debt and capital lease payments                                       |                                      |                                                  | (65.8  | )    |       |      | (69.2  | )     |       |   | (43.8  | )    
|                                                                                |                                      |                                                  |        |      |       |      |        |       |       |   |        |      
|Net cash provided by financing activities                                       |                                      |                                                  | 172.3  |      |       |      | 319.6  |       |       |   | 14.2   |      
|                                                                                |                                      |                                                  |        |      |       |      |        |       |       |   |        |      
|Net change in cash and cash equivalents                                         |                                      |                                                  | (31.1  | )    |       |      | 389.5  |       |       |   | (221.8 | )    
|Cash and cash equivalents at beginning of year                                  |                                      |                                                  | 132.3  |      |       |      | 101.2  |       |       |   | 490.7  |      
|                                                                                |                                      |                                                  |        |      |       |      |        |       |       |   |        |      
|Cash and cash equivalents at end of year                                        |                                      | $                                                | 101.2  |      |       | $    | 490.7  |       |       | $ | 268.9  |      
|                                                                                |                                      |                                                  |        |      |       |      |        |       |       |   |        |      
|Supplemental disclosure of cash paid (refunded) during the year for:            |                                      |                                                  |        |      |       |      |        |       |       |   |        |      
|                                                                                | Interest (net of amount capitalized) |                                                  | $      | 28.5 |       |      | $      | 49.9  |       |   | $      | 45.2  |      
|                                                                                | Income taxes                         |                                                  |        | 3.6  |       |      |        | (18.4 | )     |   |        | (22.8 | )    

|                                            |  |   |  |                                                                                                                                                                               
|------------------------------------------- |  | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Noncash investing and financing activities:
|2000                                        |  | - |  | A $99.0 million capital contribution from Alaska Air Group was used
to reduce a non-interest bearing payable to Alaska Air Group.                                             
|                                            |  |   |  | A flight simulator was transferred to Alaska Air Group Leasing in exchange for a
$2.4 million note receivable and a $0.6 million reduction in its payable to Alaska Air Group.

See accompanying notes to financial statements.

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NOTES TO FINANCIAL STATEMENTS
Alaska Airlines, Inc.
December 31, 2002

Note 1. Summary of Significant Accounting Policies

Organization and Basis of Presentation

Alaska Airlines, Inc. (Alaska or the Company), an Alaska corporation, is a
wholly owned subsidiary of Alaska Air Group, Inc. (Air Group), a Delaware
corporation. Air Group is also the parent company of Alaska Air Group Leasing
(AAGL) and Horizon Air Industries, Inc. (Horizon).

These financial statements have been prepared in conformity with accounting
principles generally accepted in the United States of America and their
preparation requires the use of managements estimates. Actual results could
differ from these estimates. Certain reclassifications have been made in prior
years financial statements to conform to the 2002 presentation.

Nature of Operations

Alaska is a major airline serving primarily Alaska; Vancouver, Canada; the U.S.
West Coast; and Mexico. It operates an all jet fleet and its average passenger
trip is 932 miles. Substantially all of Alaskas sales occur in the United
States.

Cash and Cash Equivalents

Cash equivalents consist of highly liquid investments with original maturities
of three months or less. They are carried at cost, which approximates market.
The Company reduces its cash balance when checks are disbursed. Due to the
time delay in checks clearing the banks, the Company normally maintains a
negative cash balance, which is reported as a current liability. The amount of
the negative cash balance was $17.4 million and $24.8 million at December 31,
2001 and 2002, respectively.

Inventories and Supplies  net

Expendable and repairable aircraft parts, as well as other materials and
supplies, are stated at average cost. An allowance for obsolescence of flight
equipment expendable and repairable parts is accrued based on estimated
disposal dates and salvage values. Surplus inventories are carried at their
net realizable value. At December 31, 2001 and 2002, the allowance for all
inventories was $24.3 million and $27.4 million, respectively.

Property, Equipment and Depreciation

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

|                                       |  |              
|-------------------------------------- |  | -------------
|Aircraft and related flight equipment: |  |              
|Boeing 737-200C                        |  | 10-14 years  
|Boeing 737-400/700/900                 |  | 20 years     
|Boeing MD-80                           |  | 20 years     
|Buildings                              |  | 10-30 years  
|Capitalized leases and                 |  |              
|leasehold improvements                 |  | Term of lease
|Other equipment                        |  | 3-15 years   

Routine maintenance and repairs are expensed when incurred. The costs of major
airframe and engine overhauls are capitalized and amortized to maintenance
expense over the shorter of the life of the overhaul or the remaining lease
term. Major modifications that extend the life or improve the usefulness of
aircraft are capitalized and depreciated over their estimated period of use.
Assets and related obligations for items financed under capital leases are
initially recorded at an amount equal to the present value of the future
minimum lease payments. The Company reviews long-lived assets for impairment
whenever events or changes in circumstances indicate that the total amount of
an asset may not be recoverable. An impairment loss is recognized when

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estimated future undiscounted cash flows expected to result from the use of the
asset and its eventual disposition are less than its carrying amount. If the
asset is not considered recoverable, an amount equal to the excess of the
carrying amount over the fair value will be charged against the asset with a
corresponding expense to the statement of operations.

Internally Developed Software

The Company capitalizes certain internal development software costs.
Amortization commences when the software is ready for its intended use and the
amortization period is the estimated useful life of the software. Capitalized
costs primarily include contract labor and the internal salaries and wages of
individuals dedicated to the development of internal use software. The Company
capitalized software development costs of $6.1 million, $9.2 million, and $6.9
million during the years ended December 31, 2000, 2001 and 2002, respectively.

Deferred Revenue

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

Leased Aircraft Return Costs

Cash payments associated with returning leased aircraft are accrued when
probable and estimable. As leased aircraft are returned, any payments are
charged against the established reserve. The reserve is part of other current
and long-term liabilities, and at December 31, 2001 and 2002 was $11.6 million
and $14.2 million, respectively.

Revenue Recognition

Passenger revenue is recognized when the passenger travels. Tickets sold but
not yet used are reported as air traffic liability. Freight and mail revenues
are recognized when service is provided. Other-net revenues are primarily
related to the Companys frequent flyer program and they are recognized as
described in the Frequent Flyer Awards paragraph below.

Frequent Flyer Awards

Alaska operates a frequent flyer program (Mileage Plan) that provides travel
awards to members based on accumulated mileage. For miles earned by flying on
Alaska and travel partners, the estimated incremental cost of providing free
travel awards is recognized as a selling expense and accrued as a liability as
miles are accumulated. Alaska also sells mileage credits to non-airline
partners, such as hotels, car rental agencies, and a credit card company. The
Company defers a majority of the sales proceeds and recognizes them as revenue
when the award transportation is provided. The deferred proceeds are
recognized as passenger revenue for awards issued on Alaska, and as other-net
revenue for awards issued on other airlines.

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

|                               |                           |   |       |       |      |   |       |       | 
|------------------------------ | ------------------------- | - | ----- | ----- | ---- | - | ----- | ----- | 
|                               |                           |   | 2001  |       | 2002
|                               |                           |   |       |       |     
|Current Liabilities:           |                           |   |       |       |      |   |       |      
|                               | Other accrued liabilities |   | $     | 65.7  |      |   | $     | 87.0  | 
|Other Liabilities and Credits: |                           |   |       |       |      |   |       |      
|                               | Deferred revenue          |   |       | 150.7 |      |   |       | 183.9 | 
|                               | Other liabilities         |   |       | 31.9  |      |   |       | 32.1  | 
|                               |                           |   |       |       |      |   |       |      
|Total                          |                           | $ | 248.3 |       |      | $ | 303.0 |      
|                               |                           |   |       |       |      |   |       |      

Contracted Services

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

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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 $17.5
million, $15.2 million, and $14.3 million, respectively, in 2000, 2001, and
2002.

Capitalized Interest

Interest is capitalized on flight equipment purchase deposits and ground
facility progress payments as a cost of the related asset. The interest cost
is based on the Companys weighted average borrowing rate and is depreciated
over the estimated useful life of the asset. The Company ceases capitalization
of interest on aircraft when delivery dates are deferred. Capitalization
continues when the deferral period is over.

Income Taxes

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

Derivative Financial Instruments

Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and
Hedging Activities, as amended. SFAS No. 133 requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. The Companys operating results can be significantly impacted by
changes in the price of aircraft fuel. To manage the risks associated with
changes in aircraft fuel prices, the Company uses swap agreements and call
options for crude oil and other commodities. These contracts, referred to as
fuel hedge contracts, have a high correlation to changes in aircraft fuel
prices, and therefore qualify as cash flow hedges under SFAS No. 133. Each
period, the contracts are adjusted to fair market value. The change in the
value of the fuel hedge contracts that perfectly offsets the change in the
value of the aircraft fuel being hedged is recorded as other comprehensive
income or loss until the hedged contract is settled and is then recognized in
earnings as part of fuel expense. To the extent the change in the value of the
fuel hedge contracts does not perfectly offset the change in the value of the
aircraft fuel purchase being hedged, the change is recognized in earnings as
part nonoperating income (expense). At December 31, 2002, Air Group had fuel
hedge contracts for 140 million gallons of jet fuel usage in
2003, which represents approximately 35% of projected usage. Of these
contracts, approximately 85% of projected fuel usage relates to the
Company.

For the years ended December 31, 2001 and 2002, the Company recognized $5.9
million in nonoperating expense and $5.1 million in nonoperating income,
respectively, related to the ineffectiveness of the fuel hedge contracts. In
2001 and 2002, the Company recorded unrealized losses of $1.0 million and
unrealized gains of $8.0 million, respectively, net of income taxes, which are
reflected in other comprehensive income (loss). During 2000 and 2002, the
Company recognized gains of $3.8 million and $9.7 million, respectively, from
the cash settlement of hedging activities. In 2001,

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hedging gains resulting
from cash settlements of hedging activities were de minimus. These amounts
are reflected in aircraft fuel in the statements of operations.

The Company enters into foreign exchange forward contracts, generally with
maturities of less than one month, to manage the risk associated with net
foreign currency transactions. Resulting gains and losses are recognized
currently in other operating expense. The Company periodically enters into
interest rate swap agreements to hedge interest rate risk. At December 31,
2002, there were no foreign currency contracts or interest rate swap agreements
outstanding.

New Accounting Standards

In November 2002, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others.
Interpretation No. 45 elaborates on the disclosures to be made by a guarantor
in its interim and annual financial statements about its obligations under
certain guarantees. Additionally, Interpretation No. 45 clarifies the
requirements for recognizing a liability at the inception of the guarantee
equal to the fair value of the obligation undertaken in issuing the guarantee
and incorporates the guidance in FASB Interpretation No. 34, Disclosure of
Indirect Guarantees of Indebtedness of Others. Disclosures under
Interpretation No. 45 are effective for financial statements issued after
December 15, 2002. While the Company has various guarantees included in
contracts in the normal course of business, primarily in the form of
indemnities, these guarantees would result in only immaterial increases in
future costs, but do not represent significant commitments or contingent
liabilities of the indebtedness of others.

Note 2. Marketable Securities

At December 31, 2001 and 2002, all of the Companys marketable securities are
classified as available-for-sale. The securities are carried at fair value,
with the unrealized gains and losses reported in shareholders equity under the
caption Accumulated Other Comprehensive Income (Loss). Realized gains and
losses are included in other nonoperating income (expense) in the statements of
operations. The cost of securities sold is based on the specific
identification method. Interest and dividends on securities classified as
available-for-sale are included in interest income in the statements of
operations.

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

|                            |  |      |       |      |  |   |       | 
|--------------------------- |  | ---- | ----- | ---- |  | - | ----- | 
|                            |  | 2001 |       | 2002
|                            |  |      |       |     
|Cost:                       |  |      |       |      |  |   |       | 
|U.S. government securities  |  | $    | 59.2  |      |  | $ | 156.1 | 
|Asset backed obligations    |  |      | 72.5  |      |  |   | 118.1 | 
|Other corporate obligations |  |      | 36.2  |      |  |   | 91.0  | 
|                            |  |      |       |      |  |   |       | 
|                            |  | $    | 167.9 |      |  | $ | 365.2 | 
|                            |  |      |       |      |  |   |       | 
|Fair value:                 |  |      |       |      |  |   |       | 
|U.S. government securities  |  | $    | 59.3  |      |  | $ | 158.2 | 
|Asset backed obligations    |  |      | 72.9  |      |  |   | 118.1 | 
|Other corporate obligations |  |      | 37.6  |      |  |   | 90.5  | 
|                            |  |      |       |      |  |   |       | 
|                            |  | $    | 169.8 |      |  | $ | 366.8 | 
|                            |  |      |       |      |  |   |       | 

Of the marketable securities on hand at December 31, 2002, 29% are expected to
mature in 2003, 40% in 2004, and 31% thereafter.

|                                   |  |      |       |      |  |      |       |  |  |   |       | 
|---------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                                   |  | 2000 |       | 2001 |  | 2002
|                                   |  |      |       |      |  |     
|Proceeds from sales
and maturities |  | $    | 300.0 |      |  | $    | 446.4 |  |  | $ | 433.9 | 
|Gross realized gains               |  |      | 0.3   |      |  |      | 4.0   |  |  |   | 1.3   | 
|Gross realized losses              |  |      | 0.6   |      |  |      | 0.4   |  |  |   | 1.7   | 
|                                   |  |      |       |      |  |      |       |  |  |   |       | 

Realized gains and losses are reported as a component of other nonoperating
income (expense).

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Note 3. Other Assets

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

|                         |  |      |       |      |  |   |      | 
|------------------------ |  | ---- | ----- | ---- |  | - | ---- | 
|                         |  | 2001 |       | 2002
|                         |  |      |       |     
|Prepaid pension cost     |  | $    | 98.4  |      |  | $ |     | 
|Restricted deposits      |  |      | 26.7  |      |  |   | 40.6 | 
|Deferred costs and other |  |      | 9.6   |      |  |   | 9.3  | 
|                         |  |      |       |      |  |   |      | 
|                         |  | $    | 134.7 |      |  | $ | 49.9 | 
|                         |  |      |       |      |  |   |      | 

At December 31, 2001, the Company owned approximately 81,000 depository
certificates convertible, subject to certain restrictions, into the common
stock of Equant N.V., a telecommunication network company. During 2001,
France Telecom purchased Equant N.V. At December 31, 2001, carrying value in
the certificates was de minimis; they had an estimated fair value of $1.4
million. In April 2002, the Company sold the certificates for net sales
proceeds of approximately $0.9 million.

Note 4. Related Company Transactions

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

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

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

The Company periodically loans Horizon funds at varying interest rates. All
amounts are payable on demand. Interest income recognized related to the
Horizon loans totaled $3.1 million, $3.1 million, and $2.1 million during
2000, 2001, and 2002, respectively. At December 31, 2002, receivables from
related companies include $67.5 million from Horizon, $10.2 million from AAGL
and $49.0 million from Air Group.

Alaska has an agreement with Horizon, the Incentive Payment Program (IPP), to
provide revenue sharing on certain markets. Under the IPP, Alaska makes a
monthly payment to Horizon for markets which provide connecting traffic to
Alaska but create losses for Horizon (the incentive markets). The payment is
based on full-allocated cost for Horizon to provide the transportation
service, plus a 5% mark-up. Incentive markets are analyzed quarterly and the
monthly reimbursement amount is adjusted to reflect the prior quarters actual
performance. Alaska made incentive payments to Horizon of $15.6 million, $19.0
million, and $24.0 million in 2000, 2001, and 2002, respectively, which are
reflected as commission expense in the statements of operations.

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

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received by Alaska from Horizon were $3.8
million, $3.9 million, and $4.4 million in 2000, 2001, and 2002, respectively.

In the normal course of business, Alaska and Horizon provide certain ground
handling services to the other company. Charges for ground services provided
by Alaska to Horizon totaled $0.6 million, $0.7 million, and $1.7 million
during 2000, 2001, and 2002, respectively. Charges for ground services
provided by Horizon to Alaska totaled $2.1 million, $2.4 million, and $2.6
million during 2000, 2001, and 2002, respectively.

Note 5. Long-Term Debt and Capital Lease Obligations

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

|                                              |  |      |       |      |  |   |       |  
|--------------------------------------------- |  | ---- | ----- | ---- |  | - | ----- | -
|                                              |  | 2001 |       | 2002
|                                              |  |      |       |     
|Fixed rate notes payable
due through 2015*    |  | $    | 420.7 |      |  | $ | 439.9 |  
|Variable rate notes payable
due through 2018* |  |      | 455.5 |      |  |   | 453.6 |  
|                                              |  |      |       |      |  |   |       |  
|Long-term debt                                |  |      | 876.2 |      |  |   | 893.5 |  
|Capital lease obligations                     |  |      | 14.9  |      |  |   | 11.8  |  
|Other                                         |  |      | 4.3   |      |  |   |      |  
|Less current portion                          |  |      | (43.2 | )    |  |   | (48.6 | )
|                                              |  |      |       |      |  |   |       |  
|                                              |  | $    | 852.2 |      |  | $ | 856.7 |  
|                                              |  |      |       |      |  |   |       |  



---

|* |  | The weighted average fixed interest rate was 7.4% during 2001 and 2002. The
weighted average variable interest rate was 4.6% and 2.5% during 2001 and
2002, respectively.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

At December 31, 2002, borrowings of $893.5 million were secured by flight
equipment and real property. During 2002, Alaska issued $58.0 million of debt
secured by flight equipment, having interest rates that vary with LIBOR and
payment terms of 12 years. In September 2001, the Company borrowed $150
million under its credit facility at an interest rate that varies with LIBOR,
payable on or before December 31, 2004.

At December 31, 2002, long-term debt principal payments for the next five
years were (in millions):

|     |  |   |       |  |  |  |  | 
|---- |  | - | ----- |  |  |  |  | 
|2003 |  | $ | 45.3  | 
|2004 |  | $ | 205.5 | 
|2005 |  | $ | 38.8  | 
|2006 |  | $ | 41.6  | 
|2007 |  | $ | 44.5  | 

Certain of the Companys 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, 2002, the Company was in compliance
with all loan provisions.

Note 6. Commitments

Lease Commitments

At December 31, 2002, the Company has lease contracts for 50 aircraft that have
remaining noncancelable lease terms of one to 15 years. The majority of
airport and terminal facilities are also leased, with terms ranging from one to
87 years. Total rent expense was $188.1 million, $192.5 million, and $197.8
million in 2000, 2001, and 2002, respectively.

Future minimum lease payments with noncancelable terms in excess of one year as
of December 31, 2002 are shown below (in millions):

|                                        |  |                  |         |            |  |        |       |  |  |   |      |  
|--------------------------------------- |  | ---------------- | ------- | ---------- |  | ------ | ----- |  |  | - | ---- | -
|                                        |  | Operating Leases |         |           
|                                        |  |                  |         | Capital   
|                                        |  | Aircraft         |         | Facilities |  | Leases
|                                        |  |                  |         |            |  |       
|2003                                    |  | $                | 126.9   |            |  | $      | 34.1  |  |  | $ | 4.1  |  
|2004                                    |  |                  | 110.8   |            |  |        | 25.0  |  |  |   | 8.4  |  
|2005                                    |  |                  | 106.0   |            |  |        | 17.5  |  |  |   | 0.2  |  
|2006                                    |  |                  | 103.4   |            |  |        | 10.9  |  |  |   | 0.2  |  
|2007                                    |  |                  | 88.5    |            |  |        | 8.1   |  |  |   | 0.1  |  
|Thereafter                              |  |                  | 575.4   |            |  |        | 79.5  |  |  |   |     |  
|Total lease payments                    |  | $                | 1,111.0 |            |  | $      | 175.1 |  |  |   | 13.0 |  
|                                        |  |                  |         |            |  |        |       |  |  |   |      |  
|Less amount representing interest       |  |                  |         |            |  |        |       |  |  |   | (1.2 | )
|                                        |  |                  |         |            |  |        |       |  |  |   |      |  
|Present value of capital lease payments |  |                  |         |            |  |        |       |  |  | $ | 11.8 |  
|                                        |  |                  |         |            |  |        |       |  |  |   |      |  

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Aircraft Commitments

The Company has firm orders for 14 Boeing 737 series aircraft to be delivered
between 2003 and 2004. The firm orders require payments of $295.4 million
between 2003 and 2004. As of December 31, 2002, deposits of $57.5 million
related to the firm orders had been made. In addition to the ordered aircraft,
the Company holds purchase options on 26 Boeing 737s.

The Company is party to a purchase agreement with an aircraft manufacturer.
Under the agreement, upon commitment to purchase the aircraft, the Company must
make deposits to the manufacturer of a portion of the purchase price of the
aircraft, with the remainder of the purchase price due at delivery. Concurrent
with this agreement, the manufacturer has an agreement with a trust wherein the
trust makes deposits to the manufacturer of additional pre-delivery deposits
for the aircraft. Under certain specified events, including default by the
trust, the Company may be required to pay the manufacturer the amounts paid by
the trust in order to retain the right to purchase the aircraft. The Company
makes monthly payments to the trust related to the advances made by the trust
to the manufacturer; such payments are capitalized as part of the aircraft
cost. The trust is reimbursed for its advances on or before the delivery of
the applicable aircraft.

Note 7. Employee Benefit Plans

Pension Plans

Four defined benefit and four defined contribution retirement plans cover
various employee groups of the Company. 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 at December 31 (in
millions):

|                                               |  |      |        |      |  |   |         |  
|---------------------------------------------- |  | ---- | ------ | ---- |  | - | ------- | -
|                                               |  | 2001 |        | 2002
|                                               |  |      |        |     
|Projected
benefit obligation                   |  |      |        |      |  |   |         |  
|Beginning of year                              |  | $    | 430.2  |      |  | $ | 507.2   |  
|Service cost                                   |  |      | 29.0   |      |  |   | 37.2    |  
|Interest cost                                  |  |      | 32.3   |      |  |   | 38.6    |  
|Amendments                                     |  |      | 5.2    |      |  |   | 3.8     |  
|Change in assumptions                          |  |      | 16.4   |      |  |   | 41.3    |  
|Actuarial loss                                 |  |      | 6.2    |      |  |   | 25.7    |  
|Benefits paid                                  |  |      | (12.1  | )    |  |   | (13.1   | )
|                                               |  |      |        |      |  |   |         |  
|End of year                                    |  | $    | 507.2  |      |  | $ | 640.7   |  
|                                               |  |      |        |      |  |   |         |  
|Plan
assets at fair value                      |  |      |        |      |  |   |         |  
|Beginning of year                              |  | $    | 438.7  |      |  | $ | 454.5   |  
|Actual return on plan assets                   |  |      | (17.1  | )    |  |   | (42.6   | )
|Employer contributions                         |  |      | 45.0   |      |  |   | 19.3    |  
|Benefits paid                                  |  |      | (12.1  | )    |  |   | (13.1   | )
|                                               |  |      |        |      |  |   |         |  
|End of year                                    |  | $    | 454.5  |      |  | $ | 418.1   |  
|                                               |  |      |        |      |  |   |         |  
|Funded status                                  |  |      | $(52.7 | )    |  |   | $(222.6 | )
|Unrecognized loss                              |  |      | 99.6   |      |  |   | 250.1   |  
|Unrecognized transition asset                  |  |      | (0.1   | )    |  |   | --      |  
|Unrecognized prior service cost                |  |      | 51.6   |      |  |   | 50.2    |  
|                                               |  |      |        |      |  |   |         |  
|Net amounts recognized                         |  | $    | 98.4   |      |  | $ | 77.7    |  
|                                               |  |      |        |      |  |   |         |  
|Amounts recognized in the
balance sheet:       |  |      |        |      |  |   |         |  
|Prepaid benefit cost                           |  | $    | 98.4   |      |  | $ |        |  
|Intangible asset                               |  |      |       |      |  |   | 50.2    |  
|Accrued benefit liability-current              |  |      |       |      |  |   | (38.0   | )
|Accrued benefit liability-long term            |  |      |       |      |  |   | (74.2   | )
|Accumulated other comprehensive
income         |  |      |       |      |  |   | 139.7   |  
|                                               |  |      |        |      |  |   |         |  
|Net amount recognized                          |  | $    | 98.4   |      |  | $ | 77.7    |  
|                                               |  |      |        |      |  |   |         |  
|Weighted average assumptions
as of December 31 |  |      |        |      |  |   |         |  
|Discount rate                                  |  |      | 7.25   | %    |  |   | 6.75    | %
|Expected return on plan assets                 |  |      | 10.0   | %    |  |   | 8.0     | %
|Rate of compensation increase                  |  |      | 5.4    | %    |  |   | 5.4     | %

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Net pension expense for the defined benefit plans included the following components (in millions):

|                                   |  |      |       |      |  |      |       |   |  |   |       |  
|---------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- | - |  | - | ----- | -
|                                   |  | 2000 |       | 2001 |  | 2002
|                                   |  |      |       |      |  |     
|Service cost                       |  | $    | 24.0  |      |  | $    | 29.0  |   |  | $ | 37.2  |  
|Interest cost                      |  |      | 28.5  |      |  |      | 32.3  |   |  |   | 38.6  |  
|Expected return on assets          |  |      | (43.4 | )    |  |      | (46.0 | ) |  |   | (46.4 | )
|Amortization of
prior service cost |  |      | 4.5   |      |  |      | 4.6   |   |  |   | 5.2   |  
|Recognized actuarial
loss (gain)   |  |      | (0.1  | )    |  |      | 0.1   |   |  |   | 5.4   |  
|Amortization of
transition asset   |  |      |      |      |  |      |      |   |  |   |      |  
|                                   |  |      |       |      |  |      |       |   |  |   |       |  
|Net pension expense                |  | $    | 13.5  |      |  | $    | 20.0  |   |  | $ | 40.0  |  
|                                   |  |      |       |      |  |      |       |   |  |   |       |  

In the fourth quarter of 2002, the Company recorded an $87.2 million (net of
taxes of $52.5 million) non-cash charge to equity in connection with the
defined benefit plans that the Company sponsors for eligible employees. This
charge is a result of an unfunded accrued benefit obligation resulting from
lower than expected returns on plan assets and a reduction in discount rate.

The Company also maintains an unfunded, noncontributory defined benefit plan
for certain elected officers. The following table sets forth the status of the
plan at December 31 (in millions):

|                                |  |      |       |      |  |   |        |  
|------------------------------- |  | ---- | ----- | ---- |  | - | ------ | -
|                                |  | 2001 |       | 2002
|                                |  |      |       |     
|Projected benefit obligation    |  |      |       |      |  |   |        |  
|Beginning of year               |  | $    | 24.8  |      |  | $ | 28.3   |  
|Service cost                    |  |      | 0.8   |      |  |   | 0.6    |  
|Interest cost                   |  |      | 1.8   |      |  |   | 2.0    |  
|Amendments                      |  |      |      |      |  |   | 0.5    |  
|Actuarial gain                  |  |      | 1.0   |      |  |   | 1.0    |  
|Benefits paid                   |  |      | (1.4  | )    |  |   | (1.5   | )
|                                |  |      |       |      |  |   |        |  
|End of year                     |  | $    | 27.0  |      |  | $ | 30.9   |  
|                                |  |      |       |      |  |   |        |  
|Plan assets at fair value       |  |      |       |      |  |   |        |  
|Beginning of year               |  | $    |      |      |  | $ |       |  
|Actual return on plan assets    |  |      |      |      |  |   |       |  
|Employer contributions          |  |      | 1.4   |      |  |   | 1.5    |  
|Benefits paid                   |  |      | (1.4  | )    |  |   | (1.5   | )
|                                |  |      |       |      |  |   |        |  
|End of year                     |  | $    | 0.0   |      |  | $ | 0.0    |  
|                                |  |      |       |      |  |   |        |  
|Funded status                   |  | $    | (27.0 | )    |  | $ | (30.9  | )
|Unrecognized loss               |  |      | 3.3   |      |  |   | 5.8    |  
|Unrecognized prior service cost |  |      | 0.4   |      |  |   | 0.7    |  
|                                |  |      |       |      |  |   |        |  
|Net amount recognized           |  | $    | (23.3 | )    |  |   | ($24.4 | )
|                                |  |      |       |      |  |   |        |  

|                                         |  |      |       |      |  |   |       |  
|---------------------------------------- |  | ---- | ----- | ---- |  | - | ----- | -
|                                         |  | 2001 |       | 2002
|                                         |  |      |       |     
|Amounts recognized in the
balance sheet: |  |      |       |      |  |   |       |  
|Intangible assets                        |  | $    | 0.3   |      |  | $ | 0.7   |  
|Accrued benefit liability-current        |  |      | (1.5  | )    |  |   | (1.5  | )
|Accrued benefit liability-long term      |  |      | (25.5 | )    |  |   | (28.2 | )
|Accumulated other comprehensive
income   |  |      | 3.4   |      |  |   | 4.6   |  
|                                         |  |      |       |      |  |   |       |  
|Net amount recognized                    |  | $    | (23.3 | )    |  | $ | (24.4 | )
|                                         |  |      |       |      |  |   |       |  

Net pension expense for the noncontributory defined benefit plan included the
following components (in millions):

|                                   |  |      |     |      |  |      |     |  |  |   |     | 
|---------------------------------- |  | ---- | --- | ---- |  | ---- | --- |  |  | - | --- | 
|                                   |  | 2000 |     | 2001 |  | 2002
|                                   |  |      |     |      |  |     
|Service cost                       |  | $    | 0.7 |      |  | $    | 0.8 |  |  | $ | 0.6 | 
|Interest cost                      |  |      | 1.7 |      |  |      | 1.8 |  |  |   | 2.0 | 
|Expected return on assets          |  |      |    |      |  |      |    |  |  |   |    | 
|Amortization of
prior service cost |  |      | 0.1 |      |  |      |    |  |  |   | 0.1 | 
|Amortization of
transition asset   |  |      | 0.1 |      |  |      |    |  |  |   |    | 
|                                   |  |      |     |      |  |      |     |  |  |   |     | 
|Net pension expense                |  | $    | 2.6 |      |  | $    | 2.6 |  |  | $ | 2.7 | 
|                                   |  |      |     |      |  |      |     |  |  |   |     | 

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 $10.2
million, $12.4 million, and $13.8 million, respectively, in 2000, 2001, and
2002.

Profit Sharing Plans

The Company has an employee profit sharing plan. There was no expense during
2000, 2001, and 2002.

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

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this subsidy is unfunded, and at December 31, 2001 and
2002 was $32.6 million and $52.7 million, respectively. The accrued liability
related to the subsidy is included with other liabilities on the balance sheet,
and totaled $29.4 million and $31.3 million at December 31, 2001 and 2002,
respectively. Annual expense related to this subsidy was approximately $4.6
million in 2000 and in 2001, and $4.4 million in 2002.

Net periodic benefit cost for the postretirement medical plans included the
following components (in millions):

|                                   |  |      |     |      |  |      |     |  |  |   |      |  
|---------------------------------- |  | ---- | --- | ---- |  | ---- | --- |  |  | - | ---- | -
|                                   |  | 2000 |     | 2001 |  | 2002
|                                   |  |      |     |      |  |     
|Service cost                       |  | $    | 1.3 |      |  | $    | 1.5 |  |  | $ | 2.3  |  
|Interest cost                      |  |      | 1.9 |      |  |      | 2.1 |  |  |   | 3.2  |  
|Expected return on assets          |  |      |    |      |  |      |    |  |  |   |     |  
|Amortization of
prior service cost |  |      | 0.2 |      |  |      | 0.1 |  |  |   | (0.2 | )
|Recognized actuarial
loss (gain)   |  |      | 1.2 |      |  |      | 0.9 |  |  |   | (0.9 | )
|                                   |  |      |     |      |  |      |     |  |  |   |      |  
|Net periodic benefit cost          |  | $    | 4.6 |      |  | $    | 4.6 |  |  | $ | 4.4  |  
|                                   |  |      |     |      |  |      |     |  |  |   |      |  

Effect of 1% higher or lower trend rates for the postretirement medical plans
on the following components (in millions):

|                                                     |                      |   |      |      |      |   |      |      |   |   |     |      |  
|---------------------------------------------------- | -------------------- | - | ---- | ---- | ---- | - | ---- | ---- | - | - | --- | ---- | -
|                                                     |                      |   | 2000 |      | 2001 |   | 2002
|                                                     |                      |   |      |      |      |   |     
|Change in service and interest cost                  |                      | $ | 0.5  |      |      | $ | 0.6  |      |   | $ | 1.0 |     
|                                                     | 1% higher trend rate |   | $    | 0.5  |      |   | $    | 0.6  |   |   | $   | 1.0  |  
|                                                     | 1% lower trend rate  |   |      | (0.5 | )    |   |      | (0.5 | ) |   |     | (0.6 | )
|Change in year-end postretirement
benefit obligation |                      | $ | 4.2  |      |      | $ | 5.0  |      |   | $ | 7.0 |     
|                                                     | 1% higher trend rate |   | $    | 4.2  |      |   | $    | 5.0  |   |   | $   | 7.0  |  
|                                                     | 1% lower trend rate  |   |      | (3.6 | )    |   |      | (4.2 | ) |   |     | (6.0 | )

Note 8. Income Taxes

Alaska files a consolidated tax return with Air Group and other Air Group
subsidiaries. Each member of the consolidated group, including Alaska,
calculates its tax provision and tax liability, if applicable, on a
separate-entity basis. Any differences between the consolidated amounts and
the total of the subsidiaries amounts are included in the tax provision of the
parent company.

Deferred income taxes reflect the impact of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
such amounts for tax purposes. Deferred tax (assets) and liabilities comprise
the following at December 31 (in millions):

|                                     |  |      |        |      |  |   |        |  
|------------------------------------ |  | ---- | ------ | ---- |  | - | ------ | -
|                                     |  | 2001 |        | 2002
|                                     |  |      |        |     
|Excess of tax over book
depreciation |  | $    | 279.8  |      |  | $ | 342.2  |  
|Fuel hedges                          |  |      |       |      |  |   | 4.2    |  
|Other  net                          |  |      | 1.7    |      |  |   | 9.7    |  
|                                     |  |      |        |      |  |   |        |  
|Gross deferred tax liabilities       |  |      | 281.5  |      |  |   | 356.1  |  
|                                     |  |      |        |      |  |   |        |  
|Frequent flyer program               |  |      | (88.0  | )    |  |   | (112.4 | )
|Alternative minimum tax              |  |      | (21.7  | )    |  |   | (56.1  | )
|Leased aircraft return provisions    |  |      | (4.7   | )    |  |   | (5.9   | )
|Inventory obsolescence               |  |      | (9.2   | )    |  |   | (6.7   | )
|Deferred revenue                     |  |      | (9.9   | )    |  |   | (12.4  | )
|Fuel hedges                          |  |      | (3.0   | )    |  |   |       |  
|Employee benefits                    |  |      | (1.8   | )    |  |   | (53.1  | )
|Other  net                          |  |      | (7.6   | )    |  |   | (16.0  | )
|                                     |  |      |        |      |  |   |        |  
|Gross deferred tax assets            |  |      | (145.9 | )    |  |   | (262.6 | )
|                                     |  |      |        |      |  |   |        |  
|Net deferred tax liabilities         |  | $    | 135.6  |      |  | $ | 93.5   |  
|                                     |  |      |        |      |  |   |        |  
|Current deferred tax asset           |  | $    | (46.7  | )    |  | $ | (60.2  | )
|Noncurrent deferred tax liability    |  |      | 182.3  |      |  |   | 153.7  |  
|                                     |  |      |        |      |  |   |        |  
|Net deferred tax liability           |  | $    | 135.6  |      |  | $ | 93.5   |  
|                                     |  |      |        |      |  |   |        |  

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

|                                                         |         |                   |       |      |       |      |       |       |      |   |       |       |       |  
|-------------------------------------------------------- | ------- | ----------------- | ----- | ---- | ----- | ---- | ----- | ----- | ---- | - | ----- | ----- | ----- | -
|                                                         |         |                   |       | 2000 |       | 2001 |       | 2002 
|                                                         |         |                   |       |      |       |      |       |      
|Current
tax expense (benefit):                           |         |                   |       |      |       |      |       |       |      |   |       |      
|                                                         | Federal |                   | $     | 1.4  |       |      | $     | (22.1 | )    |   | $     | (34.0 | )    
|                                                         | State   |                   |       | 0.3  |       |      |       | (1.2  | )    |   |       | (2.0  | )    
|                                                         |         |                   |       |      |       |      |       |       |      |   |       |      
|Total current                                            |         |                   | 1.7   |      |       |      | (23.3 | )     |      |   | (36.0 | )    
|                                                         |         |                   |       |      |       |      |       |       |      |   |       |      
|Deferred
tax expense (benefit):                          |         |                   |       |      |       |      |       |       |      |   |       |      
|                                                         | Federal |                   |       | (4.8 | )     |      |       | 19.1  |      |   |       | 5.1   |      
|                                                         | State   |                   |       | (2.2 | )     |      |       | (0.4  | )    |   |       | 0.6   |      
|                                                         |         |                   |       |      |       |      |       |       |      |   |       |      
|Total deferred                                           |         |                   | (7.0  | )    |       |      | 18.7  |       |      |   | 5.7   |      
|                                                         |         |                   |       |      |       |      |       |       |      |   |       |      
|Total before acctg. change                               |         |                   | (5.3  | )    |       |      | (4.6  | )     |      |   | (30.3 | )    
|                                                         |         |                   |       |      |       |      |       |       |      |   |       |      
|Deferred tax benefit, cumulative
effect of acctg. change |         |                   | (29.5 | )    |       |      |      |       |      |   | --    |      
|                                                         |         |                   |       |      |       |      |       |       |      |   |       |      
|                                                         |         | Total tax benefit |       | $    | (34.8 | )    |       | $     | (4.6 | ) |       | $     | (30.3 | )
|                                                         |         |                   |       |      |       |      |       |       |      |   |       |      

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

|                                             |  |      |       |      |  |      |       |   |  |   |       |  
|-------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- | - |  | - | ----- | -
|                                             |  | 2000 |       | 2001 |  | 2002
|                                             |  |      |       |      |  |     
|Loss before income tax
and accounting change |  | $    | (20.1 | )    |  | $    | (16.4 | ) |  | $ | (87.3 | )
|                                             |  |      |       |      |  |      |       |   |  |   |       |  
|Expected tax benefit                         |  | $    | (7.0  | )    |  | $    | (5.7  | ) |  | $ | (30.6 | )
|Nondeductible expenses                       |  |      | 2.2   |      |  |      | 2.2   |   |  |   | 1.8   |  
|State income tax                             |  |      | (0.5  | )    |  |      | (1.1  | ) |  |   | (1.9  | )
|Other  net                                  |  |      |      |      |  |      |      |   |  |   | 0.4   |  
|                                             |  |      |       |      |  |      |       |   |  |   |       |  
|Actual tax benefit                           |  | $    | (5.3  | )    |  | $    | (4.6  | ) |  | $ | (30.3 | )
|                                             |  |      |       |      |  |      |       |   |  |   |       |  
|Statutory tax rate                           |  |      | 26.4  | %    |  |      | 28.0  | % |  |   | 34.7  | %
|                                             |  |      |       |      |  |      |       |   |  |   |       |  

As of December 31, 2001 and 2002, the following intercompany tax accounts were
recorded on the balance sheets:

|                                     |  |      |      |      |  |   |      | 
|------------------------------------ |  | ---- | ---- | ---- |  | - | ---- | 
|                                     |  | 2001 |      | 2002
|                                     |  |      |      |     
|Receivable from affiliated companies |  | $    | 11.4 |      |  | $ | 17.7 | 
|Payable to Air Group                 |  | $    | 11.4 |      |  | $ | 17.7 | 

Note 9. Financial Instruments

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

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

|                          |  |                   |       |       |  |   |       | 
|------------------------- |  | ----------------- | ----- | ----- |  | - | ----- | 
|                          |  | December 31, 2002
|                          |  |                  
|                          |  | Carrying          |       | Fair 
|                          |  | Amount            |       | Value
|                          |  |                   |       |      
|Assets:                   |  |                   |       |       |  |   |       | 
|Cash and cash equivalents |  | $                 | 268.9 |       |  | $ | 268.9 | 
|Marketable securities     |  |                   | 366.8 |       |  |   | 366.8 | 
|Restricted deposits       |  |                   | 40.6  |       |  |   | 40.6  | 
|Fuel hedge contracts      |  |                   | 14.0  |       |  |   | 14.0  | 
|Liabilities:              |  |                   |       |       |  |   |       | 
|Long-term debt            |  |                   | 856.7 |       |  |   | 926.7 | 
|                          |  |                   |       |       |  |   |       | 

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, 2001, the fair
value of restricted deposits includes depository certificates convertible into
the common stock of Equant N.V., which were valued at $1.4 million based on
the market value of France Telecom stock. In April 2002 the Company sold the
certificates for net sales proceeds of approximately $0.9 million. The fair
value of long-term debt is based on a discounted cash flow analysis using the
Companys current borrowing rate.

Note 10. U.S. Government Compensation

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

Through December 31, 2001, Alaska received government compensation of $71.6
million. This amount is reflected in nonoperating income (expense) in the
statement of operations. During the third quarter of 2002, the Department of
Transportation completed its review procedures and remitted a final
compensation payment to Alaska of $0.2 million.

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Note 11. Contingencies

Oakland Maintenance Investigation

In December 1998, the U.S. attorney for the Northern District of California
initiated a grand jury investigation concerning certain 1998 maintenance
activities at Alaskas Oakland maintenance base. The investigation was expanded
to include the aircraft involved in the loss of Flight 261 in January 2000. The
FAA separately proposed a civil penalty in connection with the 1998 maintenance
activities, which Alaska and the FAA have settled for an agreed amount. In
December 2001, the U.S. attorney notified Alaska that the evidence it had
gathered relative to the 1998 maintenance activities did not warrant the filing
of criminal charges, and closed that part of the investigation. The U.S.
attorney also placed the portion of its investigation related to Flight 261 on
inactive status, with the possibility of reactivating and reviewing the matter
when the National Transportation Safety Board (NTSB) issued its final report on
the accident. Accordingly, following the final NTSB hearing on the Flight 261
investigation in December 2002, the U.S. attorneys office reactivated the
matter in order to review it in light of the final NTSB report.

Flight 261 Litigation

Alaska is a defendant in a number of lawsuits relating to the loss of Flight
261 on January 31, 2000. Representatives of all 88 passengers and crew on board
have filed cases against Alaska, the Boeing Company, and others. The suits
were originally filed in various state and federal courts in Alaska,
California, Washington and Illinois. Since then, they have all been
consolidated in the U.S. District Court for the Northern District of
California. The suits seek unspecified compensatory and punitive damages. In
May 2001, the judge presiding over the majority of the cases ruled that
punitive damages are not available against Alaska. Alaska has settled 48 of
the cases for those lost on Flight 261 and continues in its efforts to settle
the remaining ones. Trial on the remaining cases is set for July 2003.
Consistent with industry standards, the Company maintains insurance against
aircraft accidents.

Flight 261 NTSB Proceeding

In January 2003, the NTSB issued its final report on the Flight 261 accident.
The report contained the NTSBs findings, conclusions, probable cause of the
accident and safety recommendations. The NTSB staffs draft report included
language that the Board recommend a new FAA inspection of Alaska due to
perceived deficiencies in recent maintenance practices. The Board rejected
that recommendation.

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

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

Note 12. Change in Accounting Principles

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 2000 the Company changed its
method of accounting for the sale of miles in its Mileage Plan. Under the new

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

In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. Under this statement, goodwill is considered to have an indefinite
life and will no longer be amortized but instead will be subject to periodic
impairment testing. Effective January 1, 2002, the Company adopted SFAS No.
142. Assuming the Company had adopted this standard as of January 1, 2000, the
Companys net loss for the years ended December 31, 2000 and 2001 would be
reduced by approximately $0.5 million for the impact of goodwill amortization.

During the second quarter of 2002, the Company completed the first step of its
impairment test related to its $12.5 million of goodwill and determined that
the net book value exceeded its fair value. In the fourth quarter of 2002, the
Company completed the second step of its impairment test and determined that
all of the Companys goodwill was impaired. As a result, the Company recorded
a one-time, non-cash charge, effective January 1, 2002, of $12.5 million to
write-off all of its goodwill. This charge is reflected as a cumulative effect
of accounting change in the statement of operations.

The impact of this statement was also to increase annual results of operations
by $0.5 million resulting from no longer amortizing goodwill.

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Alaska Airlines Financial and Statistical Data ( Unaudited)

|                                             |  |                           |        |                        |  |        |        |      |  |          |       |        |      |   |         |   |      |   |         |          |  |  |       |  
|-------------------------------------------- |  | ------------------------- | ------ | ---------------------- |  | ------ | ------ | ---- |  | -------- | ----- | ------ | ---- | - | ------- | - | ---- | - | ------- | -------- |  |  | ----- | -
|                                             |  | Quarter Ended December 31 |        | Year Ended December 31
|                                             |  |                           |        |                       
|                                             |  |                           |        |                        |  |        |        |      |  | %        |       |        |      |   |         |   |      |   |         | %       
|Financial Data (in millions):                |  | 2001                      |        | 2002                   |  | Change |        | 2001 |  | 2002     |       | Change
|                                             |  |                           |        |                        |  |        |        |      |  |          |       |       
|Operating Revenues:                          |  |                           |        |                        |  |        |        |      |  |          |       |        |      |   |         |   |      |   |         |          |  |  |       |  
|Passenger                                    |  | $                         | 349.6  |                        |  | $      | 392.2  |      |  |          | 12.2  |        |      | $ | 1,607.6 |   |      | $ | 1,667.8 |          |  |  | 3.7   |  
|Freight and mail                             |  |                           | 17.7   |                        |  |        | 16.6   |      |  |          | (6.2  | )      |      |   | 78.2    |   |      |   | 72.1    |          |  |  | (7.8  | )
|Other  net                                  |  |                           | 18.2   |                        |  |        | 21.0   |      |  |          | 15.4  |        |      |   | 77.2    |   |      |   | 93.2    |          |  |  | 20.7  |  
|                                             |  |                           |        |                        |  |        |        |      |  |          |       |        |      |   |         |   |      |   |         |          |  |  |       |  
|Total Operating Revenues                     |  |                           | 385.5  |                        |  |        | 429.8  |      |  |          | 11.5  |        |      |   | 1,763.0 |   |      |   | 1,833.1 |          |  |  | 4.0   |  
|                                             |  |                           |        |                        |  |        |        |      |  |          |       |        |      |   |         |   |      |   |         |          |  |  |       |  
|Operating Expenses:                          |  |                           |        |                        |  |        |        |      |  |          |       |        |      |   |         |   |      |   |         |          |  |  |       |  
|Wages and benefits                           |  |                           | 166.4  |                        |  |        | 179.9  |      |  |          | 8.1   |        |      |   | 642.9   |   |      |   | 705.5   |          |  |  | 9.7   |  
|Contracted services                          |  |                           | 19.0   |                        |  |        | 20.4   |      |  |          | 7.4   |        |      |   | 76.0    |   |      |   | 80.7    |          |  |  | 6.2   |  
|Aircraft fuel                                |  |                           | 49.9   |                        |  |        | 67.2   |      |  |          | 34.7  |        |      |   | 269.8   |   |      |   | 257.3   |          |  |  | (4.6  | )
|Aircraft maintenance                         |  |                           | 29.7   |                        |  |        | 41.9   |      |  |          | 41.1  |        |      |   | 129.7   |   |      |   | 145.2   |          |  |  | 12.0  |  
|Aircraft rent                                |  |                           | 33.6   |                        |  |        | 32.4   |      |  |          | (3.6  | )      |      |   | 137.6   |   |      |   | 128.2   |          |  |  | (6.8  | )
|Food and beverage service                    |  |                           | 13.2   |                        |  |        | 15.6   |      |  |          | 18.2  |        |      |   | 55.5    |   |      |   | 63.5    |          |  |  | 14.4  |  
|Commissions                                  |  |                           | 13.6   |                        |  |        | 7.6    |      |  |          | (44.1 | )      |      |   | 64.1    |   |      |   | 48.2    |          |  |  | (24.8 | )
|Other selling expenses                       |  |                           | 23.8   |                        |  |        | 23.1   |      |  |          | (2.9  | )      |      |   | 102.7   |   |      |   | 101.9   |          |  |  | (0.8  | )
|Depreciation and amortization                |  |                           | 30.0   |                        |  |        | 28.4   |      |  |          | (5.3  | )      |      |   | 106.1   |   |      |   | 114.2   |          |  |  | 7.6   |  
|Loss on sale of assets                       |  |                           | 3.2    |                        |  |        | 1.0    |      |  | NM       |       |        | 5.0  |   |         |   | 1.7  |   |         | NM      
|Landing fees and other rentals               |  |                           | 28.7   |                        |  |        | 28.3   |      |  |          | (1.4  | )      |      |   | 99.5    |   |      |   | 110.5   |          |  |  | 11.1  |  
|Other                                        |  |                           | 35.4   |                        |  |        | 38.0   |      |  |          | 7.3   |        |      |   | 145.7   |   |      |   | 150.7   |          |  |  | 3.4   |  
|                                             |  |                           |        |                        |  |        |        |      |  |          |       |        |      |   |         |   |      |   |         |          |  |  |       |  
|Total Operating Expenses                     |  |                           | 446.5  |                        |  |        | 483.8  |      |  |          | 8.4   |        |      |   | 1,834.6 |   |      |   | 1,907.6 |          |  |  | 4.0   |  
|                                             |  |                           |        |                        |  |        |        |      |  |          |       |        |      |   |         |   |      |   |         |          |  |  |       |  
|Operating Loss                               |  |                           | (61.0  | )                      |  |        | (54.0  | )    |  |          | (11.5 | )      |      |   | (71.6   | ) |      |   | (74.5   | )        |  |  | 4.1   |  
|                                             |  |                           |        |                        |  |        |        |      |  |          |       |        |      |   |         |   |      |   |         |          |  |  |       |  
|Interest income                              |  |                           | 4.4    |                        |  |        | 5.7    |      |  |          |       |        |      |   | 26.0    |   |      |   | 23.2    |          |  |  |       |  
|Interest expense                             |  |                           | (12.9  | )                      |  |        | (11.5  | )    |  |          |       |        |      |   | (47.4   | ) |      |   | (46.3   | )        |  |  |       |  
|Interest capitalized                         |  |                           | 0.9    |                        |  |        | 1.0    |      |  |          |       |        |      |   | 7.5     |   |      |   | 2.1     |          |  |  |       |  
|U.S. government compensation                 |  |                           | 52.9   |                        |  |        |       |      |  |          |       |        |      |   | 71.6    |   |      |   | 0.3     |          |  |  |       |  
|Other  net                                  |  |                           | (3.1   | )                      |  |        | 0.2    |      |  |          |       |        |      |   | (2.5    | ) |      |   | 7.9     |          |  |  |       |  
|                                             |  |                           |        |                        |  |        |        |      |  |          |       |        |      |   |         |   |      |   |         |          |  |  |       |  
|                                             |  |                           | 42.2   |                        |  |        | (4.6   | )    |  |          |       |        |      |   | 55.2    |   |      |   | (12.8   | )        |  |  |       |  
|                                             |  |                           |        |                        |  |        |        |      |  |          |       |        |      |   |         |   |      |   |         |          |  |  |       |  
|Loss Before Income Tax
and Accounting Change |  | $                         | (18.8  | )                      |  | $      | (58.6  | )    |  |          | 211.7 |        |      | $ | (16.4   | ) |      | $ | (87.3   | )        |  |  | 432.3 |  
|                                             |  |                           |        |                        |  |        |        |      |  |          |       |        |      |   |         |   |      |   |         |          |  |  |       |  
|Operating Statistics:                        |  |                           |        |                        |  |        |        |      |  |          |       |        |      |   |         |   |      |   |         |          |  |  |       |  
|Revenue passengers (000)                     |  |                           | 3,025  |                        |  |        | 3,367  |      |  |          | 11.3  |        |      |   | 13,668  |   |      |   | 14,154  |          |  |  | 3.6   |  
|RPMs (000,000)                               |  |                           | 2,736  |                        |  |        | 3,164  |      |  |          | 15.6  |        |      |   | 12,249  |   |      |   | 13,186  |          |  |  | 7.6   |  
|ASMs (000,000)                               |  |                           | 4,121  |                        |  |        | 4,758  |      |  |          | 15.5  |        |      |   | 17,919  |   |      |   | 19,360  |          |  |  | 8.0   |  
|Passenger load factor                        |  |                           | 66.4   | %                      |  |        | 66.5   | %    |  | 0.1pts   |       |        | 68.4 | % |         |   | 68.1 | % |         | (0.3)pts
|Breakeven load factor                        |  |                           | 82.2   | %                      |  |        | 78.4   | %    |  | (3.7)pts |       |        | 73.5 | % |         |   | 73.1 | % |         | (0.4)pts
|Yield per passenger mile                     |  |                           | 12.78¢ |                        |  |        | 12.40¢ |      |  |          | (3.0  | )      |      |   | 13.12¢  |   |      |   | 12.65¢  |          |  |  | (3.6  | )
|Operating revenue per ASM                    |  |                           | 9.35¢  |                        |  |        | 9.03¢  |      |  |          | (3.4  | )      |      |   | 9.84¢   |   |      |   | 9.47¢   |          |  |  | (3.8  | )
|Operating expenses per ASM                   |  |                           | 10.84¢ |                        |  |        | 10.17¢ |      |  |          | (6.2  | )      |      |   | 10.24¢  |   |      |   | 9.85¢   |          |  |  | (3.8  | )
|Expense per ASM excluding fuel               |  |                           | 9.62¢  |                        |  |        | 8.76¢  |      |  |          | (8.9  | )      |      |   | 8.73¢   |   |      |   | 8.52¢   |          |  |  | (2.4  | )
|Fuel cost per gallon                         |  |                           | 71.9¢  |                        |  |        | 84.7¢  |      |  |          | 17.8  |        |      |   | 88.3¢   |   |      |   | 79.6¢   |          |  |  | (9.9  | )
|Fuel gallons (000,000)                       |  |                           | 69.6   |                        |  |        | 79.3   |      |  |          | 13.9  |        |      |   | 305.7   |   |      |   | 323.3   |          |  |  | 5.8   |  
|Average number of employees                  |  |                           | 9,834  |                        |  |        | 10,065 |      |  |          | 2.3   |        |      |   | 10,115  |   |      |   | 10,142  |          |  |  | 0.3   |  
|Aircraft utilization (blk hrs/day)           |  |                           | 9.2    |                        |  |        | 10.3   |      |  |          | 12.0  |        |      |   | 10.4    |   |      |   | 10.6    |          |  |  | 1.9   |  
|Operating fleet at period-end                |  |                           | 101    |                        |  |        | 102    |      |  |          | 1.0   |        |      |   | 101     |   |      |   | 102     |          |  |  | 1.0   |  

NM = Not Meaningful

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INDEPENDENT AUDITORS REPORT

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

We have audited the accompanying balance sheets of Alaska Airlines, Inc. (an
Alaska Corporation) (the Company), a wholly owned subsidiary of Alaska Air
Group, Inc., as of December 31, 2002 and 2001 and the related statements of
operations, shareholders equity, and cash flows for each of the three years in
the period ended December 31, 2002. Our audits also included the financial
statement schedule listed in the Index at Item 15(a). These financial
statements and financial statement schedule are the responsibility of the
Companys management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.

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

In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 2002 and
2001 and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 2002 in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, such financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.

The Company changed its method of accounting for goodwill upon adoption of SFAS
No. 142 Goodwill and Other Intangible Assets for the year ended December 31,
2002 and for the deferral of revenue on miles sold under the mileage plan for
the year ended December 31, 2000, both discussed in Note 12 to the financial
statements.

/s/ DELOITTE & TOUCHE LLP

Deloitte & Touche LLP
Seattle, Washington

March 10, 2003

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

|                                                     |                                                         |         |           |            |         |            |           |         |        |  |   |      |   |  |   |      | 
|---------------------------------------------------- | ------------------------------------------------------- | ------- | --------- | ---------- | ------- | ---------- | --------- | ------- | ------ |  | - | ---- | - |  | - | ---- | 
|                                                     |                                                         |         |           |            |         |            | Additions |         |        |  |   |      |   |  |  
|                                                     |                                                         |         | Beginning |            | Charged |            | (A)       |         | Ending
|(In Millions)                                        |                                                         | Balance |           | to Expense |         | Deductions |           | Balance
|                                                     |                                                         |         |           |            |         |            |           |        
|Year
Ended December 31, 2000                         |                                                         |         |           |            |         |            |           |         |        |  |   |      |   |  |   |     
|(a) Reserve deducted from asset
to which it applies: |                                                         |         |           |            |         |            |           |         |        |  |   |      |   |  |   |     
|                                                     | Allowance for doubtful accounts                         |         | $         | 1.0        |         |            | $         | 1.8     |        |  | $ | (1.1 | ) |  | $ | 1.7  | 
|                                                     |                                                         |         |           |            |         |            |           |         |        |  |   |      |   |  |   |     
|                                                     | Obsolescence allowance for flight
equipment spare parts |         | $         | 18.2       |         |            | $         | 2.2     |        |  | $ | (0.2 | ) |  | $ | 20.2 | 
|                                                     |                                                         |         |           |            |         |            |           |         |        |  |   |      |   |  |   |     
|(b) Reserve recorded as other
long-term liabilities: |                                                         |         |           |            |         |            |           |         |        |  |   |      |   |  |   |     
|                                                     | Leased aircraft return provision                        |         | $         | 4.0        |         |            | $         | 4.0     |        |  | $ | 0.0  |   |  | $ | 8.0  | 
|                                                     |                                                         |         |           |            |         |            |           |         |        |  |   |      |   |  |   |     
|Year Ended December 31, 2001                         |                                                         |         |           |            |         |            |           |         |        |  |   |      |   |  |   |     
|(a) Reserve deducted from asset
to which it applies: |                                                         |         |           |            |         |            |           |         |        |  |   |      |   |  |   |     
|                                                     | Allowance for doubtful accounts                         |         | $         | 1.7        |         |            | $         | 2.5     |        |  | $ | (2.4 | ) |  | $ | 1.8  | 
|                                                     |                                                         |         |           |            |         |            |           |         |        |  |   |      |   |  |   |     
|                                                     | Obsolescence allowance for flight
equipment spare parts |         | $         | 20.2       |         |            | $         | 4.1     |        |  | $ | 0.0  |   |  | $ | 24.3 | 
|                                                     |                                                         |         |           |            |         |            |           |         |        |  |   |      |   |  |   |     
|(b) Reserve recorded as other
long-term liabilities: |                                                         |         |           |            |         |            |           |         |        |  |   |      |   |  |   |     
|                                                     | Leased aircraft return provision                        |         | $         | 8.0        |         |            | $         | 4.0     |        |  | $ | (0.4 | ) |  | $ | 11.6 | 
|                                                     |                                                         |         |           |            |         |            |           |         |        |  |   |      |   |  |   |     
|Year Ended December 31, 2002                         |                                                         |         |           |            |         |            |           |         |        |  |   |      |   |  |   |     
|(a) Reserve deducted from asset
to which it applies: |                                                         |         |           |            |         |            |           |         |        |  |   |      |   |  |   |     
|                                                     | Allowance for doubtful accounts                         |         | $         | 1.8        |         |            | $         | 1.6     |        |  | $ | (1.5 | ) |  | $ | 1.9  | 
|                                                     |                                                         |         |           |            |         |            |           |         |        |  |   |      |   |  |   |     
|                                                     | Obsolescence allowance for flight
equipment spare parts |         | $         | 24.3       |         |            | $         | 4.1     |        |  | $ | (1.0 | ) |  | $ | 27.4 | 
|                                                     |                                                         |         |           |            |         |            |           |         |        |  |   |      |   |  |   |     
|(b) Reserve recorded as other
long-term liabilities: |                                                         |         |           |            |         |            |           |         |        |  |   |      |   |  |   |     
|                                                     | Leased aircraft return provision                        |         | $         | 11.6       |         |            | $         | 2.8     |        |  | $ | (0.2 | ) |  | $ | 14.2 | 
|                                                     |                                                         |         |           |            |         |            |           |         |        |  |   |      |   |  |   |     



---

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

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EXHIBIT INDEX

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

|     |  |                                                                                                                                                                                        | 
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|3.1  |  | Articles of Incorporation of Alaska Airlines,
Inc. as amended through March 7, 1991 (Exhibit
3.1 to Form 10-Q for the six months ended June
30, 2002)                                 
|     |  |                                                                                                                                                                                       
|*3.2 |  | Bylaws of Alaska Airlines, Inc. as amended and
in effect November 4, 1997                                                                                                             
|     |  |                                                                                                                                                                                       
|4.1  |  | Trust Indentures and Security Agreement for
Alaska Airlines Equipment Trust Certificates,
Series A and B (Exhibit No. 4(a)(1) to Form S-3,
Amendment No. 1, Registration No. 33-46668)
|     |  |                                                                                                                                                                                       
|4.2  |  | Trust Indentures and Security Agreement for
Alaska Airlines Equipment Trust Certificates,
Series C and D (Exhibit No. 4(a)(1) to Form S-3,
Amendment No. 2, Registration No. 33-46668)
|     |  |                                                                                                                                                                                       
|4.3  |  | Participation Agreement for Alaska Airlines
Equipment Trust Certificates, Series A and B
(Exhibit No. 4(b)(1) to Form S-3, Amendment No.
1, Registration No. 33-46668)                
|     |  |                                                                                                                                                                                       
|4.4  |  | Participation Agreement for Alaska Airlines
Equipment Trust Certificates, Series C and D
(Exhibit No. 4(b)(1) to Form S-3, Amendment No.
2, Registration No. 33-46668)                
|     |  |                                                                                                                                                                                       
|4.5  |  | Lease Agreement for Alaska Airlines Equipment
Trust Certificates (Exhibit No. 4(b)(2) to Form
S-3, Registration No. 33-46668)                                                         
|     |  |                                                                                                                                                                                       
|10.1 |  | Management Incentive Plan (Exhibit 10.1 to 2002
Alaska Air Group, Inc. Form 10-K)                                                                                                     
|     |  |                                                                                                                                                                                       
|10.2 |  | Loan Agreement dated as of December 1, 1984,
between                                                                                                                                  

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|         |  |                                                                                                                                                                                                                                                                                             | 
|-------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|         |  | Alaska Airlines, Inc. and the Industrial
Development Corporation of the Port of Seattle
(Exhibit 10-38 to 1984 10-K for Alaska Air
Group, Inc.)                                                                                                                                            
|         |  |                                                                                                                                                                                                                                                                                            
|#10.3    |  | Lease Agreement dated January 22, 1990 between
International Lease Finance Corporation and
Alaska Airlines, Inc. for the lease of a
B737-400 aircraft, summaries of 19 substantially
identical lease agreements and Letter Agreement
#1 dated January 22, 1990 (Exhibit 10-14 to 1990
10-K)
|         |  |                                                                                                                                                                                                                                                                                            
|#10.4(a) |  | 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)                                                                                                                       
|         |  |                                                                                                                                                                                                                                                                                            
|#10.4(b) |  | Supplemental Agreement 6 to Agreement dated
September 18, 1996 between Alaska Airlines, Inc.
and Boeing for the purchase of 12 Boeing 737-400
aircraft (Exhibit 10.5(b) to 2002 Alaska Air
Group, Inc. Form 10-K)                                                                          
|         |  |                                                                                                                                                                                                                                                                                            
|10.5     |  | Alaska Air Group, Inc. 1981 Supplementary
Retirement Plan for Elected Officers (Exhibit
10.15 to 1997 10-K)                                                                                                                                                                                
|         |  |                                                                                                                                                                                                                                                                                            
|10.6     |  | Alaska Air Group, Inc. 1995 Supplementary
Retirement Plan for Elected Officers (Exhibit
10.8 to 1997 10-K)                                                                                                                                                                                 
|         |  |                                                                                                                                                                                                                                                                                            
|*12      |  | Calculation of Ratio of Earnings to Fixed Charges                                                                                                                                                                                                                                          
|         |  |                                                                                                                                                                                                                                                                                            
|*23      |  | Consent of Deloitte & Touche LLP                                                                                                                                                                                                                                                           
|         |  |                                                                                                                                                                                                                                                                                            
|*99.1    |  | Chief Executive Officer Certification Pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002                                                                                                                                             
|         |  |                                                                                                                                                                                                                                                                                            
|*99.2    |  | Chief Financial Officer Certification                                                                                                                                                                                                                                                      

60



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| |  |                                                                                                          | 
| |  | -------------------------------------------------------------------------------------------------------- | 
| |  | Pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002



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

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INDEPENDENT AUDITORS REPORT

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

We have audited the accompanying balance sheets of Alaska Airlines,
Inc. (an Alaska Corporation) (the Company), a wholly owned subsidiary
of Alaska Air Group, Inc., as of December 31, 2002 and 2001 and the
related statements of operations, shareholders equity, and cash
flows for each of the three years in the period ended December 31,
2002. Our audits also include the financial statement schedule listed
in the Index at Item 15(a). These financial statements and financial
statement schedule are the responsibility of the Companys management.
Our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.

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

In our opinion, such financial statements present fairly, in all
material respects, the financial position of the Company as of
December 31, 2002 and 2001 and the results of its operations and its
cash flows for each of the three years in the period ended December
31, 2002 in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such financial
statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.

The Company changed its method of accounting for goodwill upon
adoption of SFAS No. 142 Goodwill and Other Intangible
Assets for
the year ended December 31, 2002 and for the deferral of revenue on
miles sold under the mileage plan for the year ended December 31,
2000, both discussed in Note 12 to the financial statements.



/s/ DELOITTE & TOUCHE LLP

Deloitte & Touche LLP
Seattle, Washington

March 10, 2003