ANNUAL REPORT 2005 Cover photos:
An Alaska Airlines Boeing 737-800 and a Horizon Air Bombardier CRJ-700 grace the skies of Washington state with Mt. Rainier in the distance.
Alaska Airlines Customer Service Agent Darwin Johnson and First Officer Kerri Ballard shown on front cover; Horizon Air First Officer Jamar Perry and Inflight Instructor Brigitte Barnes featured on back cover. Shareholder Letter Our Letter to Shareholders Shareholder Letter TI AEITNINLYLF BLANK] LEFT INTENTIONALLY PAGE [THIS Shareholder Letter Chairman and CEO Bill Ayer
ollowing 9-11 and the ensuing downturn in the
airline industry, we realized that despite a great brand, a Many of you are familiar withthat some would of not the directly changes impact we’ve our made.pushed people. We more At initially ticket Alaska targeted sales we things to simplified the ourrevamped Internet, fare our added structure, catering, fuel-saving negotiated winglets insurance to and oursuppliers lease 737 to rate aircraft, reduce reductions, costs, worked and with began our improving to efficiency. implement LEAN principles – proven techniques for At Horizon Air we adjusted ourExpress schedule Service—a to fee-based better flying meet arrangement demand with andproductivity Frontier began improvements Airlines. Frontier and We Jet undertook made other initiativesour to operation reduce in costs, order and to we compete improved more effectively. The most difficult decisions have been2004, those we that made have the negatively decision affected to ourfleet contract employees. service out In and certain the functions remainder at of Alaskarestructured our Airlines, pilot aircraft including wages heavy and maintenance. hired And an inoperation. outside 2005 service we provider for our Seattle ground Three years ago we launched ourinto Alaska one 2010 of Plan the – best a airlines blueprintemployees, in to the America, transform best providing Alaska value excellent Airlines in jobs the andhave industry retirement been for security focused customers, for on and executing a that good plan return ever for since. investors. We F Alaska Air Group 2005 Annual Report toEngagement Shareholders with our customersone – interaction one passenger at at a time a time, – is what sets us apart. reputation for delivering outstanding customer service,discipline and of a conservative financial management, wewere clearly not positioned to compete successfullypermanently in changed the industry environment. We were faced with a choice.if We at could times make unpopular, the decisions responsible, towe secure could our throw own up future our – hands or chose and the let former. fate take its course. We Shareholder Letter ligeprec htrpeet h etvlei h nuty htrslsi nincreasing an in results That industry. the in value best deliver the who represents employees that with experience begins flying that a cycle” “virtuous a to contribute accomplishments These and growth. savings profitable annual fuel in help 2008. million will of $115 that end than efficiencies the more operating by in create type result will fleet will 737 investment single, this of a that retirement operate estimate early will We The Airlines fleet. Alaska MD-80 that our means of fleet retirement this the accelerate to million $750 commit to us for sufficiently improved structure capital our and position cash our offering, equity the and profitability our of result a As December. in stock of sale million $200 a for way the a paved in which reflected was Investor goals aircraft. cost 737-800 price, our new stock achieve 100 higher to to up continue for would Boeing we with that deal confidence a announced we 2005 June themselves. In presented opportunities other success, financial see to began we As CYCLE VIRTUOUS A 2005. in to profit carriers significant U.S. a major post two only of one and us year makes fourth a to our trend extends earnings it improving margin, percent 10 a our of from goal far Although 2005. of in margin percent, pretax 3.6 a or net million, adjusted $55 an of to profit 2001 in million $88.3 net of adjusted loss an from improved Alaska has year, Group each Air billion $8 to billion $5 ranging from losses industry airline U.S. of a backdrop Against off. paying are our efforts been, collective have changes these as difficult As Shareholder Letter GROWTH One natural result of the virtuouscombined cycle with is a the revenue ability premium to driven expand.growth. by A In customer competitive 2005 preference cost Alaska positions structure added us service wellMexico. to for Horizon Dallas, added Texas, Reno, and Nevada, to to Mexicoroute its City system. and In Loreto, 2006 we plangrow to by continue about to 6 percent atHorizon both by Alaska adding and more frequency, connecting existing cities in new ways, andservice initiating to new markets from SeattleWest and Coast other points. The Boeing 737-800 gives us theaircraft perfect for growth and for replacingMD-80 our fleet. The 737-800 is fuel-efficient,low has maintenance costs, and has thepayload range characteristics and that fit our markets well. Growing with these 157-seat aircraftfurther will reduce unit costs. We also are excited about ouracquire decision additional to Bombardier Q400 aircraft for our Horizon fleet. This airplanesuited is to well Horizon’s markets, and theadditions fleet will support future growth. Horizon’s mix of 37-seat Q200 and 74-seatturboprops Q400 and 70-seat CRJ-700 jets allowsto us continue our “harmonization” efforts, matching the right Alaska or Horizona aircraft market’s to needs. This fleet approachresulted has in a significant improvement inprofitability the of our jointly served markets. number of satisfied customers with areturn strong for preference investors, for which our leads product, to whichwhich new results produce capital in career for a opportunities growth, solid and which retirement leads security to for increased employees profits, – and on it goes. Shareholder Letter em ebleeta h iaca efrac o’ese vrtels opeo years of direction. couple right last the the in over headed seen we’re you’ve that performance indicates financial the that believe long We the term. on to focused time us long keeps a That for come. here be to intend we years, and 75 almost for around been We’ve lower. or cents 7.25 of goal with ultimate fuel) an of cost the (excluding available mile per seat cents 7.65 at goal Alaska’s cost set 2006 we end, that To costs. unit our reducing further to and improvement operational continuous to remain committed we do, to work have we still While issues. operational with deal to order in schedule our reduced we intentionally fall, and summer the our During in capacity. reduction a and areas some in costs higher-than-planned to due year the for slightly increased costs unit Alaska’s employees. and customers both impacting 2005, during short fell operational performance our that secret no is It the minimizing while viability our employees. greatest ensure on Our to impact easy. necessary been changes not the has making certainly is it challenge and perfect, been hasn’t transformation Our CHALLENGES mana separately of benefits the preserve yet suppor Horizon and c Alaska to some hard consolidating working been has Horizon Alaska, Like e opne n ahariesuiu brand. unique airline’s each and companies ged ucin.Orga st lmnt redundancy, eliminate to is goal Our functions. t nrlcss n eaenwi h rcs of process the in now are we and costs, ontrol Shareholder Letter Dear Alaska Airlines, …On June 18, I left Seattlebrother…. to Within enjoy hours a of fishing my trip arrivaldiagnosed in in with Sitka Sitka, a with I very my learned severe father that conditionlife and my that of wife not our had only unborn been threatened child her ascounter life, well. – but I and the was this a is mental where wreck your when employee I truly got shined. Alaska to Airlines the was Alaska under no obligationwhich to the change agent my did flight gratis. for Ishe no will conveyed cost always as – appreciate she the performed compassion her and job. care I will never forget the lookthat of evening…. relief Both on are my now wife’s healthy face and when happy. I returnedFor to the her part you played, Ibond thank to you, a and company though and it a is group rare of to employees, have you an have emotional earned it for life. William S. Ayer Chairman, President and CEO, Alaska AirApril Group 10, 2006 Sincerely, Engagement with our customers – onesets passenger us at apart. a When time, you one boil interactionTheir it at initiative, all a professionalism, down, time the caring – only and is sustainable integrity what And advantage are their we the hard have heart work is and is our soul getting people. ofemployees us our should through companies. be the very tough proud spots of in what our they’re transformation. achieving. Our We are optimistic about our futurewith – the we progress have we’ve great made people and andleader look a in forward great this to culture. industry. securing We’re our pleased position as an undisputed CULTURE I want to share with youcontinue an to excerpt make from a a difference recent for letter our that customers. illustrates how our employees Shareholder Letter TI AEITNINLYLF BLANK] LEFT INTENTIONALLY PAGE [THIS Proxy Statement and of Shareholders Proxy Statement Notice of Annual Meeting Proxy Statement TI AEITNINLYLF BLANK] LEFT INTENTIONALLY PAGE [THIS LETTER TO STOCKHOLDERS P.O. Box 68947 Seattle, Washington 98168
April 10, 2006
Dear Stockholder: We cordially invite you to attend our 2006 Annual Meeting of Stockholders. The meeting will be held at 2 p.m. on Tuesday, May 16, 2006, in the William M. Allen Theater at the Museum of Flight in Seattle.
We encourage you to participate at this meeting, but whether or not you plan to attend, please complete and submit your proxy as soon as possible. As explained in the proxy statement: • you can vote by proxy over the internet, by telephone, by mail, or you can vote at the meeting; • you can use any of these means to change your internet, telephone, or mail vote and thereby revoke any earlier vote; and • voting by proxy will not prevent you from attending the meeting, but it will ensure that your vote will be counted if you are unable to attend the meeting. Statement Proxy
The execution of your proxy card will revoke any previously executed proxies, and you may revoke any previously executed proxies by voting in person at the meeting. For more detailed information on revocation of a proxy and voting at the meeting, see “What if I change my mind after I submit my proxy?” on page 3.
As explained in this proxy statement, we are making changes to our corporate governance structure this year. We believe these changes ensure our accountability to our stockholders. To that effect, we amended our Bylaws to eliminate the requirement for a supermajority vote to amend the Bylaws and provide for a majority vote standard for the election of directors. The Board of Directors has also approved amendments to our Restated Certificate of Incorporation to authorize the annual election of all directors and to eliminate a supermajority voting provision. These latter amendments are subject to your approval and are described in Proposal 2 on page 39 and Proposal 3 on page 41.
Your opinion and your vote are important to us regardless of the number of shares you own.
We look forward to visiting with you at the meeting and addressing your questions and comments.
Sincerely,
William S. Ayer Chairman, President, and Chief Executive Officer Proxy Statement TI AEITNINLYLF BLANK] LEFT INTENTIONALLY PAGE [THIS NOTICE OF ANNUAL MEETING OF STOCKHOLDERS P.O. Box 68947 Seattle, Washington 98168
The Annual Meeting of Stockholders of Alaska Air Group, Inc. will be held in the William M. Allen Theater at the Museum of Flight, 9404 E. Marginal Way South, Seattle, Washington at 2 p.m. on Tuesday, May 16, 2006, for the following purposes: 1. To elect four directors for three-year terms; 2. To vote on an amendment to the Restated Certificate of Incorporation to eliminate Article 10; 3. To vote on an amendment to the Restated Certificate of Incorporation to provide for the annual election of all directors; 4. To consider and vote on a stockholder proposal relating to the adoption of a simple majority vote policy, if properly presented at the Annual Meeting; 5. To consider and vote on a stockholder proposal relating to the adoption of a simple majority vote when amending the bylaws, if properly presented at the Annual Meeting; 6. To consider and vote on a stockholder proposal relating to the adoption of a majority vote standard for the election of directors, if properly presented at the Annual Meeting; 7. To consider and vote on a stockholder proposal relating to the enforcement of stockholder votes, if properly presented at the Annual Meeting; rx Statement Proxy 8. To consider and vote on a stockholder proposal relating to equal ownership rights for 401(k) employee shareholders, if properly presented at the Annual Meeting; 9. To consider and vote on a stockholder proposal relating to the election of directors annually, if properly presented at the Annual Meeting; and 10. To transact such other business as may properly come before the meeting or any adjournment thereof.
Stockholders owning Company common stock at the close of business on March 31, 2006, are entitled to vote.
By Order of the Board of Directors,
Keith Loveless Corporate Secretary & General Counsel
April 10, 2006 Proxy Statement TI AEITNINLYLF BLANK] LEFT INTENTIONALLY PAGE [THIS TABLE OF CONTENTS
Annual Meeting Information ...... 1 Proposal 1: Election of Directors ...... 7 Nominees for Election to Terms Expiring in 2009 ...... 7 Continuing Directors Whose Terms Expire in 2007 ...... 8 Continuing Directors Whose Terms Expire in 2008 ...... 9 Corporate Governance ...... 10 Structure of the Board of Directors ...... 10 Board and Committee Independence ...... 13 Director Nomination Policy ...... 14 Stockholder Communication Policy ...... 17 Executive Sessions and Lead Director ...... 17 Director Compensation ...... 18 CEO and CFO Certifications ...... 18 Code of Conduct and Ethics ...... 18 Certain Relationships and Related Transactions ...... 18 Section 16(a) Beneficial Ownership Reporting Compliance ...... 19 Independent Auditors ...... 19 Audit Committee Report ...... 21 Security Ownership of Certain Beneficial Owners and Management ...... 23 Executive Compensation ...... 25 Compensation Committee Report on Executive Compensation ...... 25 Performance Graph ...... 32 Statement Proxy Summary Compensation Table ...... 33 Option Grants in 2005 ...... 35 Aggregated Option Exercises in 2005 and Year-End Option Values ...... 36 Change-in-Control Arrangements ...... 39 Proposal 2: Amend the Certificate of Incorporation to Eliminate the 80% Super-Majority Voting Requirement ...... 39 Proposal 3: Adoption of Annual Election of All Directors ...... 41 Proposal 4: Simple Majority Vote ...... 43 Proposal 5: Shareholder Proposal to Adopt Simple Majority Vote When Amending Bylaws ...... 45 Proposal 6: Majority Vote Standard for the Election of Directors ...... 47 Proposal 7: Proposal to Enforce Stockholder Votes ...... 49 Proposal 8: Equal Ownership Rights for Worker “401(k)” Shareholders ...... 51 Proposal 9: Shareholder Proposal to Elect Directors Annually ...... 53 Participants in the Solicitation ...... 55 Submission of Proposals for Next Annual Meeting ...... 59 Proxy Statement TI AEITNINLYLF BLANK] LEFT INTENTIONALLY PAGE [THIS ANNUAL MEETING INFORMATION
The Board of Directors of Alaska Air Group, Inc. (“AAG” or the “Company”) is soliciting proxies for this year’s Annual Meeting of Stockholders. This proxy statement contains important information for you to consider when deciding how to vote on the matters brought before the meeting. Please read it carefully.
The Board set March 31, 2006, as the record date for the meeting. Stockholders who owned Company common stock on that date are entitled to vote at the meeting, with each share entitled to one vote. There were 35,965,862 shares of Company common stock outstanding on the record date.
Annual meeting materials, which include this proxy statement, a proxy card or voting instruction form, and the 2005 Annual Report, were mailed to stockholders and made available via the internet on or about April 10, 2006. The Company’s Form 10-K for the year ended December 31, 2005 is included in the 2005 Annual Report. It was filed with the Securities and Exchange Commission (“SEC”) and is available on the Company’s website at http://www.alaskaair.com.
QUESTIONS AND ANSWERS
Why am I receiving this annual meeting information and proxy? You are receiving this annual meeting information and proxy from us because you owned shares of common stock in Alaska Air Group as of the record date for the annual meeting. This proxy statement describes issues on which you may vote and provides you with other important information so that you can make informed decisions. Statement Proxy
You may own shares of Alaska Air Group common stock in several different ways. If your stock is represented by one or more stock certificates registered in your name, you have a stockholder account with our transfer agent, Computershare Trust Company, N.A., which makes you a stockholder of record. If you hold your shares in a brokerage, trust or similar account, you are the beneficial owner but not the stockholder of record of those shares. Employees of the Company who hold shares of stock in one or more of the Company’s 401(k) retirement plans are beneficial owners.
What am I voting on? You are being asked to vote on the election of four directors, two amendments to the Company’s Restated Certificate of Incorporation and six stockholder proposals. When you sign and mail the proxy card or submit your proxy by telephone or the internet, you appoint William S. Ayer and Keith Loveless as your representatives at the meeting. (When we refer to the “named proxies,” we are referring to Messrs. Ayer and Loveless.) This way, your shares will be voted even if you cannot attend the meeting.
How does the Board of Directors recommend I vote on each of the proposals? • FOR the Board’s director nominees (Proposal 1) • FOR the amendments to the Company’s Restated Certificate of Incorporation (Proposals 2 and 3) • AGAINST the other stockholder proposals (Proposals 4 through 9)
How do I vote my shares? Record holders may vote by using the proxy card or by telephone or by the internet. Persons who beneficially own stock held: • in a brokerage account can vote by using the voting instruction form provided by the broker or by telephone or the internet.
1 • by a bank, and have the power to vote or to direct the voting of the shares, can vote using the proxy or the voting information form provided by the bank and, if made available by the bank, telephone and/or internet voting. • in trust under an arrangement that provides the beneficial owner with the power to vote or to direct the voting of the shares can vote in accordance with the provisions of such arrangement. • in trust in one of the Company’s 401(k) retirement plans can vote using the voting instruction form provided by the trustee or by telephone or internet.
Persons who beneficially own shares, other than persons who beneficially own shares held in trust in one of the Company’s 401(k) retirement plans, can vote at the meeting provided that they obtain a “legal proxy” from the person or entity holding the stock for him (typically a broker, bank, or trustee). A beneficial owner can obtain a legal proxy by making a request to the broker, bank, or trustee. Under a legal proxy, the bank, broker, or trustee confers all of its rights as a record holder (which may in turn have been passed on to it by the ultimate record holder) to grant proxies or to vote at the meeting.
Set forth below are the various means — internet, phone and mail — for voting without attending the annual meeting. Subject to applicable time deadlines for internet and phone voting applicable to stockholders and the time deadline for all means of voting for persons holding shares in a 401(k) retirement plan, a person voting by any of these means may vote again using that means or another means and the later-dated vote will have the effect of revoking the earlier-dated vote. Thus a person who votes on May 1 using the internet can change his or her vote on May 2 by using the internet, phone, or mail and the effect of the voting on May 2 would be to revoke the earlier May 1 vote. A record holder can attend the annual meeting and vote, which will have the effect of revoking a previously given proxy. A beneficial holder (other than an employee holding shares in a 401(k) retirement plan) who has been given a legal proxy by the record holder can attend the meeting and vote, which will have the effect of revoking a previously given proxy or voting instruction form.
You may vote on the internet. Stockholders of record and beneficial owners of the Company’s common stock may vote via the internet Proxy Statement regardless of whether they receive their annual meeting materials through the mail or via the internet. Instructions for doing so are provided along with your proxy card or voting instruction form. If you vote on the internet, please do not mail in your proxy card. Subject to rules relating to broker non-votes and limitations in the powers of trustees of employee 401(k) retirement plans to vote, your internet vote will authorize the named proxies to vote your shares in the same manner as if you marked, signed and returned your proxy card.
You may vote by phone. Stockholders of record and beneficial owners of the Company’s common stock may vote by phone. Instructions for voting by phone are provided along with your proxy card or voting instructions. If you vote by telephone, please do not mail in your proxy card. Subject to rules relating to broker non-votes and limitations in the powers of trustees of employee 401(k) retirement plans to vote, your phone vote will authorize the named proxies to vote your shares in the same manner as if you marked, signed and returned your proxy card.
You may vote by mail. Simply sign and date the proxy card or voting instruction form received with this proxy statement and mail it in the enclosed prepaid and addressed envelope. If you mark your choices on the card or voting instruction form, your shares will be voted as you instruct.
If you return a signed proxy card but do not mark your choices, your shares will be voted in accordance with the recommendations of the Board of Directors shown above. If you do not mark your choices on the voting
2 instruction form, the voting of your shares will be subject to rules relating to broker non-votes and limitations in the powers of trustees of employee 401(k) retirement plans.
The availability of telephone and internet voting. ADP Proxy Services (“ADP”)’s internet and telephone voting facilities for stockholders of record, beneficial holders and 401(k) plan participants will be available 24 hours a day, and will close at 11:59 p.m. Eastern Time on May 15, 2006. However, to allow sufficient time for voting by the trustee, voting instructions for 401(k) plan shares must be received by 11:59 p.m. Eastern Time on May 13, 2006.
What business may be properly brought before the meeting, and what discretionary authority is granted? Under the Company’s Bylaws, a stockholder may bring business before the meeting only if the stockholder has given written notice to the Company on or before February 16, 2006. The only such business as to which the Company received notice are the six stockholder proposals described in this proxy statement and included on the Company’s proxy card. Under the Bylaws, business not set forth in the notice of meeting but otherwise properly brought before the meeting by or at the direction of the Board of Directors may be acted on. The Company has no knowledge or notice that any such business will be brought before the meeting. As to other matters that properly come before the meeting and are not on the proxy card, Mr. Ayer and Mr. Loveless will vote the shares for which they hold proxies in accordance with their best judgment.
What does it mean if I receive more than one proxy card, voting instruction form or email notification from the Company? Statement Proxy It means that you have more than one account for your AAG shares. Please complete and submit all proxies to ensure that all your shares are voted or vote by internet or telephone using each of the identification numbers.
What if I change my mind after I submit my proxy? You may revoke your proxy and change your vote irrespective of the method (i.e., telephone, internet or mail) in which you originally voted by delivery of a later-dated proxy or, except for persons who beneficially own shares held in trust in one of the Company’s 401(k) retirement plans, voting at the meeting. The later-dated proxy may be delivered by telephone, internet or mail and need not be delivered by the same means used in delivering the to-be-revoked proxy. Except for persons beneficially holding stock in one of the Company’s 401(k) retirement plans, you may do this at a later date or time by: • voting by telephone or on the internet (which may not be available to some beneficial holders) before 11:59 p.m. Eastern Time on May 15, 2006 (your latest telephone or internet proxy is counted), • signing and delivering a proxy card with a later date, or • voting at the meeting. (If you hold your shares beneficially through a broker, you must bring a legal proxy from the record holder in order to vote at the meeting.)
Persons beneficially holding stock in one of the Company’s 401(k) retirement plans cannot vote in person at the meeting and must vote by internet or telephone no later than 11:59 p.m. on May 14, 2006, and if they vote by mail, their voting instruction form must be received no later than 11:59 p.m. on May 13, 2006. Subject to these qualifications, such holders have the same rights as other record and beneficial holders to change their votes.
If you are a registered stockholder, you may obtain a new proxy card by contacting the Company’s Corporate Secretary, Alaska Air Group, Inc., P.O. Box 68947, Seattle, WA 98168, telephone (206) 392-5131. If your shares are held by a broker, trustee or bank, you may obtain a new voting instruction form by contacting your broker, trustee or bank. If your shares are held by one of the Company’s 401(k) retirement plans, you may
3 obtain a new voting instruction form by contacting the trustee of such plan. You may obtain information about how to contact the trustee from the Company’s Corporate Secretary. Please refer to the section below titled “How are shares voted that are held in a Company 401(k) plan?” for more information. If you sign and date the proxy card or voting instruction and submit it in accordance with the accompanying instructions and in a timely manner, any earlier proxy card or voting instructions will be revoked and your choices on the proxy card or voting instruction will be voted as you instruct.
What are broker non-votes? As indicated above, if you are a stockholder of record who submits a proxy but does not indicate how the proxies should vote on one or more matters, the named proxies will vote as recommended by the Company. However, if your shares are held by a broker and you do not provide instructions to the broker on how to vote (whether you use the internet or phone or return the enclosed voting instruction form), the absence of instructions may cause your shares to result in a “broker non-vote” on the matters for which you do not provide instructions on how to vote. Accordingly, if you want to vote your shares on a matter, it is important that you provide voting instructions on that matter.
The following sets forth the application of broker non-vote rules to the proposals.
Election of Directors. The election of directors is the subject of Proposal 1. Based upon a preliminary proxy statement referred to under Opposing Solicitation on page 54, the election of directors will not be “contested” for purposes of New York Stock Exchange Rule 452 and, accordingly, a broker will have the discretion to vote your shares in the absence of specific instructions regarding Proposal 1. The preliminary proxy statement referred to under Opposing Solicitation on page 54 indicates that the current position of the NYSE is that an election is not contested unless the “challengers ...doamailing to all shareholders who hold their shares beneficially or in street name through banks, brokers or other intermediaries.” That preliminary proxy statement indicates that the proxy statement will be made available only to those who (1) access a website and download the proxy statement, (2) request the proxy statement, or (3) view paper copies of the proxy statement at locations in Brush Prairie, WA or Tucson, AZ.
Board and Stockholder Proposals. Brokers will not be allowed to vote on any of the Proposals 2-9 for which Proxy Statement you do not provide instructions. For example, if you provide instructions for Proposals 2-8, but not for Proposal 9, the broker will not cast a vote on your behalf on Proposal 9; in other words, there will be a “broker non-vote” on Proposal 9.
How are shares voted that are held in a Company 401(k) plan? At the record date, 1,487,705 shares were held in the trust for Alaska Air Group 401(k) plan participants. ADP sent a proxy statement, an annual report and a voting instruction form to each participant who held shares through the Company’s 401(k) plans at the record date. The trustees, Vanguard and Fidelity, will vote only those shares for which instructions are received from participants. If a participant does not indicate a preference as to a matter, including the election of directors, then the trustee will not vote the shares on such matters.
To allow sufficient time for voting by the trustee, your voting instructions for 401(k) plan shares must be received by 11:59 p.m. Eastern Time on May 13, 2006. Because the shares must be voted by the trustee, employees who hold stock through the 401(k) plans may not vote these shares at the meeting.
May I vote in person at the meeting? We will pass out a ballot to anyone who requests one at the meeting. If you hold your shares through a broker, you must bring a legal proxy from your broker in order to vote at the meeting. You may request a legal proxy from your stockbroker by indicating on your voting instruction form that you plan to attend and vote your shares at the meeting, or at the internet voting site to which your voting materials direct you. Please allow sufficient time to receive a legal proxy through the mail after your broker receives your request.
4 Can I receive future materials via the internet? If you vote on the internet, simply follow the prompts for enrolling in the electronic proxy delivery service. This will reduce the Company’s printing and postage costs, as well as the number of paper documents you will receive.
Stockholders may enroll in that service at any time after the annual meeting and can read additional information about this option and request electronic delivery by going to ADP’s website, http://www.proxyvote.com.
If you already receive your proxy materials via the internet, you will continue to receive them that way until you instruct otherwise through the website referenced above.
How many shares must be present to hold the meeting? A majority of the Company’s outstanding shares as of the record date must be present at the meeting and entitled to vote in order to hold the meeting and conduct business (i.e., to constitute a quorum). Shares are counted as present at the meeting if the stockholder of record attends the meeting; if the beneficial holder attends with a “legal proxy” from the record holder; or the record holder has granted a proxy, whether by returning a proxy card or by telephone or internet, without regard to whether the proxy actually casts a vote, withholds or abstains from voting.
How many votes must the nominees have to be elected? The Bylaws of the Company provide that “each director shall be elected by the vote of the majority of the
votes cast with respect to the director at any meeting of stockholders for the election of directors at which a Statement Proxy quorum is present, provided that if the number of nominees exceeds the number of directors to be elected, the directors shall be elected by the vote of a plurality of the shares represented in person or by proxy at any such meeting and entitled to vote on the election of directors.” The Company has been informed that an opposing solicitation for the election of three directors will be made. (See “Opposing Solicitation” on page 54.) Because there will be more nominees than the number of directors to be elected, directors will be elected by a plurality vote. Withheld votes will not be taken into account in determining the outcome of the election of directors. Based on the Company’s understanding of the opposing solicitation, the broker non-vote rule will not be applicable so that brokers may vote shares for which beneficial holders do not provide instructions.
What happens if a nominee is unable to stand for election? The Board of Directors may reduce the number of seats on the Board or they may designate a substitute nominee. If the Board designates a substitute, shares represented by proxies will be voted for the substitute nominee.
How many votes must each amendment to the Restated Certificate of Incorporation (Proposals 2 and 3) receive to be approved? A majority of the outstanding shares must be voted for an amendment in order for it to be approved. Abstain votes and broker non-votes, not being votes for, will have the effect of a negative vote.
How many votes must each of the stockholder proposals (Proposal 4 through 9) receive in order to pass? A majority of the shares present in person or by proxy and entitled to vote at the meeting must be voted for the shareholder proposals in order for each of them to pass. “Abstain” votes are deemed present and eligible to vote and are included for purposes of determining the number of shares constituting a majority of shares present and eligible to vote. Accordingly, an abstention, not being a vote for, will have the effect of a negative vote. A broker non-vote is not deemed present and eligible to vote for proposals as to which it is applicable and are not included for purposes of determining the number of shares constituting a majority of shares present and eligible to vote. Accordingly, a broker non-vote has no effect on the outcome of the vote on the stockholder proposal. See “What are broker non-votes?” [Page 4].
5 How are votes counted? Voting results will be tabulated by ADP Proxy Services. Mr. Carl T. Hagberg of Hagberg and Associates will serve as the independent inspector of elections.
Is my vote confidential? The Company has a confidential voting policy as a part of its governance guidelines, which are published on the Company’s website.
Who pays the costs of proxy solicitation? The Company pays for distributing and soliciting proxies and reimburses brokers, nominees, fiduciaries and other custodians their reasonable fees and expenses in forwarding proxy materials to beneficial owners. The Company has engaged Georgeson Shareholder Communications Inc. (“Georgeson”) to assist in the solicitation of proxies for the meeting. Georgeson may use four employees in connection with the solicitations. It is intended that proxies will be solicited by the following means: additional mailings, personal interview, mail, telephone and electronic means. Proxies may also be solicited by the persons identified as Participants under the heading “Participants in the Solicitation,” who will receive no additional compensation therefore, except for reimbursement of expenses. Although no precise estimate can be made at this time, we anticipate that the aggregate amount we will spend in connection with the solicitation of proxies will be $22,500, of which $15,000 has been incurred to date. This amount includes fees payable to Georgeson, but excludes salaries and expenses of our officers, directors and employees.
Is a list of stockholders entitled to vote at the meeting available? A list of stockholders of record entitled to vote at the annual meeting will be available at the annual meeting. It will also be available Monday through Friday from May 5 through May 15, 2006, between the hours of 9 a.m. and 4 p.m., local time, at the offices of the Corporate Secretary, 19300 International Blvd., Seattle WA 98188. A stockholder of record may examine the list for any legally valid purpose related to the annual meeting. Proxy Statement
Where can I find the voting results of the meeting? We will publish the final results in our quarterly report on Form 10-Q for the second quarter of 2006. You can read or print a copy of that report by going to the Company’s website, http://www.alaskaair.com, and then choosing Company Information, Investor Information, and Securities and Exchange Commission Filings. You can find the same Form 10-Q by going directly to the SEC EDGAR files at http://www.sec.gov. You can also get a copy by calling us at (206) 392-5567, or by calling the SEC at (800) SEC-0330 for the location of a public reference room.
6 PROPOSAL 1. ELECTION OF DIRECTORS
The Company currently has twelve directors. The directors are divided into three classes so that approximately one-third of the directors are elected each year for three-year terms. Directors are elected to hold office until their successors are elected and qualified, or until resignation or removal in the manner provided in our Bylaws. Four directors are nominees for election this year and each has consented to serve a three-year term ending in 2009. The remaining directors will continue to serve the terms set out below.
NOMINEES FOR ELECTION TO TERMS EXPIRING IN 2009
Director Name Principal Occupation or Employment and Other Business Affiliations Age Since Patricia M. Bedient .... Ms.Bedient was appointed to the Board of Directors in December 52 2004 2004. She serves on the Company’s Audit Committee and on the Board of Directors of Alaska Airlines. Ms. Bedient is Senior Vice President of Finance and Strategic Planning for Weyerhaeuser, one of the world’s largest integrated forest products companies. A certified public accountant, she served as the managing partner of Arthur Andersen LLP’s Seattle office prior to joining Weyerhaeuser. Ms. Bedient also worked at the firm’s Portland and Boise offices as a partner and as a CPA during her 27-year career with Andersen. Ms. Bedient is on the Weyerhaeuser Foundation Board and the advisory board of the University of Washington School of Business. She has Statement Proxy also served on the boards of a variety of civic organizations, including the Oregon State University Foundation Board of Trustees, the World Forestry Center, the City Club of Portland, St. Mary’s Academy of Portland and the Chamber of Commerce of Boise, Idaho. She is a member of the American Institute of CPAs and the Washington Society of CPAs. Bruce R. Kennedy ..... Mr.Kennedy has been a director since 1972 and serves as Chairman 67 1972 of the Governance and Nominating Committee. He is Chairman Emeritus of Alaska Air Group and served as its Chairman, Chief Executive Officer, and President from 1985 to 1991. He was also Chairman of Alaska Airlines from 1979 to 1991, Chief Executive Officer from 1979 to 1990, and President from 1978 to 1990. He is on the Horizon Air Board and serves as Chairman of Quest Aircraft Trust, an aircraft design and manufacturing company. Jessie J. Knight, Jr. .... Mr.Knight has been a director since 2002 and serves on the 55 2002 Compensation Committee and the Governance and Nominating Committee. He is the President and Chief Executive Officer of the San Diego Regional Chamber of Commerce, an organization whose primary focus is economic development. Before assuming his current position in 1999, Mr. Knight served from 1993 through 1998 as a commissioner of the California Public Utilities Commission, which is responsible for the regulatory oversight of all energy, telecommunications, shipping, railroad and investor-owned utilities in the state. Mr. Knight is also on the Board of Directors of Alaska Airlines, Avista Corporation, Environmental Power and the San Diego Padres Baseball Club. He is a standing member of the Council on Foreign Relations.
7 Director Name Principal Occupation or Employment and Other Business Affiliations Age Since
J. Kenneth Thompson . . Mr. Thompson has been a director since October 1999 and serves on 54 1999 the Company’s Governance and Nominating Committee and its Safety Committee. He served as Executive Vice President of ARCO’s Asia Pacific oil and gas operating companies in Alaska, California, Indonesia, China and Singapore from 1998 to 2000. Prior to that, he was President of ARCO Alaska, Inc., the parent company’s oil and gas producing division based in Anchorage. Mr. Thompson is President and CEO of Pacific Star Energy LLC, a private energy investment company in Alaska, with partial ownership in the oil exploration firm Alaska Venture Capital Group (AVCG LLC) where he serves as the Managing Director. He is on the board of directors of Coeur d’Alene Mines Corporation, Horizon Air, and a number of community service organizations.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR ELECTION OF EACH OF THE DIRECTOR NOMINEES.
CONTINUING DIRECTORS WHOSE TERMS EXPIRE IN 2007
Director Name Principal Occupation or Employment and Other Business Affiliations Age Since William S. Ayer ...... Mr.Ayerhasbeen a director since 1999. He is Chairman, President 51 1999 and CEO of Alaska Air Group and Alaska Airlines and Chairman of Horizon Air. He served as Alaska Airlines’ President since November 1997 and Chief Operating Officer from May 2000 to January 2002. Prior to that, he served in various marketing, planning and operational Proxy Statement capacities with Horizon Air, including Senior Vice President, Operations. Mr. Ayer serves on the boards of Alaska Airlines, Horizon Air, Puget Energy, Angel Flight, the Alaska Airlines Foundation, the University of Washington Business School Advisory Board and the Museum of Flight. Dennis F. Madsen ..... Mr.Madsen has been a director since 2003 and serves on the 57 2003 Compensation and Safety Committees. He was President and CEO of Recreational Equipment, Inc. (REI), a retailer and online merchant for outdoor gear and clothing through March 2005. He served as REI’s Executive Vice President, and Chief Operating Officer from 1987 to 2000, and held numerous positions throughout the Company. Mr. Madsen is currently the CEO of Seatab Software of Bellevue, WA. He also serves on the boards of Alaska Airlines, Seatab Software, the Western Washington University Foundation, Western Washington University and the Youth Outdoors Legacy Fund. R. Marc Langland ..... Mr.Langland has been a director since 1991. He is a member of the 64 1991 Company’s Governance and Nominating Committee. He has been President of Northrim Bank, Anchorage, Alaska, since November 1990 and Chairman since January 1998. Mr. Langland has also been Chairman, President and CEO of its parent company, Northrim BanCorp, Inc., since December 2001. He was Chairman and Chief
8 Director Name Principal Occupation or Employment and Other Business Affiliations Age Since Executive Officer of Key Bank of Alaska from 1987 to 1988 and President from 1985 to 1987. He served on the Board of Trustees of the Alaska Permanent Fund Corporation from February 1987 to January 1991 and was Chairman from June 1990 to January 1991. He is also a director of Horizon Air, Northrim BanCorp, Inc., Saltchuk Resources Inc. and Usibelli Coal Mine, and is a member of the Anchorage Chamber of Commerce, and a board member and past chairman of Commonwealth North. John V. Rindlaub ..... Mr.Rindlaub has been a director since 1996 and serves on the 61 1996 Company’s Audit and Compensation Committees. He is CEO, Pacific Northwest Region, of Wells Fargo Bank. Prior to joining Wells Fargo, he held a number of positions with Bank of America between 1989 and 2001, including President, Bank of America, Northwest and Chairman of Seafirst Bank. Prior to his position at Seafirst, Mr. Rindlaub was Group Executive Vice President/Asia Division for Bank America and a managing director for Bankers Trust Company New York, Investment Banking Group. He is also a director of Horizon Air, Saltchuk Resources, Inc., Washington Roundtable and the Greater Seattle Chamber of Commerce.
CONTINUING DIRECTORS WHOSE TERMS EXPIRE IN 2008 Statement Proxy
Director Name Principal Occupation or Employment and Other Business Affiliations Age Since Phyllis J. Campbell .... Ms.Campbell has been a director since 2002 and serves as Chair of 54 2002 the Company’s Compensation Committee. She is President and CEO of The Seattle Foundation. She was President of U.S. Bank of Washington from 1993 until 2001 and has served as Chair of the Bank’s Community Board. She also is on the boards of Alaska Airlines, Nordstrom, and Puget Energy. Ms. Campbell is also a member of the Board of Trustees of Seattle University. Mark R. Hamilton ..... Mr.Hamilton has been a director since 2001 and serves on the 61 2001 Company’s Audit and Safety Committees, as well as on the Horizon Air Board. He has served as President of the University of Alaska since 1998. That same year, he retired as a U.S. Army Major General following 31 years of active military duty, primarily in the fields of teaching, management and administration. Formerly, Mr. Hamilton was Chief of Staff of the Alaskan Command at Elmendorf Air Force Base and Commander of Division Artillery at Fort Richardson. Mr. Hamilton is a graduate of the U.S. Military Academy at West Point and is the recipient of the Army’s highest peacetime award, the Distinguished Service Medal. Byron I. Mallott ...... Mr.Mallott has been a director since 1982 and is Chair of the 62 1982 Company’s Audit Committee. Currently he is President of the First Alaskans Institute (a nonprofit organization dedicated to the development of Alaska Native peoples and their communities); on April 15, 2006 he will become Senior Fellow of First Alaskans Institute. From 1995 to 1999, he served as Executive Director (chief
9 Director Name Principal Occupation or Employment and Other Business Affiliations Age Since executive officer) of the Alaska Permanent Fund Corporation, a trust managing proceeds from the state of Alaska’s oil revenues. He was a director of Sealaska Corporation, Juneau, Alaska, from 1972 to 1988, Chairman from 1976 to 1983, and Chief Executive Officer from 1982 to 1992. He owns Mallott Enterprises (personal investments) and is a director of Alaska Airlines, Sealaska Corporation and the Alaska Communications Systems Group Incorporated. Richard A. Wien ...... Mr.Wienhasbeen a director since 1982. He is Chair of the 70 1982 Company’s Safety Committee. Mr. Wien played an active role in the management of Wien Airlines until 1969, when he was elected President of Merric, Inc., an Alaska helicopter contract and charter service company. After Merric merged with Era Aviation in 1973, Mr. Wien served as Era’s Executive Vice President until 1981. He has been Chairman and Chief Executive Officer of Florcraft, Inc. (retail flooring), Fairbanks and Anchorage, Alaska, since 1986. He is also a director of Alaska Airlines and Usibelli Coal Mine.
CORPORATE GOVERNANCE
STRUCTURE OF THE BOARD OF DIRECTORS In accordance with the Delaware General Corporation Law and the Company’s Certificate of Incorporation and Bylaws, our business affairs are managed under the direction of our Board of Directors. Directors meet their responsibilities by, among other things, participating in meetings of the Board and Board committees on which they sit, discussing matters with our Chairman and Chief Executive Officer and other officers, reviewing materials provided to them, and visiting our facilities.
Proxy Statement Pursuant to the Bylaws, the Board of Directors has established four standing committees, which are the Audit Committee, the Compensation Committee, the Governance and Nominating Committee, and the Safety Committee. Only independent directors serve on these committees. The Board has adopted a written charter for each committee. The charters of the Audit, Compensation, Governance and Nominating, and Safety Committees are posted on the Company’s website and can be accessed free of charge at http://www.alaskaair.com/ and are available in print to any stockholder who requests them.
The table below shows the current membership of the standing Board committees. An asterisk (*) identifies the chairman of each committee.
Governance and Name Audit Compensation Nominating Safety Patricia M. Bedient ...... x Phyllis J. Campbell ...... x* Mark R. Hamilton ...... x x Bruce R. Kennedy ...... x* Jessie J. Knight, Jr...... x x R. Marc Langland ...... x Byron I. Mallott ...... x* Dennis F. Madsen ...... x x John V. Rindlaub ...... x x J. Kenneth Thompson ...... x x Richard A. Wien ...... x*
10 The principal functions of the standing Board committees are as follows:
Audit Committee 1. Matters pertaining to the independent auditors: • appoint them and oversee their work; • review at least annually their statement regarding their internal quality-control procedures and their relationship with the Company; • maintain a dialogue with respect to their independence; • pre-approve all auditing and non-auditing services they are to perform; • review annual and quarterly financial statements and filings made with the SEC; and • receive and review communications required from the independent auditors under applicable rules and standards.
2. Review the planned activities and results of the internal auditors and any changes in the internal audit charter.
3. Prepare the Audit Committee report required for the annual proxy statement.
4. Matters pertaining to controls: • review financial reporting risk and associated internal controls;
• review procedures with respect to significant accounting policies and the adequacy of financial Statement Proxy controls; • discuss with management policies with respect to risk assessment and risk management including the process by which the Company undertakes risk assessment and management; • discuss with management, as appropriate, earnings releases and any information provided to analysts and rating agencies; • develop and monitor a Corporate Compliance program, including a Code of Conduct and Ethics, decide on requested changes to or waivers of such program and code relating to officers and directors, and establish procedures for confidential treatment of complaints concerning accounting, internal controls or auditing matters; and • obtain and review at least quarterly a statement from the CEO, CFO and Disclosure Committee disclosing any significant deficiencies in internal controls and any fraud that involves management or other employees with significant roles in internal controls.
5. Annually review and reassess the adequacy of its charter and the Committee’s performance and recommend for Board approval any proposed changes to the charter.
Compensation Committee 1. Establish the process for approving corporate goals relevant to CEO compensation and evaluating CEO performance in light of those goals.
2. Set the salary of the CEO.
3. Approve salaries of other executive officers of the Company and of Alaska Airlines and Horizon Air.
4. Set annual goals under the Performance-Based-Pay Plan and administer the Plan.
5. Grant stock awards and stock options.
11 6. Administer the supplementary retirement plans for elected officers and the equity-based incentive plans.
7. Make recommendations to the Board regarding other executive compensation issues, including modification or adoption of plans.
8. Fulfill ERISA fiduciary and non-fiduciary functions for tax-qualified retirement plans by monitoring the Pension/Benefits Administrative Committee and the Pension/Benefits Investment Fund Committee, and approving the membership of those committees, trustees and trust agreements, and extension of plan participation to employees of subsidiaries.
9. Approve the terms of employment and severance agreements with elected officers and the form of change-in-control agreements.
10. Review management development and succession plans.
11. Administer the Company’s equity and other long-term incentive plans.
12. Produce the report on executive compensation required for the annual proxy statement.
13. Annually review and reassess the adequacy of the committee’s charter and its performance, and recommend any proposed changes in the charter to the Board of Directors for approval.
Governance and Nominating Committee 1. Develop and monitor the Corporate Governance Guidelines.
2. Evaluate the size and composition of the Board.
3. Develop criteria for Board membership.
Proxy Statement 4. Evaluate the independence of existing and prospective members of the Board.
5. Seek qualified candidates for election to the Board.
6. Evaluate the nature, structure and composition of other Board committees.
7. Take steps it deems necessary or appropriate with respect to annual assessments of the performance of the Board, and each Board committee, including itself.
8. Annually review and reassess the adequacy of the Committee’s charter and its performance, and recommend any proposed changes in the charter to the Board of Directors for approval.
Safety Committee 1. Monitor management efforts to ensure the safety of passengers and employees.
2. Monitor and assist management in creating a uniform safety culture that achieves the highest possible industry performance measures.
3. Periodically review with management and outside experts all aspects of airline safety.
4. Evaluate the Company’s health, safety and environmental policies and practices.
12 The Board of Directors held five regular meetings. The standing Board committees held the following number of meetings in 2005: • Audit Committee — 8 • Compensation Committee — 5 • Governance and Nominating Committee — 4 • Safety Committee — 4
Each director attended at least 95.1% of all Board and applicable committee meetings during 2005. Each director is expected to attend the Company’s Annual Meeting of Stockholders. Last year, all then-current directors attended the annual meeting.
BOARD AND COMMITTEE INDEPENDENCE The Board of Directors of the Company has determined that all of the directors except Mr. Ayer, and each member of the Audit Committee, Governance & Nominating Committee and Compensation Committee, are independent under the New York Stock Exchange (“NYSE”) listing standards and the Company’s independent director standards that are set forth in the Company’s Corporate Governance Guidelines. Each member of the Company’s Audit Committee meets the independence, financial literacy and experience requirements contained in the corporate governance listing standards of the NYSE relating to audit committees. The Board has determined that John Rindlaub and Patricia Bedient are audit committee financial experts as defined in the rules of the Securities and Exchange Commission. rx Statement Proxy The Corporate Governance Guidelines are available on the Company’s internet website at http://www.alaskaair.com and are available in print to any stockholder who requests a copy. Specifically, the Board has determined that independent directors meet the following criteria:
An independent director must have no material relationship with the Company, based on all material facts and circumstances. At minimum, an independent director must meet each of the categorical standards listed below.
1. The director has not, within the last three years, been employed by, and no immediate family member has been an executive officer of, the Company.
2. Neither the director nor any immediate family member has, in any 12-month period in the last three years, received more than $100,000 in direct compensation from the Company, other than compensation for director or committee service and pension or other deferred compensation for prior service.
3. (i) Neither the director nor any immediate family member is a current partner of the Company’s independent auditor; (ii) the director is not a current employee of the audit firm; (iii) no immediate family member is a current employee of the audit firm working in its audit, assurance or tax compliance practice; (iv) neither the director nor any immediate family member was an employee or partner of the audit firm within the last three years and worked on the Company’s audit within that time.
4. Neither the director nor any immediate family member has, within the last three years, been part of an interlocking directorate. This means that no executive officer of the Company serves on the compensation committee of a company that employs the director or immediate family member.
5. The director is not currently an employee, and no immediate family member is an executive officer, of another company (i) that represented at least 2% or $1 million, whichever is greater, of the Company’s gross revenues, or (ii) of which the Company represented at least 2% or $1 million, whichever is greater, of such other company’s gross revenues, in any of the last three fiscal years. Charitable contributions are excluded from this calculation.
13 The Board considers that the following situations do not create material relationships: a. the receipt by a director of retirement compensation earned under one or more tax-qualified or nonqualified plans during the director’s employment with the Company; b. ordinary-course business between the Company and an organization of which the Board member is an officer or director, where the amount of such business is immaterial with respect to the Company’s or the organization’s annual revenues; or c. the receipt of cash or in-kind contributions from the Company by a tax-exempt charitable organization of which the Board member is an officer or director, the value of which is immaterial with respect to the Company’s or the charitable organization’s annual revenues.
For the purposes of these standards, “Company” includes all Alaska Air Group subsidiaries and other affiliates. “Immediate family member” includes the director’s spouse, domestic partner, parents, children, siblings, mothers- and fathers-in-law, sons- and daughters-in-law, and anyone sharing the director’s home. The independence standards for the members of the Audit Committee provide that in addition to the foregoing standards they may not (a) receive any compensation other than director’s fees for Board and Audit Committee service and permitted retirement pay, or (b) be an “affiliate” of the Company as defined by applicable SEC rule.
DIRECTOR NOMINATION POLICY Identification and Evaluation of Candidates 1. Internal Process for Identifying Candidates The Governance and Nominating Committee (the “Committee”) has two primary methods for identifying candidates (other than those proposed by the Company’s stockholders, as discussed below). First, on a periodic basis, the Committee solicits ideas for possible candidates from a number of sources including, but not limited to, members of the Board, senior-level Company executives, individuals personally known to the members of the Board, and research, including database and internet searches. Proxy Statement Additionally, the Committee may, from time to time, use its authority under its charter to retain at the Company’s expense one or more search firms to identify candidates (and to approve any such firms’ fees and other retention terms). If the Committee retains one or more search firms, they may be asked to identify possible candidates who meet the minimum and desired qualifications established by the Committee and to undertake such other duties as the Committee may direct.
2. Candidates Proposed by Stockholders a. General Nomination Right of All Stockholders Any stockholder of the Company may nominate one or more persons for election as a director of the Company at an annual meeting of stockholders if the stockholder complies with the notice, information and consent provisions contained in Article II, Section 8 of the Company’s Bylaws. Specifically, these provisions require that written notice of a stockholder’s intent to make a nomination for the election of directors be received by the Secretary of the Company at least 90 days in advance of the third Tuesday in May (with respect to elections held at a regular annual meeting of stockholders), and that such notice include: • The name and address of the stockholder who intends to make the nomination and of the person(s) to be nominated; • A representation that the stockholder of record is entitled to vote at the meeting; • A description of all arrangements or understandings between the stockholder and each nominee and any other person(s) (naming them) pursuant to which the nomination is to be made;
14 • Other information regarding each nominee as would have been required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had each nominee been nominated by the Board of Directors; and • The consent of each nominee to serve as a director if elected. The Corporate Secretary and General Counsel will send a copy of the Company’s Bylaws to any interested stockholder who requests them. The Company’s Bylaws are also available on the Company’s website at http://www.alaskaair.com.
b. Consideration of Director Candidates Recommended by Stockholders The Committee will evaluate candidates recommended by a single stockholder, or group of stockholders, that has beneficially owned more than 5% of the Company’s outstanding common stock for at least one year and that satisfies the notice, information and consent provisions set forth below (such individual or group, the “Qualified Stockholder”). The Committee’s policy on the evaluation of candidates recommended by stockholders who are not Qualified Stockholders is to evaluate such recommendations, and establish procedures for such evaluations, on a case-by-case basis. This policy allows the Committee to devote an appropriate amount of its own and the Company’s resources to each such recommendation, depending on the nature of the recommendation itself and any supporting materials provided. In addition, as discussed above, non-Qualified Stockholders have the ability to nominate one or more director candidates directly at the Annual Meeting. All candidates (whether identified internally or by a stockholder) who, after evaluation, are then recommended by the Committee and approved by the Board, will be included in the Company’s recommended slate of director nominees in its proxy statement.
c. Initial Consideration of Candidates Recommended by Qualified Stockholders Statement Proxy The Committee will evaluate candidates recommended by Qualified Stockholders in accordance with the following procedures.
Qualified Stockholders may propose a candidate for evaluation by the Committee by delivering a written notice to the Committee satisfying each of the requirements described below (the “Notice”). The Notice must be received by the Committee not less than 120 calendar days before the anniversary of the date that the Company’s proxy statement was released to stockholders in connection with the previous year’s annual meeting. No such notice was received in connection with the 2006 Annual Meeting.
Any candidate recommended by a Qualified Stockholder must be independent of the Qualified Stockholder in all respects (i.e., free of any material personal, professional, financial or business relationships from the nominating stockholder), as determined by the Committee or by applicable law. Any candidate submitted by a Qualified Stockholder must also meet the definition of an “independent director” under applicable NYSE rules.
The Notice shall also contain or be accompanied by the following information or documentation: • Proof of the required stock ownership (including the required holding period) of the stockholder or group of stockholders. The Committee may determine whether the required stock ownership condition has been satisfied for any stockholder that is the registered owner. Any stockholder that is not the registered stockholder must submit such evidence as the Committee deems reasonable to evidence the required ownership percentage and holding period. • A written statement that the stockholder intends to continue to own the required percentage of shares through the date of the annual meeting with respect to which the candidate is nominated. • The name or names of each stockholder submitting the proposal, the name of the candidate, and the written consent of each such stockholder and the candidate to be publicly identified. • Regarding the candidate, such person’s name, age, business and residence addresses, principal occupation or employment, number of shares of the Company’s stock, if any, beneficially owned, a
15 written resume or curriculum vitae of personal and professional experiences, and all other information relating to the candidate that would be required to be disclosed in a proxy statement or other filings required to be made in connection with the solicitation of proxies for election of directors pursuant to Section 14 of the Securities Exchange Act of 1934, as amended, and the regulations promulgated thereunder (the “Exchange Act”). • Regarding the candidate, information, documents or affidavits demonstrating to what extent the candidate meets the required minimum criteria, and the desirable qualities or skills, established by the Committee. The Notice must also include a written statement that the stockholder submitting the proposal and the candidate will make available to the Committee all information reasonably requested in furtherance of the Committee’s evaluation of the candidate. • Regarding the stockholder submitting the proposal, the person’s business address and contact information and any other information that would be required to be disclosed in a proxy statement or other filings required to be made in connection with the solicitation of proxies for election of directors pursuant to Section 14 of the Exchange Act. • The signature of each candidate and of each stockholder submitting the proposal.
The Notice shall be delivered in writing, by registered or certified, first-class mail, postage prepaid, to the following address: Board of Directors Alaska Air Group, Inc. PO Box 68947 Seattle, WA 98168
The Corporate Secretary and General Counsel will promptly forward the Notice to the Chair of the Governance and Nominating Committee.
d. Initial Consideration of Candidates Recommended by Other Stockholders If, based on the Committee’s initial screening of a candidate recommended by a Qualified Stockholder, a
Proxy Statement candidate continues to be of interest to the Committee, the Chair of the Committee will request that the CEO interview the candidate and the candidate will be interviewed by one or more of the other Committee members. If the results of these interviews are favorable, the candidate recommended by a Qualified Stockholder will be evaluated as set forth below. Except as may be required by applicable law, rule or regulation, the Committee will have no obligation to discuss the outcome of the evaluation process or the reasons for the Committee’s recommendations, with any stockholder who made a proposal.
3. Evaluation of Candidates
As to each recommended candidate that the Committee believes merits consideration, the Committee will cause to be assembled information concerning the background, qualifications and appropriate references of the candidate, including information concerning the candidate required to be disclosed in the Company’s proxy statement under the rules of the SEC and any relationship between the candidate and the person or persons recommending the candidate. The Committee will then (i) determine if the candidate satisfies the qualifications set forth below under the caption “Policy on Minimum Qualifications for All Directors”; (ii) conduct interviews with the candidate as it deems necessary and appropriate; and (iii) consider the contribution that the candidate can be expected to make to the overall functioning of the Board. The Committee will then meet to consider and finalize its list of recommended candidates for the Board’s consideration.
The Governance and Nominating Committee will consider incumbent candidates based on the same criteria used for candidates recommended by Qualified Stockholders, provided that incumbents will also be considered on the basis of the Committee’s annual evaluations of the effectiveness of the Board, its committees and their members.
16 Policy on Minimum Qualifications for All Directors While there is no formal list of qualifications, the Governance and Nominating Committee considers, among other things, the prospective nominees’ relevant experience, intelligence, independence, commitment, ability to work with the Chief Executive Officer and within the Board culture, prominence, diversity, age, understanding of the Company’s business, and other factors deemed relevant. For candidates to serve as independent directors, an independent and questioning mindset is critical. The Committee also considers whether the prospective candidates’ workloads would allow them to attend the vast majority of Board meetings, be willing and available to serve on Board committees, and devote the additional time and effort necessary to keep up with Board matters and the rapidly changing environment in which the Company operates. Different substantive areas may assume greater or lesser significance at particular times, in light of the Board’s present composition and the Committee’s (or the Board’s) perceptions about future issues and needs. Relevant experiences might include, among other things, company CEO experience, senior level international experience, senior level regulatory or legal experience, and relevant senior level expertise in one or more of the following areas — finance, accounting, sales and marketing, organizational development, information technology and public relations.
STOCKHOLDER COMMUNICATION POLICY Any stockholder or interested party who wishes to communicate with our Board of Directors or any specific directors, including non-management directors, may write to: Board of Directors Alaska Air Group, Inc. PO Box 68947 Seattle, WA 98168 Statement Proxy
Depending on the subject matter, management will: • forward the communication to the director or directors to whom it is addressed (for example, if the communication received deals with questions, concerns or complaints regarding accounting, internal accounting controls and auditing matters, it will be forwarded by management to the Chairman of the Audit Committee for review); • attempt to handle the inquiry directly (for example, where it is a request for information about us or our operations or it is a stock-related matter that does not appear to require direct attention by our Board of Directors or an individual director); or • not forward the communication if it is primarily commercial in nature or if it relates to an improper or irrelevant topic.
At each meeting of the Governance and Nominating Committee, the Corporate Secretary and General Counsel will present a summary of all communications received since the last meeting of the Governance and Nominating Committee that were not forwarded and will make those communications available to any director on request.
EXECUTIVE SESSIONS AND LEAD DIRECTOR The Board holds regular executive sessions of non-management directors quarterly. As provided in the Governance and Nominating Committee Charter, the Lead Director for these executive sessions is the chairman of the Governance and Nominating Committee.
17 DIRECTOR COMPENSATION We do not pay directors who are also employees of the Company any additional compensation for their service as directors, except for the reimbursement of expenses incurred in attending meetings. In 2005, compensation for nonemployee directors included the following: • an annual retainer of $30,000, with a minimum of 50% of the retainer paid in the form of Alaska Air Group common stock issued under the Company’s 2004 Long Term Incentive Plan. (In connection with this practice, the Board has set stock ownership guidelines for directors.) • $2,000 for each Audit Committee meeting and $1,200 for each Board or other committee meeting in which a nonemployee director participated in person, or $750 if participation was via telephone; • $500 for participation in telephone updates that occur between meetings; • an annual retainer of $8,000 to the Audit Committee chairperson and $4,000 to other committee chairpersons; • an annual retainer of $1,000 to nonemployee directors who served on the Board of Directors of Alaska Airlines or Horizon Air; and • reimbursement of expenses in connection with attending Board and committee meetings as well as expenses in connection with director education.
In addition to the retainers and meeting fees mentioned above, and as part of a director’s compensation package, a nonemployee director, a nonemployee director’s spouse and a nonemployee director’s dependent children are provided transportation on Alaska and Horizon Air.
CEO AND CFO CERTIFICATIONS In accordance with NYSE listing standards, the Company’s 2005 CEO certification required by Section 303a.12(a) of the NYSE Listed Company Manual has been filed with the NYSE. In addition, the Company’s CEO and CFO certifications required under Section 302 of the Sarbanes-Oxley Act are filed as
Proxy Statement exhibits to the Company’s Annual Report on Form 10-K.
CODE OF CONDUCT AND ETHICS The Company has adopted a Code of Conduct & Ethics that applies to all employees of the Company, including our Chief Executive Officer, Chief Financial Officer, principal accounting officer and persons performing similar functions. The Code of Conduct & Ethics is located on the Company’s internet website at http://www.alaskaair.com/ and is available in print to any stockholder who requests it. Information on the Company’s website, however, does not form a part of this proxy statement. The Company intends to disclose any amendments (other than technical, administrative or non-substantive amendments) to, and any waivers from, a provision of the Code of Conduct and Ethics for directors or executive officers on the Company’s internet website.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company and its subsidiaries have transactions in the ordinary course of business with other corporations of which the Company’s executive officers or directors or members of their immediate families are directors, executive officers, or stockholders. The amounts involved are below disclosure thresholds set by the SEC, or the executive officer or director or his or her family member does not have a direct or indirect material interest, as that term is used in SEC rules, in the transaction and, in any case, the Company does not consider the amounts involved in such transactions to be material in relation to its business.
18 SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s directors and certain of its officers to send reports of their ownership of Company common stock and changes in such ownership to the SEC and the NYSE. The Company assists its directors and officers by preparing forms for filing. SEC regulations also require the Company to identify in this proxy statement any person subject to this requirement who failed to file a report on a timely basis. Based on a review of copies of reports furnished to the Company and written representations that no reports were required, the Company believes that all of its directors and officers subject to Section 16(a) complied with the reporting requirements with respect to transactions during 2005.
INDEPENDENT AUDITORS Termination of Deloitte & Touche LLP; Engagement of KPMG LLP On August 10, 2004, the Audit Committee dismissed Deloitte & Touche LLP (“Deloitte”) and engaged KPMG LLP (“KPMG”) as its independent auditor for the year ending December 31, 2004.
The Company disclosed these events in a Current Report on Form 8-K filed with the SEC on August 13, 2004 (the “Form 8-K”), which included the following information:
Deloitte’s report on Air Group’s financial statements for each of the years ended December 31, 2003, and December 31, 2002, did not contain an adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles, except the report contained explanatory
paragraphs relating to the adoption of Statement of Financial Accounting Standards No. 142, “Goodwill and Statement Proxy Other Intangible Assets,” and the revision to the financial statements discussed in the notes thereto.
During the years ended December 31, 2003, and 2002, and the interim period between December 31, 2003, and the date of Deloitte’s dismissal, there were no disagreements between Air Group, Alaska or Horizon Air and Deloitte on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure which, if not resolved to Deloitte’s satisfaction, would have caused them to make reference to the subject matter of the disagreement in connection with their report for such years; and there were no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K, except as follows: • In connection with its audit of Air Group’s consolidated financial statements for the year ended December 31, 2003, Deloitte advised the Audit Committee of two matters related to its internal controls that Deloitte considered to be reportable conditions under standards established by the American Institute of Certified Public Accountants. First, Deloitte noted that although the Company reconciles its balance sheet accounts regularly, and those reconciliations are reviewed by someone other than the preparer, the Company should improve its process of analyzing the underlying account detail. Second, Deloitte noted that Horizon Air was not reconciling its inventory of expendable parts on a timely basis. • In connection with its audit of Air Group’s consolidated financial statements for the year ended December 31, 2002, Deloitte advised the Audit Committee of one matter that Deloitte considered to be a reportable condition. Deloitte noted design deficiencies specific to password controls in the Peoplesoft application software and the security configuration of the Peoplesoft Financials application.
Air Group believes that the reportable conditions described above have been corrected.
Air Group has authorized Deloitte to fully respond to the inquiries, if any, of Air Group’s, Alaska’s or Horizon Air’s successor independent accountants concerning the matters described above. Air Group requested that Deloitte furnish Air Group with a letter addressed to the SEC stating whether they agree with the statements made in the Form 8-K; and if not, stating the respects in which they do not agree. The required letter from Deloitte with respect to the above statements made by the Registrant was filed as Exhibit 16 to the Form 8-K.
19 During the years ended December 31, 2003, and 2002, and through the date of the Form 8-K, neither Air Group nor Alaska nor Horizon Air nor anyone acting on their behalf consulted KPMG with respect to the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on Air Group’s or Alaska’s or Horizon Air’s financial statements, or any other matters or reportable events listed in Items 304(a)(2)(i) and (ii) of Regulation S-K.
Selection of Independent Auditors for the Current Fiscal Year The Audit Committee of the Board of Directors has selected KPMG as the Company’s independent public auditors for the current fiscal year. Representatives of KPMG are expected to attend the meeting to respond to questions from stockholders and will have the opportunity to make a statement, if they wish to do so.
Fees Paid to Independent Auditors During fiscal year 2005, the Company retained KPMG as its principal auditors. During fiscal year 2004, the Company retained Deloitte and KPMG as its principal auditors. The independent auditors provided services in the following categories and amounts:
Deloitte & Touche 2005 LLP KPMG LLP Total Audit Fees for the Company’s Annual Financial Statements and Quarterly Reviews(1) ...... $ 14,451 $1,026,509 $1,040,960 Audit-Related Fees(2) ...... 3,500 284,853 288,353 Tax Fees(3) ...... 32,580 56,234 88,814 All Other Fees(4) ...... — 29,132 29,132 Total Fees for 2005 ...... $ 50,531 $1,396,728 $1,447,259
2004 Audit Fees for the Company’s Annual Financial Statements and Quarterly
Proxy Statement Reviews(1) ...... $467,000 $1,339,000 $1,806,000 Audit-Related Fees(2) ...... 176,000 — 176,000 Tax Fees(3) ...... 67,000 52,314 119,314 All Other Fees(4) ...... 26,000 — 26,000 Total Fees for 2004 ...... $736,000 $1,391,314 $2,127,314 (1) Audit fees arranged for 2005 and 2004 include the annual audit of internal controls as mandated under Sarbanes-Oxley Section 404. (2) Includes fees paid in connection with the audit of Air Group’s employee benefit plans in both years and, in fiscal 2005, fees incurred in connection with the Form S-3 Registration Statement filed on December 12, 2005. (3) Fees for professional services in connection with tax consulting, planning and tax return review. Substantially all of the tax fees paid to Deloitte were paid after their dismissal as our principal auditor. The tax fees paid to KPMG in 2004, with the exception of $22,000 in connection with one specific project, were paid prior to their appointment as our principal auditor. (4) Fees for professional services in connection with (i) the audit of security costs incurred as reported to the Transportation Security Administration, (ii) the audit of passenger facility charges and examination of related controls, (iii) the examination of agreed-upon procedures for the U.S. Citizenship and Immigration Services, (iv) the audit of airport improvement fees and examination of related controls, and (v) miscellaneous consulting.
20 The Audit Committee has considered whether the provision of the non-audit services referenced above is compatible with maintaining the independence of the Company’s independent auditors, and has determined that it does not impact the independence of the auditors.
Independent Auditor Engagement Policy The Audit Committee has established an Independent Auditor Engagement Policy that is designed to ensure that the Company’s auditor performs its services independently and with the highest integrity and professionalism. The Audit Committee reviews the policy annually.
The policy provides that any engagement of the Company’s outside auditor must be consistent with principles determined by the SEC, namely, whether the independent auditor is capable of exercising impartial judgment on all issues encompassed within the auditor’s engagement.
Permitted services under the policy include audit services, audit-related services, certain tax services and certain other services not prohibited by SEC rules or other federal regulations. Before retaining its independent auditor for non-audit services, the Audit Committee will consider factors such as whether the services might compromise the auditor’s independence, whether the auditor is the best provider for the services, and the appropriate proportion of audit to non-audit services.
All services must be pre-approved by the Audit Committee except for certain services other than audit, review or attest services that meet the “de minimis exception” under 17 CFR Section 210.2-01, namely: • the aggregate amount of fees paid for all such services is not more than 5 percent of the total fees paid
by the Company to its auditor during the fiscal year in which the services are provided; Statement Proxy • such services were not recognized by the Company at the time of the engagement to be non-audit services; and • such services are promptly brought to the attention of the Audit Committee and approved prior to the completion of the audit.
During fiscal year 2005, there were no such services that were performed pursuant to the “de minimus exception.”
AUDIT COMMITTEE REPORT The following report of the Audit Committee shall not be deemed to be soliciting material or to be filed with the SEC under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, or incorporated by reference in any document so filed.
Review of Our Company’s Audited Financial Statements The Audit Committee has reviewed and discussed with management and KPMG, the Company’s independent auditors, the Company’s audited financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005. We believe that management maintains an effective system of internal controls that results in fairly presented financial statements.
The discussions with KPMG also included the material and judgmental matters required by Statement on Auditing Standards No. 61, Communication with Audit Committees, as amended, by the Auditing Standards Board of the American Institute of Certified Public Accountants.
We have also received and reviewed the written disclosures and the KPMG letter required by Independence Standard No. 1, Independence Discussions with Audit Committees, as amended, by the Independence Standards Board, and have discussed with KPMG their independence.
21 Based on the review and discussions described above, the Audit Committee recommended to the Board of Directors that the audited financial statements be included in Alaska Air Group’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005.
Audit Committee of the Board of Directors Byron I. Mallott, Chairperson Patricia M. Bedient, Member Mark R. Hamilton, Member John V. Rindlaub, Member Proxy Statement
22 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This table shows how much Company common stock is owned as of March 31, 2006, by (a) each director and nominee, (b) each of the Company’s five most highly compensated executive officers, and (c) all executive officers as a group. The number shown for each person includes shares that he or she: • may vote or invest alone; • holds with his or her spouse, with shared voting and investment power; • holds otherwise with shared voting and investment power; • holds in one of the Company’s 401(k) plans; or • may acquire through stock option exercises through June 9, 2006.
Options Shares Exercisable Stock Percent of Beneficially within Units and Outstanding Name Owned(a) 60 Days Interests(b) Total(c) Shares Patricia M. Bedient ...... 1,145 — 1,145 * Phyllis J. Campbell ...... 2,256 — 2,256 * Mark R. Hamilton ...... 1,377 — 1,377 * Bruce R. Kennedy ...... 5,217 — 5,217 * Jessie J. Knight, Jr...... 2,315 — 2,315 *
R. Marc Langland ...... 4,597 — 4,597 * Statement Proxy Dennis F. Madsen ...... 2,001 — 2,001 * Byron I. Mallott ...... 3,389 — 3,389 * John V. Rindlaub ...... 5,599 — 5,599 * J. Kenneth Thompson ...... 5,145 — 5,145 * Richard A. Wien ...... 5,597 — 5,597 * William S. Ayer ...... 19,256 418,200 29,400 437,456 1.2% George D. Bagley ...... 1,262 232,250 13,380 233,512 * Kevin P. Finan ...... 379 55,825 11,760 56,204 * Gregg A. Saretsky ...... 1,432 121,052 11,140 122,484 * Bradley D. Tilden ...... 2,795 105,750 10,700 108,545 * Keith Loveless ...... 278 65,568 10,360 65,846 * Jeffrey D. Pinneo ...... 2,325 71,500 9,740 73,825 * Glenn S. Johnson ...... 3,667 48,800 10,460 52,467 * Brandon S. Pedersen ...... 0 2,975 3,380 2,975 * All directors and all executive officers as a group (20 persons) ...... 70,032 1,121,920 110,320 1,191,952 3.3%
* Less than 1% (a) Consists of the aggregate total of shares of common stock held by the reporting person either directly or indirectly, including 401(k) plan holdings. (b) Consists of the aggregate total of Restricted Stock Units (RSUs) granted in 2004 and 2005, which will vest November 17, 2007, and August 30, 2008, respectively. (c) Total does not include stock units because they are not yet vested.
23 The table below identifies those known to have beneficial ownership of more than 5% of the Company’s outstanding common stock, as of March 31, 2006, or as otherwise indicated.
Number of Percent of Shares Outstanding Name and Address of Beneficial Owner Owned Shares Donald Smith & Co., Inc.(1) ...... 2,747,100 7.6 152 West 57th Street New York, NY 10019 Vanguard PRIMECAP Fund(2) ...... 2,540,000 7.0 100 Vanguard Boulevard Malvern, PA 19355 AXA Financial, Inc (3) ...... 2,448,708 7.3 1290 Avenue of the Americas New York, New York 10104 Dimensional Fund Advisors Inc.(4) ...... 2,322,700 6.4 1299 Ocean Avenue, 11th Floor Santa Monica, 90401 CA Franklin Resources, Inc.(5) ...... 1,850,600 5.1 One Franklin Parkway San Mateo, CA 94403-1906 (1) Information is based on a Schedule 13G filed by Donald Smith & Co., Inc. (“Donald Smith”) on February 12, 2006. Donald Smith reported in the Schedule 13G that it had sole voting power over 2,416,500 of the shares. (2) Information is based on a Schedule 13G filed by Vanguard PRIMECAP Fund (“Vanguard”) on February 13, 2006. Vanguard reported in the Schedule 13G that it had sole voting power over all 2,540,000 shares. (3) Information is based on a Schedule 13G filed by ASA Financial, Inc. (“AXA”) on February 14, 2006. AXA
Proxy Statement reported that shares covered are owned by AXA Rosenberg Investment Management LLC, Alliance Capital Management, L.P., and AXA Equitable Life Insurance Company each with power over 1,116,620 shares, 1,330,038 shares and 2,050 shares, respectively. (4) Information is based on a Schedule 13G filed by Dimensional Fund Advisors Inc. (“Dimensional”) on February 1, 2006. Dimensional reported in the Schedule 13G that it furnishes investment advice to four investment companies and serves as investment manager to other accounts, which hold the shares shown in the table above. It further reported that while it possesses voting and investment power over such shares, they are owned by the Funds, and Dimensional disclaims beneficial ownership of such shares. (5) Information is based on a Schedule 13G filed by Franklin Resources, Inc. (“FRI”) on January 27, 2006. The Schedule 13G reported that the shares covered are owned by accounts advised by FRI’s advisory subsidiaries. FRI, the advisory subsidiaries, Charles B. Johnson and Rupert H. Johnson, who are FRI’s principal stockholders, collectively, have sole voting power over all 1,850,600 shares.
24 EXECUTIVE COMPENSATION In this section, we describe the compensation we pay our Chief Executive Officer and the next four most highly compensated executive officers (the “named executive officers”). That group includes officers of Alaska Air Group, the CEO of an operating subsidiary and two elected officers of a subsidiary who have policy-making roles at the Alaska Air Group level (see the Summary Compensation Table on page 33). This section consists of: • a report by the Compensation Committee on executive compensation, • a graph showing comparative performance of the common stock, • a detailed table showing compensation for the years 2005, 2004 and 2003, and • information about stock options and retirement benefits.
This section also includes descriptions of certain change-in-control arrangements between the Company and the named executive officers.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION The following report of the Compensation Committee and the performance graph showing comparative performance of the Company’s common stock included elsewhere in this proxy statement do not constitute soliciting material and should not be deemed filed or incorporated by reference into any other Company filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent the Company specifically incorporates this report or the performance graph by reference therein. rx Statement Proxy During 2005, the Compensation Committee of the Company’s Board of Directors consisted of Ms. Campbell, Mr. Knight, Mr. Rindlaub and Mr. Madsen. Mr. Langland also served on the Committee during the early part of 2005. No member of the Committee was an employee of the Company or any of its subsidiaries during the year. Each member meets the definition of “nonemployee director” under Rule 16b-3 of the Securities Exchange Act of 1934, is an “outside director” within the meaning of Section 162(m) of the Internal Revenue Code and is “independent” within the meaning of the corporate governance rules of the NYSE.
The Committee has overall responsibility for the Company’s executive compensation policies and practices. In part, the Committee’s functions include: • determining the compensation of the Chief Executive Officer based on a detailed evaluation of his and the Company’s performance by the Board of Directors; • reviewing and approving all other elected officers’ compensation upon recommendation of the Chief Executive Officer; • setting annual goals to be used in the Company’s Performance Based Pay Plan (“PBP”); and • granting awards under stock incentive plans.
25 The Committee has provided the following report on the compensation policies of the Company as they apply to its executive officers and the relationship of Company performance to executive compensation and the Chief Executive Officer’s compensation.
Executive Compensation Philosophy Five elements comprise the Company’s executive compensation philosophy. They are:
1. establishing objectives for compensation;
2. defining appropriate competitive reference points;
3. creating an appropriate linkage between compensation programs and Company objectives and values;
4. describing the roles of various elements of compensation; and
5. maintaining good governance practices concerning compensation.
We will describe the Company’s approach to each of these elements in more detail below.
Objectives. The objectives of the Company’s executive compensation policies are: • to attract and retain highly qualified executives by designing the total compensation package to be in line with our competitive reference points; • to motivate executives to provide excellent leadership and achieve Company goals by linking merit- based salary adjustments and short-term incentives to the achievement of specific annual goals as reflected in executives’ commitment plans and the PBP; • to link the interests of executives, employees, and stockholders by tying a large portion of total compensation to the Company’s safety, operational performance, profitability and stock value; Proxy Statement • to align the interests of executives, employees, and stockholders by establishing cohesive safety, operational, and financial goals that reflect the Company’s 2010 strategic growth plan; and • to provide executives with reasonable security, through a combination of retirement plans, employment and/or change-in-control agreements and performance-based incentives that motivate them to continue employment with the Company and achieve goals that will make the Company thrive and remain competitive in the long run.
Competitive Reference Points. To ensure that its overall compensation is competitive, the Company periodically reviews executive compensation for a range of other companies that may include: • a group of eight larger and four smaller air carriers, including the Company’s primary competitors and the majority of the companies included in the Dow Jones Airlines Group contained in the Performance Graph on page 32, and • other companies in a broad-based 2005 national compensation survey compiled by Watson Wyatt.
26 The table [below] provides results of a survey recently completed by Watson Wyatt of cross-industry and airline industry compensation.
CEO Pay Comparisons
$(000s) 1999 2000 2001 2002 2003 2004 2005 Base Salary Alaska Air ...... 511.0 518.0 525.0 525.0 374.0 369.0 360.0 Benchmarks: Cross Industry(1) ...... 586.6 601.5 623.8 650.5 701.3 655.8 749.5 Airline Industry(2) ...... 510.0 611.0 506.0 564.0 507.0 479.2 (3) Total Cash Alaska Air ...... 886.0 518.0 525.0 637.0 473.0 479.3 360.0 Benchmarks: Cross Industry ...... 956.5 960.6 1,051.7 997.9 1,199.0 1,170.0 1,501.8 Airline Industry ...... 1,027.0 1,253.0 698.0 876.0 682.0 687.8 (3) Total Compensation(3) ...... Including long-term equity incentives valued at the time of award using a Black-Scholes factor of .50 for all companies, total compensation for Alaska Air’s CEO lagged the airline industry comparison group (described in footnote 2) by an average of 53 percent over the six years for which data was available (1999-2004), and it lagged cross-industry comparisons
by an average of 43 percent over that same period. Statement Proxy
Top Five Executives Pay Comparisons (Average)
$(000s) 1999 2000 2001 2002 2003 2004 2005 Base Salary Alaska Air ...... 303.0 300.0 307.0 340.0 278.0 286.0 281.0 Benchmarks: Cross Industry ...... 298.2 309.6 315.6 330.8 373.0 356.5 391.3 Airline Industry ...... 382.0 417.0 413.0 404.0 373.0 379.3 (3) Total Cash Alaska Air ...... 500.0 300.0 307.0 399.0 358.0 350.0 402.8 Benchmarks: Cross Industry ...... 450.6 463.3 484.1 441.0 580.4 562.0 674.9 Airline Industry ...... 948.0 779.0 538.0 614.0 504.0 518.9 (3) Total Compensation(3) ...... Including long-term equity incentives valued at the time of award using a Black-Scholes factor of .50 for all companies, total average compensation for Alaska Air’s Top Five Executives lagged the airline industry comparison group by an average of 50 percent over the five years for which data was available (1999-2004), and it lagged cross-industry comparisons by an average of 15 percent over that same period. (1) Cross Industry Group includes over 1,000 companies from a wide variety of industries (excluding the financial industry). Comparisons were based on the job responsibilities of Alaska Airlines positions. Values were calculated using regression analysis based on the companies’ actual revenues for each year. (2) Airline Industry Group includes the following 12 airlines: Air Tran Holdings, America West Holdings, AMR, ATA Holdings, Continental Airlines, Delta Air Lines, Frontier Airlines, JetBlue Airways, Northwest
27 Airlines, Southwest Airlines, UAL and US Airways Group. These airlines vary somewhat from those included in the Performance Graph on page 32. This group was chosen for purposes of executive compensation comparison because it is the same group of airlines used by the Company when evaluating comparative market wage rates for other employee groups. Data reflects average values for the group of airlines. (3) 2006 proxy data (2005 actual pay data) for the group of airlines was not available when this report was conducted.
Linkage between compensation programs and Company objectives and values. We link executive compensation closely with Company objectives, which include safety, employee engagement, operational excellence, cost management and profitability. First, the Company’s annual incentive plans (the Performance Based Pay Plan (“PBP”) and Operational Performance Rewards Plan (“OPR”)) explicitly incorporate these goals in stated annual targets. Second, equity-based awards such as options and restricted stock units maximize their value when the Company achieves these objectives, which will in the long term positively impact the Company’s stock price. Finally, executives’ annual performance evaluations are based in part on their achievement of specific goals in their individual commitment plans.
The roles of various elements of compensation. Executive compensation includes base salary, at-risk pay tied to annual financial and operational performance, equity-based awards and retirement benefits. Taken together, the Compensation Committee’s goal is to ensure a total pay package that is in line with the executive’s competitive reference points. However, the Committee may allocate the value of the individual components of a competitive package (base salary, short-term incentives and long-term incentives) differently from other companies, depending on market conditions and Company performance.
For 2005, the Compensation Committee targeted the CEO’s base salary at the 25th percentile with higher short-term and long-term at-risk compensation such that the targeted combined value is at the 50th percentile relative to a general industry survey conducted by Watson Wyatt. By weighting the at-risk components more heavily, Mr. Ayer will be compensated as Company profitability and operational performance improve. The Committee acknowledges that Mr. Ayer’s 2005 combined base salary, at-risk annual incentive pay and long-term
Proxy Statement equity awards were well below the 50th percentile. In light of the current economic distress in the airline industry in general and the need to restructure employee wages and productivity at the Company, in particular, the Committee has decided to make any adjustments to his compensation over a period of time, and to link such adjustments to long-term financial and operational results as set forth in our “Alaska 2010” strategic plan.
Governance practices concerning compensation. The Compensation Committee Charter describes many of the procedures that the Committee follows to ensure good governance. These include setting CEO salary and reviewing and approving elected vice president salaries, setting annual goals under the PBP, reviewing equity compensation plans and making awards under those plans, exercising fiduciary responsibilities over retirement plans, overseeing management development and succession planning, and keeping adequate records of its activities. The Committee also retains the services of an outside compensation specialist.
Annual Base Salary In 2005, base salaries for executive officers were based on: • an analysis of competitive market rates including other airlines as well as cross-industry comparisons; • the market demand for each executive officer’s skills; • the executive’s influence on long-term Company strategies and success; • the relationships among executive positions; and • individual leadership performance.
28 In light of the financial distress of the industry, Mr. Ayer and the executive vice presidents took voluntary salary reductions in 2002, and took no increases in base salary in 2003, except those made in connection with promotions entailing additional responsibilities or in isolated situations where pay was significantly below a competitive rate in relation to an individual’s responsibilities. In 2004, the Company restored the salaries of Mr. Ayer and the executive vice presidents to January 2002 levels. These changes were not retroactive and these executives did not recapture any salary foregone over that period.
Annual Incentive Plans Air Group executives participate in an annual incentive plan called the Performance Based Pay Plan, or “PBP,” which places at risk a significant portion of each executive’s market-based compensation, linking it to annual profitability and operational goals. A separate incentive plan, called Operational Performance Rewards, or “OPR,” pays a monthly incentive to all employees when particular operational performance targets are met.
For awards to be paid, the Company must achieve or exceed profit and/or operating goals established annually by the Compensation Committee. OPR awards are based on operational performance exclusively, and the maximum annual payout for each employee is $1,200. PBP awards are based on operational performance and profitability. In 2005, PBP measures included safety (10%), customer satisfaction (10%), competitive unit costs (10%) and profitability (70%). Awards increase proportionately based on the degree to which the various goals are met. Consistent with the Committee’s compensation philosophy of placing a higher percentage of total cash compensation at risk, beginning with the 2005 plan year, Mr. Ayer could have earned up to 100% of base pay if the target goals were met, and up to 200% if the maximum goals were reached. The other named executives could have earned up to 60% of base salary if the target goals were met, and up to 120% of base salary if the Company reached the maximum goals. Statement Proxy
During 2005, Air Group performed at 106% of target for PBP (108% at Horizon Air). Mr. Ayer voluntarily declined his 2005 PBP payment of $382,679, in light of sacrifices made by other employees in 2005. Based on performance, payment of awards for the 2005 PBP plan year for other Air Group named executives totaled 106% of target with respect to the annual incentive goals outlined above. Mr. Pinneo’s award included Horizon Air goals and totaled 108% of target.
Equity-Based Awards The stockholder-approved 2004 Long-Term Incentive Equity Plan provides for a variety of equity- and cash-based awards, including stock options, stock appreciation rights and stock grants. The Company has used stock options to provide an incentive to maximize stock values, linking the long-term interests of executives with those of stockholders. Because the awards vest over several years, they encourage executives to remain with the Company. The Committee grants options at market price, so recipients benefit only if the price of the stock appreciates and stockholders also benefit.
In 2005, the Committee issued both stock options and restricted stock units (“RSUs”). The RSUs vest on August 30, 2008, at which time one share of stock is issued to the recipient for each RSU. The stock options vest at the rate of 25% per year, beginning August 30, 2006. The Committee believes that issuing equity awards in the form of stock options combined with RSUs provides a strong incentive for executives to take a long-term view of the Company’s success, thereby serving the interests of stockholders and employees alike.
The Committee does not base grants on stock ownership targets or on the number of stock options or shares an individual has outstanding because it believes doing so would discourage officers from retaining options or shares. Individual grants are determined according to base salary, position and comparative equity grant information from the Company’s competitive reference points. The options and RSUs granted to each of the named executives in 2005 are shown in the tables on pages 33 and 35.
29 Chief Executive Officer’s Compensation Base Salary — In setting the CEO’s base salary, the Committee reviews competitive information similar to that used for other Company executives and retains the services of an outside consultant. By reviewing survey data, the Committee believes it will remain mindful of compensation levels that would be required to recruit from outside the Company.
Annual Incentive Plans — The PBP award is the primary portion of the CEO’s compensation that most directly relates to the Company’s financial and operational performance. Under the plan in effect during 2005, the CEO’s award could range from zero, if performance was below threshold, to 100% of base salary if all of the operating and financial targets were met, up to a maximum of 200% if maximum goals were reached on all measures. Based on his performance, Mr. Ayer was entitled to a payment of $382,679 for 2005. Mr. Ayer voluntarily declined the full amount of this payment due to the on-going transformation of the Company and recent sacrifices by front-line employees.
Equity-Based Awards — Mr. Ayer was granted 46,100 stock options and 14,000 RSUs in 2005. The total value of these grants was below amounts suggested by awards to similarly situated CEOs at the Company’s competitive reference companies.
CEO Evaluation by Board of Directors The independent directors of the Board of Directors conduct an annual evaluation of the CEO’s performance based on: • the Company’s financial performance; • overall leadership; • strategic and succession planning; • communication to the Board and other Company constituencies; • investor relations; • the CEO’s relationship with the Board; Proxy Statement • achievement of safety and compliance goals; and • achievement of objectives in individual commitment plans.
The Compensation Committee provides the following discussion of the CEO’s performance during 2005:
In 2005, Mr. Ayer continued implementation of a comprehensive, forward-looking strategic plan to transform the Company and position it for success in the years ahead. Steady improvements in Alaska Air Group’s year-over-year financial position and a strong strategic focus poise the Company for future growth and long-term viability in an industry marked by turmoil.
Financial and Strategic. Alaska was one of only three major carriers to post a profit (after adjusting for special items) for 2005. Strong revenue performance driven by record load factors and solid yield improvement, together with cost improvements from strategic fuel hedging positions and wage and benefit concessions, resulted in the Company’s second consecutive profitable year.
Horizon Air also posted a profit in 2005, marking three years of consecutive profitability. Horizon Air experienced a second consecutive year of record-breaking load factors and continued its profitable relationship with Frontier Airlines operating as Frontier Jet Express, which accounted for 10% of its revenues.
Air Group continued to maintain a strong balance sheet and solid liquidity in the face of unprecedented economic challenges in the airline industry. In 2005, the Company strengthened its position further when Air Group sold 5.7 million shares of common stock at $35.15 per share, which raised approximately $200 million for the Company.
30 Strategic decisions paved the way for long-term Alaska Air Group growth. In 2005, Alaska Air Group placed firm orders for delivery of 40 737-800 aircraft over the next three years. Alaska Airlines continues to add major destinations to its route system, with Dallas/Fort Worth and Mexico City joining the roster of “Alaska” cities in 2005.
Key Relationships and Leadership. Mr. Ayer has exhibited a positive, interactive and responsive relationship with the Board of Directors and other constituencies.
Mr. Ayer has maintained open and appropriate communications with the Company’s investors and has increased the Company’s focus on this important group by adding a full-time position dedicated to investor relations during 2005.
While the difficult decisions necessary for continued viability challenged the relationship with labor, Mr. Ayer continued the effort to establish a more open, collaborative relationship with employee groups through increased communication and employee involvement.
In the recent past, Alaska has faced extraordinary challenges in the marketplace. Competition from low-cost carriers and bankruptcy-protected legacy carriers has resulted in great pressure to lower all costs, including labor costs. In May 2005, market rates of pay were achieved with Alaska Airlines’ pilot group through an arbitrated decision. Also in May, after prolonged negotiations had failed, Alaska made the difficult decision to contract its Seattle ramp work. Consistent with its own past practice, Alaska offered generous severance packages that compared favorably to incentive packages offered by others in the industry, and that significantly exceeded the requirements of union contracts.
Operational. Safety remains the most important goal of Alaska Airlines and Horizon Air. In 2005, Alaska’s Statement Proxy safety division earned the International Organization for Standardization’s prestigious ISO 9000 certification for the second consecutive year.
Short-term operational difficulties followed the necessary but painful labor-cost related decisions made in 2005. While Alaska experienced declining operational performance throughout the summer of 2005, the latter part of the year showed improving operational statistics and an increased focus on operational-based strategies.
In summary, difficult but significant steps have been taken this year to continue the transformation of the Company into an attractive investment that provides secure careers for employees. Significant challenges remain. We are very pleased with the progress to date and are confident that management will continue to make strides to achieve this goal.
Other Information: Tax Law Limits on Deductibility of Executive Compensation Section 162(m) of the Internal Revenue Code eliminates the Company’s ability to deduct certain compensation over $1 million paid to the named executives unless such compensation is based on performance objectives meeting certain criteria or is otherwise excluded from the limitation. The Company strives whenever possible to structure its compensation plans such that they are tax deductible by the Company. Accordingly, compensation to executive officers from the exercise of options or the vesting of restricted stock units granted under the Company’s equity plans is expected to be tax deductible by the Company to the maximum extent allowable. At this time, none of our named executive officers’ compensation subject to the deductibility limits exceeds $1 million, and it is the Compensation Committee’s view that the Company will not likely be affected by the deductibility rules in the near future.
Compensation Committee of the Board of Directors Phyllis J. Campbell, Chairperson Jessie J. Knight, Jr., Member Dennis F. Madsen, Member John V. Rindlaub, Member
31 PERFORMANCE GRAPH
The following graph shows a five-year comparison of cumulative total returns for the Company’s common stock, the Standard & Poor’s 500 Index, and the Dow Jones Airlines Group*, assuming an initial investment of $100 on December 31, 2000, with all dividends reinvested. The stock price performance shown here is historical and not necessarily indicative of future performance.
Dow Jones Alaska Air Airlines Date Group S&P 500 Group* 2000 ...... 100.00 100.00 100.00 Proxy Statement 2001 ...... 97.82 88.11 65.99 2002 ...... 72.77 68.64 37.65 2003 ...... 91.73 88.32 48.70 2004 ...... 112.57 97.93 45.53 2005 ...... 120.07 102.74 49.49
Information presented is as of fiscal years ended December 31. * The companies included in the Dow Jones Airlines Group are: Air Tran Holdings, Alaska Air Group, AMR, Continental Airlines, JetBlue Airways, Skywest and Southwest Airlines.
32 SUMMARY COMPENSATION TABLE This table shows compensation information for the named executive officers of Alaska Air Group for the last three fiscal years. Bonus figures are shown and based upon performance in the year earned, although paid in the following year.
Annual Compensation Other Annual Name and Principal Position Year Salary ($) Bonus(1) ($) Compensation(2) ($) William S. Ayer ...... 2005 360,000 0 43,740 Chairman, President & CEO (Alaska Air Group and 2004 368,985 110,326 39,628 Alaska Airlines) 2003 373,895 99,149 40,928 George D. Bagley ...... 2005 300,000 191,340 37,016 Former Executive VP/Operations (Alaska Airlines) 2004 283,938 58,775 35,411 2003 286,482 56,723 32,127 Gregg A. Saretsky ...... 2005 250,000 159,450 44,939 Executive Vice President/Marketing & Planning 2004 236,615 48,979 70,885 (Alaska Airlines) 2003 238,735 47,269 67,887 Bradley D. Tilden ...... 2005 240,000 153,072 39,915 Executive Vice President/Finance & (Alaska Air Group 2004 227,151 47,020 39,488 and Alaska Airlines) CFO 2003 229,185 45,379 44,633 Jeffrey D. Pinneo ...... 2005 218,474 139,449 45,265 President and CEO (Horizon Air Industries) 2004 211,335 56,637 37,572 Statement Proxy 2003 202,701 39,600 58,480
Long-Term Compensation Awards Restricted Securities Stock Underlying All Other Name and Principal Position Year Unit(s)(3) ($) Options (#) Compensation(4) William S. Ayer ...... 2005 461,440 46,100 7,542 Chairman, President & CEO (Alaska Air Group and 2004 444,290 50,700 9,241 Alaska Airlines) 2003 — 55,000 6,809 George D. Bagley ...... 2005 220,502 16,200 9,468 Executive VP/Operations (Alaska Airlines) 2004 193,007 16,200 9,930 2003 — 30,000 8,975 Gregg A. Saretsky ...... 2005 183,587 13,500 6,885 Executive Vice President/Marketing & Planning 2004 160,695 13,500 7,046 (Alaska Airlines) 2003 — 20,800 66,373(5) Bradley D. Tilden ...... 2005 176,336 12,900 6,858 Executive Vice President/Finance & (Alaska Air Group and 2004 154,348 12,900 6,847 Alaska Airlines) CFO 2003 — 20,000 6,355 Jeffrey D. Pinneo ...... 2005 160,515 10,800 14,399 President and CEO (Horizon Air Industries) 2004 140,500 10,800 12,522 2003 — 20,000 14,505
(1) Amounts included in this column for 2005 represent the “at risk” portion of market-based cash compensation for the named executive officers earned pursuant to the Performance Based Pay Plan. The Compensation Committee sets goals with respect to profitability as well as other financial and operating goals. Payments depend on the degree to which one or more of these goals is achieved. (See the discussion
33 of the Annual Incentive Plan on page 29.) Mr. Ayer declined his 2005 Performance Based Pay award in light of sacrifices made by other employees in 2005. Mr. Ayer deferred payment of his 2004 Performance Based Pay Plan award of $110,326. In addition to this amount, as of December 31, 2004, Mr. Ayer had deferred an aggregate of $104,662, including interest earned, in connection with his 2003 award. (2) Includes the value of personal benefits, imputed interest and tax gross-ups for the imputed income in connection with certain of those benefits. Compensation for Mr. Ayer includes $22,000 for automobile expense and $9,828 for executive travel in 2005; $21,138 for automobile expense and $9,687 for executive travel in 2004; and $21,160 for automobile expense and $10,948 for executive travel in 2003. Compensation for Mr. Bagley includes $19,000 for automobile expense and $7,538 for executive travel in 2005; $18,553 for automobile expense and $6,480 for executive travel in 2004; and $18,565 for automobile expense and $6,302 for executive travel in 2003. Compensation for Mr. Saretsky includes $17,500 for automobile expense and $15,489 for executive travel in 2005; $13,624 for automobile expense and $31,188 for executive travel in 2004; and $14,723 for automobile expense and $29,159 for executive travel in 2003. Mr. Tilden’s 2005 compensation includes $17,200 for automobile expense and $10,209 in connection with executive travel; 2004 compensation includes $16,843 for automobile expense and $9,922 for executive travel; and 2003 compensation includes $16,352 for automobile expense and $12,262 for executive travel. Compensation for Mr. Pinneo includes $16,450 for automobile expense and $18,250 for executive travel in 2005; $16,262 for automobile expense and $9,591 for executive travel in 2004; and $16,000 for automobile expense and $23,962 for executive travel in 2003. (3) Represents the value as of the dates of grants (November 17, 2004 and August 30, 2005) of restricted stock units awarded to the named executives, under which they have the right to receive the following shares of common stock, which had the following values as of December 31, 2005: Mr. Ayer — 29,400 shares valued at $1,050,168; Mr. Bagley — 13,380 shares valued at $477,934; Mr. Saretsky — 11,140 shares valued at $397,921; Mr. Tilden — 10,700 shares valued at $382,204; and Mr. Pinneo — 9,740 shares valued at $347,913. The awards vest on November 17, 2007 and August 30, 2008, respectively. No dividends will be paid in connection with the restricted stock units. The closing price on the date of grant was $28.85 and $32.96, respectively. The closing price on December 31, 2005, was $35.72. (4) Represents Company-paid contributions to individual 401(k) plan accounts and imputed income for the
Proxy Statement value (as determined by the Internal Revenue Service (“IRS”)) of a term life insurance benefit provided by the Company. In 2005, 401(k) contributions were $6,300 for Mr. Ayer, $6,300 for Mr. Bagley, $6,300 for Mr. Saretsky, $6,300 for Mr. Tilden and $12,908 for Mr. Pinneo. Imputed income for term life insurance during 2005 was as follows: Mr. Ayer, $1,242; Mr. Bagley, $3,168; Mr. Saretsky, $585; Mr. Tilden, $558 and Mr. Pinneo, $1,491. (5) In connection with Mr. Saretsky’s acceptance of employment at Alaska Airlines in 1998, the Company provided a loan of $60,000 in connection with his moving expenses. Under the terms of the contract, if Mr. Saretsky remained with the Company for five years, repayment of the loan would be forgiven. The terms of the contract were fulfilled in 2003, and the Company forgave the repayment obligation.
34 OPTION GRANTS IN 2005 Individual Grants Potential Realizable Value Percent of at Assumed Annual Rates Number of Total Options Exercisable of Stock Price Securities Granted to or Base Appreciation for Option Underlying Options Employee in Price(2) Expiration Term(3) Name Granted(1) (#) Fiscal Year (%) ($/Sh) Date 5%($) 10%($) William S. Ayer ...... 46,100 15.31% $32.96 08/30/2015 $955,578 $2,421,622 George D. Bagley ...... 16,200 5.38 $32.96 01/01/2010 115,070 247,807 Gregg A. Saretsky ...... 13,500 4.48 $32.96 08/30/2015 279,833 709,152 Bradley D. Tilden ...... 12,900 4.28 $32.96 08/30/2015 267,396 677,634 Jeffrey D. Pinneo ...... 10,800 3.59 $32.96 08/30/2015 223,866 567,321 (1) These options were granted under the 2004 Long-Term Incentive Equity Plan. They: • generally were granted as incentive stock options, subject to limitations imposed by tax law; • were granted at an exercise price equal to 100% of the fair market value of the common stock on the date of grant; • expire ten years from the date of grant, unless canceled earlier as a result of termination of employment; • vest in 25% increments on each anniversary date of the grant, subject to the terms and conditions of the 2004 Long-Term Incentive Equity Plan; and • provide for accelerated vesting under certain circumstances, as described under “Change-in-Control rx Statement Proxy Arrangements” on page 39. Mr. Bagley retired as of January 1, 2006, and was granted four years after retirement to exercise the options. (2) Options were granted at the closing price on August 30, 2005, as reported on the NYSE. (3) The 5% and 10% assumed rates of appreciation over a ten-year period are required by SEC rules. This does not represent the Company’s estimate or projection of the future common stock price. If the Company’s common stock does not appreciate, these executives will receive no benefit from the options.
35 AGGREGATED OPTION EXERCISES IN 2005 AND YEAR-END OPTION VALUES There is no assurance that the indicated values of any unexercised options will actually be realized.
Shares Number of Securities Acquired Underlying Unexercised Value of Unexercised on Value Options at Fiscal Year End In-The-Money Options at Exercise Realized(1) (#) Fiscal Year End(2) ($) Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable William S. Ayer ...... 10,200 146,625(3) 359,275 149,125 2,234,656 1,156,311 George D. Bagley ...... 8,200 110,700 220,700 68,350 1,439,415 612,745 Gregg A. Saretsky ...... 5,199 76,906 104,977 41,525 560,144 370,071 Bradley D. Tilden ...... 2,725 35,626 90,025 40,075 637,585 357,302 Jeffrey D. Pinneo ...... 5,400 35,626 56,300 36,400 413,673 336,355 (1) These values are calculated by: • subtracting the option exercise price from the market price on the date of exercise; and • multiplying that by the number of options exercised. (2) These values are calculated by: • subtracting the option exercise price from the December 31, 2005, closing price ($35.72 per share); and • multiplying that by the number of exercisable and unexercisable options. (3) Mr. Ayer paid the Company $160,000 to exercise the options and acquire the shares. He has not sold the shares and continues to hold them.
Salaried Retirement Plan The Company maintains a tax-qualified, defined-benefit retirement plan for salaried Alaska Airlines employees hired prior to April 1, 2003, in which the named executive officers participate. Benefits payable under the Alaska Airlines Salaried Retirement Plan (“Salaried Retirement Plan”) are based on years of credited service Proxy Statement and final average base salary for the five highest complete and consecutive calendar years of an employee’s last ten years of service. The annual retirement benefit at age 62 (normal retirement age under the Salaried Retirement Plan) is equal to 2% of the employee’s final average base salary times years of credited service. Annual benefits are computed on a straight life annuity basis beginning at normal retirement age. Benefits under the Salaried Retirement Plan are not subject to offset for Social Security benefits.
36 The following table shows estimated Salaried Retirement Plan annual benefits payable to an employee, assuming retirement on January 1, 2006, at age 62, with various combinations of final average base salary and years of credited service. These estimates represent the straight life annuity benefit for an individual who retires at normal retirement age and are adjusted for cost of living.
IRS regulations limit the covered compensation on which annual retirement benefits are based; the limit is $220,000 in 2006. IRS regulations also limit the annual benefits that may be paid from a tax-qualified retirement plan; the benefit limit is $175,000 in 2006. To the extent that the amounts shown in the table below exceed the IRS limitations, the excess will be paid from the Officers Supplementary Retirement Plan, described below.
FINAL AVERAGE ANNUAL BENEFITS BASED ON YEARS OF CREDITED SERVICE BASE SALARY 15 20 25 30 35 $175,000 ...... $ 52,500 $ 70,000 $ 87,500 $105,000 $122,500 $200,000 ...... 60,000 80,000 100,000 120,000 140,000 $225,000 ...... 67,500 90,000 112,500 135,000 157,500 $300,000 ...... 90,000 120,000 150,000 180,000 210,000 $350,000 ...... 105,000 140,000 175,000 210,000 245,000 $400,000 ...... 120,000 160,000 200,000 240,000 280,000 $450,000 ...... 135,000 180,000 225,000 270,000 315,000 $500,000 ...... 150,000 200,000 250,000 300,000 350,000 $550,000 ...... 165,000 220,000 275,000 330,000 385,000 $600,000 ...... 180,000 240,000 300,000 360,000 420,000 $650,000 ...... 195,000 260,000 325,000 390,000 455,000 rx Statement Proxy All of the participants’ base salaries, but not bonuses, as shown in the Summary Compensation Table, are covered under the Salaried Retirement Plan and the Officers Supplementary Retirement Plan. The named executives have the following years of credited service and final average compensation as of December 31, 2005.
NAMED YEARS OF CREDITED FINAL AVERAGE EXECUTIVE SERVICE BASE SALARY William S. Ayer ...... 10.3 367,330 George D. Bagley(1) ...... 12.1(2) 282,855 Gregg A. Saretsky ...... 7.8 240,066 Bradley D. Tilden ...... 14.8 224,477 Jeffrey D. Pinneo(3) ...... 7.7 210,837 (1) When Mr. Bagley transferred from Alaska Airlines to Horizon Air in October 1995, he was 100% vested under the Salaried Retirement Plan. Horizon Air does not have a similar plan, but will supplement his benefits to ensure that his retirement benefit will be equivalent to what he would have received had he been employed with Alaska Airlines during his tenure at Horizon Air. (2) Reflects combined service at Alaska Airlines and Horizon Air since becoming eligible for the Salaried Retirement Plan. (3) When Mr. Pinneo was elected President and CEO of Horizon Air in 2002, he was 100% vested under the Salaried Retirement Plan on account of prior service at Alaska. At that time, Horizon Air, which does not have a plan similar to the Alaska Airlines Salaried Retirement Plan, agreed to supplement his benefits to ensure that his retirement benefit will be equivalent to what he would have received had he been participating in the Alaska Airlines Salaried Retirement Plan during his tenure as President and CEO of Horizon Air.
37 Officers Supplementary Retirement Plan In addition to the benefits described above, under the Officers Supplementary Retirement Plan (“Supplementary Plan”), elected officers of Alaska Air Group and Alaska Airlines, as well as Horizon Air’s Chief Executive Officer, can receive retirement benefits, provided they have met service requirements. The Supplementary Plan is a nonqualified, unfunded, noncontributory defined-benefit plan. Normal retirement benefits are payable once the officer reaches age 60 and are based on the officer’s length of service with the Company. Benefits are calculated as a monthly amount on a straight life annuity basis. Benefits under both versions of the Supplementary Plan are subject to vesting schedules that are dependent on the officer’s length of service with the Company.
Officers Elected Prior to August 8, 1995. Under the version of the Supplementary Plan applicable to officers elected prior to August 8, 1995 (including Mr. Bagley), benefits can be up to 50% (depending on the officer’s vesting percentage) of an officer’s final average base salary, offset by Social Security benefits and adjusted for cost of living. Those participants are also eligible to receive additional retirement benefits from the Supplementary Plan to the extent IRS regulations limit benefits payable from the Salaried Retirement Plan. The chart below describes annual benefits payable upon retirement for Mr. Bagley:
NAMED EXECUTIVE ACTUAL BENEFIT(1 and 2) George D. Bagley ...... $150,325
Officers Elected On or After August 8, 1995. Under the version of the Supplementary Plan applicable to officers elected on or after August 8, 1995 (including Messrs. Ayer, Pinneo, Saretsky and Tilden), benefits, assuming full vesting, are determined by a formula that first calculates 50% to 75% of a participant’s final average base salary, depending on overall length of service and length of service as an officer. The amount determined by this formula is then offset by Social Security benefits and by benefits from the Salaried Retirement Plan to the extent such benefits were accrued after the officer becomes a participant in the Supplementary Plan. (There is no offset for Salaried Retirement Plan benefits accrued for service before becoming a participant in the Supplementary Plan.) In the event IRS regulations limit retirement benefits payable under the Salaried Retirement Plan, the offset under the Supplementary Plan decreases by a corresponding
Proxy Statement amount. The chart below describes estimated annual Supplementary Plan benefits payable upon retirement at normal retirement age for Messrs. Ayer, Pinneo, Saretsky and Tilden, assuming current compensation levels and projected service levels at normal retirement age:
NAMED EXECUTIVE ESTIMATED BENEFIT(1) William S. Ayer ...... $197,958 Jeffrey D. Pinneo(3) ...... $109,552 Gregg A. Saretsky ...... $ 91,980 Bradley D. Tilden ...... $ 96,416 (1) Benefits payable under the Salaried Retirement Plan are not included in the amounts shown. The amounts shown do not reflect an offset for Social Security benefits. (2) Mr. Bagley retired as of January 1, 2006. (3) Mr. Pinneo’s Supplementary Plan benefits are also reduced by the benefits described in footnote 3 to the Salaried Retirement Plan table on page 37.
38 CHANGE-IN-CONTROL ARRANGEMENTS Agreements are in place at Alaska Airlines and Horizon Air to provide severance pay to all executive officers and certain other key employees in the event they are terminated within 24 to 36 months after a change in control of the Company. Depending on the employee’s position, the formula provides for payments of up to 24 or 36 months’ salary plus bonus, as well as commensurate service credit under the Salaried Retirement Plan and the Supplementary Plan, as applicable, in keeping with the time elapsed between a takeover and termination. Because of these and other variables to be determined at the time of distribution, the value of this benefit cannot be determined at this time.
Some Company benefit plans provide for accelerated vesting in the case of a change in control. Under the Supplementary Plan applicable to officers elected prior to August 8, 1995, after a change in control, benefits immediately become vested at the rate of 10% per year of a participant’s service as an elected officer. Under the Supplementary Plan applicable to officers elected on or after August 8, 1995, benefits become fully vested upon a change in control. The benefit after a change in control is equal to 10% of final average earnings for each year of service as an elected officer up to and including the fifth year. For officers having five or more years of service as an elected officer, the benefit amount ranges from 50% to 75% of final average earnings, depending on length of service. Under all versions of the Supplementary Plan, the benefit remains subject to applicable offsets.
The Supplementary Plan provides that, after a change in control, benefits will not be forfeited if an individual is terminated (other than for dishonesty or criminal acts) or is later employed by a competitor. The value of this provision to the named executives cannot be determined at this time as the amount depends on a number of variables to be determined at the time of any change in control. rx Statement Proxy Upon a change in control of the Company, outstanding options under the Company’s equity plans become fully exercisable and restricted stock units fully vest unless the Board of Directors determines otherwise.
PROPOSAL 2. AMEND THE CERTIFICATE OF INCORPORATION TO ELIMINATE THE 80% SUPER-MAJORITY VOTING REQUIREMENT
This proposal is sponsored by the Board of Directors.
General Subject to approval by our stockholders at the Annual Meeting, the Board of Directors, upon the recommendation of its Governance and Nominating Committee, has adopted a resolution approving and declaring the advisability of an amendment to our Restated Certificate of Incorporation providing for the deletion of Article 10, to eliminate the 80% super-majority voting requirement.
The Restated Certificate of Incorporation currently contains Article 10, which reads as follows:
Article 10
Special Voting. If this corporation has a “controlling stockholder,” the affirmative vote of the holders of not less than 80% of the outstanding shares of voting stock shall be required for this corporation to (a) consolidate with, or merge with any other corporation, (b) convey to any corporation or other person or otherwise dispose of all or substantially all of its assets, or (c) dispose of by any means all or substantially all of the stock or assets of any major subsidiary. For purposes of this Article, a controlling stockholder is a person who, including associates of such person, is the beneficial owner of more than 15% of the voting power of this corporation. This voting requirement shall not be applicable if 80% of the disinterested
39 members (not representing or being associated with the controlling stockholder) of this corporation’s full Board of Directors have voted in favor of the proposed consolidation, merger, conveyance, or disposition. If there is a controlling stockholder, this Article 10 can be amended only by the affirmative vote of 80% of the voting power of this corporation. Any determination made by the Board of Directors, on the basis of information at the time available to it, as to whether any person is an associate of a controlling stockholder, shall be conclusive and binding for all purposes of this Article 10. The Board of Directors, when evaluating any offer of another party to (a) make a tender or exchange offer for any equity security of this corporation, (b) merge or consolidate this corporation with another corporation, or (c) purchase or otherwise acquire all or substantially all of the properties and assets of this corporation, shall, in connection with the exercise of its judgment in determining what is in the best interests of this corporation and its stockholders, give due consideration to all relevant factors, including, without limitation, the social and economic effects on the employees, customers and other constituents of this corporation.
Proposed Amendment If this Proposal is approved by stockholders, Article 10 would be deleted from the Company’s Restated Certificate of Incorporation, and the Restated Certificate would be restated and all subsequent Articles would be renumbered accordingly.
General Effect of the Proposed Amendment and Reasons for Approval The Board of Directors unanimously recommends that stockholders vote FOR this proposal for the following reasons: Article 10 was designed to curb abusive takeover attempts. It was adopted in 1985, prior to the enactment of Section 203 of the Delaware General Corporation Law (“Section 203”), a statutory provision also designed to curb abusive takeovers of Delaware corporations. The Board believes that elimination of Article 10 will not adversely affect the Company or its stockholders, because the Company will continue to be protected under Section 203. Like Article 10, Section 203 addresses the problem of abusive takeover attempts by preventing certain Proxy Statement business combinations of a corporation with “interested stockholders.” Section 203 defines an “interested stockholder” as any person (other than the corporation and any direct or indirect majority-owned subsidiary of the corporation) that (a) is the owner of 15% or more of the outstanding voting stock of the corporation, or (b) is an affiliate or associate of the corporation and was an owner of 15% or more of the outstanding voting stock of the corporation at any time within the three-year period immediately prior to the date a determination is sought on whether such person is an interested stockholder. Section 203 prevents business combinations with interested stockholders within three years after such stockholders become interested unless (a) the business combination is approved by the board of directors before the person becomes an interested stockholder; (b) the interested stockholder acquired 85% or more of the outstanding voting stock of the corporation in the same transaction that makes such person an interested stockholder; or (c) the business combination is approved by the corporation’s board of directors and by the holders of at least 66-2/3% of the corporation’s outstanding voting stock at an annual or special meeting, excluding shares owned by the interested stockholder. Section 203 is intended to have a deterrent effect on the ability or desire of third persons to acquire a substantial block of a corporation’s voting stock and to attempt to gain control of the corporation without negotiating directly with its board. Article 10 is broader than Section 203 in that it is applicable to certain sales of subsidiaries or the assets of subsidiaries to third parties; by contrast, Section 203 covers only such transactions if they are “to or with the interested stockholder.” ACCORDINGLY, THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” PROPOSAL 2.
40 PROPOSAL 3. This proposal is sponsored by the Board of Directors.
ADOPTION OF ANNUAL ELECTION OF ALL DIRECTORS
General Subject to approval by our Stockholders at the Annual Meeting, the Board of Directors, upon the recommendation of its Governance and Nominating Committee, adopted a resolution approving and declaring the advisability of an amendment to the Company’s Restated Certificate of Incorporation to provide for the annual election of all of our directors.
The Restated Certificate of Incorporation presently provides that our Board of Directors is classified, and directors are divided into three classes, each serving a three-year term. At prior annual meetings, the Company’s stockholders have approved non-binding proposals recommending that all directors be elected at each annual meeting. The amendment would provide that all of our directors standing for election would be elected for one- year terms each year, commencing with the Company’s 2007 Annual Meeting of Stockholders. If the amendment is approved, it will become effective upon the filing of the amendment with the Secretary of State of the State of Delaware promptly after the Annual Meeting. If the amendment is not approved, the Board of Directors will remain divided into three classes, with the directors being elected for staggered three-year terms.
Proposed Amendment
If the amendment were adopted, the text of Article 6 of the Company’s Restated Certificate of Incorporation Statement Proxy would read in its entirety as follows:
Article 6. Directors
The Board of Directors shall be composed of no less than nine and no more than fifteen Directors, the specific number to be set by resolution of the Board of Directors; provided, that the Board of Directors may be less than nine until vacancies are filled. The number of Directors of the corporation shall be fixed from time to time by or pursuant to the By-Laws. Each Director who is serving as a Director on the date of this Restated Certificate of Incorporation and who was elected or appointed after May 16, 2006 shall hold office until the next annual meeting of stockholders and until a successor has been elected and qualified, subject to prior death, disability, resignation, retirement, disqualification or removal from office. Directors elected prior to or on May 16, 2006, including those elected at the 2006 Annual Meeting, shall continue to hold office until the expiration of the three-year terms for which they were elected, subject to prior death, disability, resignation, retirement, disqualification or removal from office. Any person elected to a newly- created director position or any person elected to fill a vacancy shall serve until the next annual meeting and until a successor has been elected and qualified, subject to prior death, disability, resignation, retirement, disqualification or removal from office. No decrease in the number of Directors constituting the Board of Directors shall shorten the term of any incumbent Director.
The current text of Article 6 of the Company’s Restated Certificate of Incorporation, which would be amended as set forth above, provides:
Article 6
The Board of Directors shall be composed of no less than nine and no more than fifteen Directors, the specific number to be set by resolution of the Board of Directors; provided, that the Board of Directors may be less than nine until vacancies are filled. The Board of Directors shall be divided into three classes, with
41 said classes to be as equal in number as may be possible. The term of office of each class shall initially be as follows:
Class Term Class 1 Until the 1986 annual meeting of stockholders Class 2 Until the 1987 annual meeting of stockholders Class 3 Until the 1988 annual meeting of stockholders
Subsequent to the expiration of the initial term, a Director’s term shall be three years, and each Director shall serve for the term for which he was elected or until his successor shall have been elected and qualified, whichever is later, or until his death, resignation or removal from office.
General Effect of the Proposed Amendment and Reasons for Approval The Board of Directors unanimously recommends that stockholders vote FOR this proposal for the following reasons: The Governance and Nominating Committee and the Board of Directors regularly evaluate our corporate governance practices to ensure that such practices, including the mechanism for the election of directors, remain in the best interests of the Company and its stockholders. The classification of directors historically has been viewed as promoting continuity and expertise on our Board and encouraging persons considering an acquisition of the Company to negotiate with the Board of Directors rather than pursuing unilateral takeover proposals. While the Board of Directors believes that these considerations continue to be important, it also appreciates the growing sentiment that the annual election of directors increases the accountability of directors to stockholders and recognizes the resulting trend away from classified boards. In light of this trend and after having given careful consideration to the various arguments for and against maintaining a classified board, the Board of Directors believes that the interests of our stockholders are best served by giving the stockholders the opportunity to evaluate the performance of each director on an annual basis. As a result, the Board of Directors has unanimously determined to recommend that all of our directors be elected annually.
Proxy Statement ACCORDINGLY, THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” PROPOSAL 3.
42 PROPOSAL 4. Simple Majority Vote
A stockholder has advised the Company that he intends to present the following resolution at the Annual Meeting. In accordance with applicable proxy regulations, the proposed resolution and supporting statement are set forth below.
RESOLVED: Comprehensive Commitment to Adopt Simple Majority Vote. Recommend that our Board take each step necessary for adoption of a simple majority vote to apply to the greatest extent possible. This proposal is focused on adoption of the lowest practicable shareholder majority vote requirements to the fullest extent practicable. This includes using all means in our Board’s power such as corresponding special company solicitations and one-on-one management contacts with major shareholders to obtain the high super majority vote required for formal adoption of this proposal topic.
Terminate Potential Frustration of the Shareholder Majority Our current rule allows a small minority to frustrate our shareholder majority. For example, with our 80% vote requirement, if 79% vote yes and only 1% vote no — only 1% can force their will on the overwhelming 79% majority.
This topic won 72% support at our 2005 meeting. It was sponsored by John Chevedden, Redondo Beach, California.
Progress Begins with One Step Statement Proxy It is important to take one step forward and adopt the above RESOLVED statement since our 2005 governance was not impeccable. For instance in 2005 it was reported (and certain concerns are noted): • The Corporate Library (TCL) http://www.thecorporatelibrary.com/ a pro-investor research firm rated our company: “D” in Board Composition. “F” in Shareholder Responsiveness. • Our board routinely failed for years to adopt numerous shareholder proposal topics that, received majority support. • We had no Independent Chairman and not even a Lead Director — Independent oversight concern. • We were allowed to vote on individual directors only once in 3-years — Accountability concern. • Yet our directors can be re-elected with only one yes-vote from our 27 million shares under plurality voting. • We would have to marshal an awesome 80% shareholder vote to make certain key governance improvements — Entrenchment concern. • Cumulative voting was not allowed. • There are too many active CEOs on our board with 7 — Over-commitment Concern. • Our full board had only 4 meetings in an entire year. • Four directors owned only 90 to 946 shares each — Company confidence concern. • Three directors had 23 to 33 years tenure — Independence concern • Mr. Kennedy, with 33 years director tenure, chaired our nomination committee — Independence concern • Mr. Mallot, with 23 years director tenure, chaired our audit committee — Independence concern.
43 • Plus Mr. Mallot was not an audit financial expert. • Poison pill: A shareholder proposal, asking our company to require shareholder approval of poison pills, received a majority vote in 2002 and 2003. Our company adopted such a policy. However the policy then allowed our board to override this policy and adopt a pill without shareholder approval. According to The Corporate Library this override provision undermines the shareholder approval requirement.
These less-than-best practices reinforce the reason to take one step forward and support simple majority vote.
Simple Majority Vote Yes on 4
MANAGEMENT RESPONSE: THE BOARD OF DIRECTORS RECOMMENDS A VOTE AGAINST PROPOSAL 4 FOR THE FOLLOWING REASONS:
The Board opposes the Proposal because: 1. The Board, on March 9, 2006, amended the Bylaws to provide that shareholders can make or amend Bylaws by the affirmative vote of a majority of the outstanding stock of the corporation entitled to vote thereon. Article X of the Company’s Bylaws has been amended to read as follows:
Article X Amendments These Bylaws may be altered or repealed and new Bylaws may be made by the affirmative vote of a majority of the Board of Directors, subject to the right of the stockholders to amend or repeal Bylaws including Bylaws made or amended by the Board of Directors or to adopt new Bylaws, by the affirmative vote of a majority of the outstanding stock of the corporation entitled to vote thereon,
Proxy Statement provided that notice of the proposed action be included in the notice of such meeting. Terms of the masculine gender used for convenience in these Bylaws should be understood in the feminine gender where appropriate.
2. Subject to approval by our Stockholders at the Annual Meeting, the Board of Directors, upon the recommendation of its Governance and Nominating Committee, has adopted a resolution approving and declaring the advisability of an amendment to our Restated Certificate of Incorporation to delete Article 10, which provides for an 80% vote requirement for approval of certain transactions with “controlling stockholders.” Please refer to Proposal 2.
If that Proposal 2 is approved by the stockholders, the Company will continue to be subject to Section 203 of the Delaware General Corporation Law, which requires, under certain circumstances, a two-thirds vote of shareholders to approve certain “business combinations” with an “interested stockholder.” The Board believes that Section 203 may provide significant protection against inadequate or coercive hostile takeovers.
ACCORDINGLY, THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “AGAINST” PROPOSAL 4.
44 PROPOSAL 5. Shareholder Proposal to Adopt Simple Majority Vote When Amending Bylaws
A stockholder has advised the Company that he intends to present the following resolution at the Annual Meeting. In accordance with applicable proxy regulations, the proposed resolution and supporting statement are set forth below.
Resolve: Commence and complete the appropriate process to amend the Company’s governance documents (certificate of incorporation and/or bylaws) to ensure bylaws are amended by a simple majority vote of shares outstanding.
Supporting Statement Hello. I’m a 19-year mechanic with Alaska Air Group, Inc. (“AAG”), and longtime stockholder. I don’t know about the rest of you AAG stockholders, but I am VERY concerned that our board has chosen to flout a shareholder supermajority-winning vote last year. It addressed changing the way our corporation’s governing documents are amended.
If you will recall, we voted 76% of votes cast at the meeting and 68% of all shares outstanding in favor! We voted in supermajority numbers to remove the supermajority provision in our bylaws. Incredible! Congratulations!
Unfortunately, our board refused, once again, to respect the irrefutably clear will of the shareholders.The Statement Proxy board argued in a Aug. 29, 2005 letter (see archives of www.votepal.com/) the technicality that this bylaw change would also require a change to the AAG’s certificate of incorporation.
I believe it was implied in last year’s proposal that the board do whatever is necessary to comply with the supermajority will of the shareholders. The stockholders don’t run the company. That is the domain of management, according to Delaware General Corporate Law (“DGCL”). Therefore, we have to run it again.
The right of shareholders to amend bylaws by a simple majority vote is well established in numerous parts of the DGCL where our company is incorporated (for example, § 212. Voting rights of stockholders; proxies; limitations).
Governance deals with drawing lines. The AAG board argues that stockholders cannot implement anything that conflicts with its certificate of incorporation, yet the super majority requirement exists only in the AAG’s bylaws and not in its certificate of incorporation — a conflict the AAG board created. The collective voice of the shareholders has spoken, and the board’s duty is to implement the wishes of the owners of the stock who have organized and acted in a lawful manner.
The language of this year’s revised proposal is intentionally mute as to the exact implementation procedure and detail that is properly within the discretionary duty of the board.
I’ve been around this company for a long time, and while I’ve forgotten how many airplanes I’ve fixed to ensure our customers fly safely on their way, perhaps you just might want to talk with me one-on-one. No complaining, just straight talk about how stockholders contribute to good corporate governance and better representation on the board for the benefit of all shareholders.
45 MANAGEMENT RESPONSE: THE BOARD OF DIRECTORS RECOMMENDS A VOTE AGAINST PROPOSAL 5 FOR THE FOLLOWING REASONS:
The Board believes that a vote in favor of the Proposal is unnecessary because the Board, on March 9, 2006, amended the Bylaws to provide that stockholders can make or amend Bylaws by the affirmative vote of a majority of the outstanding stock of the corporation entitled to vote thereon. Article X of the Company’s Bylaws has been amended to read as follows:
Article X Amendments These Bylaws may be altered or repealed and new Bylaws may be made by the affirmative vote of a majority of the Board of Directors, subject to the right of the stockholders to amend or repeal bylaws including Bylaws made or amended by the Board of Directors or to adopt new Bylaws, by the affirmative vote of a majority of the outstanding stock of the corporation entitled to vote thereon, provided that notice of the proposed action be included in the notice of such meeting. Terms of the masculine gender used for convenience in these Bylaws should be understood in the feminine gender where appropriate.
ACCORDINGLY, THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “AGAINST” PROPOSAL 5. Proxy Statement
46 PROPOSAL 6. Majority Vote Standard for the Election of Directors
A stockholder has advised the Company that he intends to present the following resolution at the Annual Meeting. In accordance with applicable proxy regulations, the proposed resolution and supporting statement are set forth below.
Resolved: That the shareholders of Alaska Air Group, Inc. (“Company”) hereby request that the Board of Directors initiate the appropriate process to amend the Company’s governance documents (certificate of incorporation or bylaws) to provide that director nominees shall be elected by the affirmative vote of the majority of votes cast at an annual meeting of shareholders.
The Proposalist intends to present the following proposal at the 2006 Annual Meeting.
Supporting Statement Our Company is incorporated in Delaware. Delaware law provides that a company’s certificate of incorporation or bylaws may specify the number of votes that shall be necessary for the transaction of any business, including the election of directors. (DGCL, Title 8, Chapter 1, Subchapter VII, Section 216). The law provides that if the level of voting support necessary for a specific action is not specified in a corporation’s certificate or bylaws, directors “shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors.” rx Statement Proxy Our Company presently uses the plurality vote standard to elect directors. This proposal requests that the Board initiate a change in the Company’s director election vote standard to provide that nominees for the board of directors must receive a majority of the vote cast in order to be elected or re-elected to the Board.
We believe that a majority vote standard in director elections would give shareholders a meaningful role in the director election process. Under the Company’s current standard, a nominee in a director election can be elected with as little as a single affirmative vote, even if a substantial majority of the votes cast are “withheld” from that nominee. The majority vote standard would require that a director receive a majority of the vote cast in order to be elected to the Board.
The majority vote proposal received high levels of support last year, winning majority support at Advanced Micro Devices, Freeport McMoRan, Marathon Oil, Marsh and McClennan, Office Depot, Raytheon and others. Leading proxy advisory firms recommended voting in favor of the proposal.
Some companies have adopted board governance policies requiring director nominees that fail to receive majority support from shareholders to tender their resignations to the board. We believe that these policies are inadequate for they are based on continued use of the plurality standard and would allow director nominees to be elected despite only minimal shareholder support. We contend that changing the legal standard to a majority vote is a superior solution that merits shareholder support.
Our proposal is not intended to limit the judgment of the Board in crafting the requested governance change. For instance, in the event that there are more director nominees than board seats (e.g. contested elections), a multi-seat Instant Runoff Voting (“IRV”) method could be used. Of all stockholders participating, IRV guarantees a majority vote for the winners.
We urge your support for this important reform for the election of directors.
47 MANAGEMENT RESPONSE: THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE AGAINST PROPOSAL 6 FOR THE FOLLOWING REASONS:
The Board, on March 9, 2006, amended the Bylaws to adopt a majority vote standard for the election of directors in uncontested elections. The Bylaw differs from the shareholder proposal in that the Bylaw is not applicable to contested elections (defined as an election in which the number of nominees exceeds the number of directors to be elected). The Board believes that the Bylaw is superior to the stockholder proposal because it is consistent with the position of Institutional Shareholder Services (“ISS”) on plurality voting in contested elections. The ISS Policy Guidelines state that “in 2006, ISS will continue to ‘generally recommend FOR’ reasonably crafted shareholders proposals calling for directors to be elected with an affirmative majority of votes cast…provided the proposal includes a carve-out for a plurality voting standard when there are more director nominees than board seats (e.g. contested elections).” Article II, Section 5 of the Company’s Bylaws has been amended to read as follows:
Article II Meeting of Stockholders
Section 5. Quorum At any meeting of the stockholders, the holders of record of a majority of the total number of shares of outstanding stock of the corporation entitled to vote, present in person or represented by proxy, shall constitute a quorum for all purposes. If a quorum is present at any meeting of stockholders, the affirmative vote of the holders of a majority of the stock present in person or represented by proxy and entitled to vote on the subject matter shall be the act of the stockholders, except as otherwise expressly provided in the Certificate of Incorporation, these Bylaws or applicable law. Each director shall be elected by the vote of the majority of the votes cast with respect to the director at any meeting of stockholders for the election of directors at which a quorum is present, provided that if the number of nominees exceeds the number of directors to be elected, the directors
Proxy Statement shall be elected by the vote of a plurality of the shares represented in person or by proxy at any such meeting and entitled to vote on the election of directors. For purposes of clarity, it is stated that the provisions of the foregoing sentence do not apply to vacancies and newly created directorships filled by a vote of the Board of Directors under Article III, Section 2 of these Bylaws. For purposes of this section, a majority of the votes cast means that the number of shares voted ‘for’ a director must exceed 50% of the votes cast with respect to that director. If a nominee who already serves as a director is not elected, the director shall offer to tender his or her resignation to the Board of Directors. The Governance and Nominating Committee will make a recommendation to the Board of Directors on whether to accept or reject the resignation, or whether other action should be taken. The Board of Directors will act on the Committee’s recommendation and publicly disclose its decision and the rationale behind it within 90 days from the date of the certification of the election results. The director who tenders his or her resignation will not participate in the Board of Directors’ decision with respect to his or her offer to tender resignation. Directors shall hold office until the next annual meeting and until their successors shall be duly elected. In the absence of a quorum at any meeting, the holders of a majority of the stock entitled to vote, present in person or represented by proxy at the meeting, may adjourn the meeting, from time to time, until the holders of the number of shares requisite to constitute a quorum shall be present in person or represented at the meeting.
ACCORDINGLY, THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “AGAINST” PROPOSAL 6.
48 PROPOSAL 7. PROPOSAL TO ENFORCE STOCKHOLDER VOTES
A stockholder has advised the Company that he intends to present the following resolution at the Annual Meeting. In accordance with applicable proxy regulations, the proposed resolution and supporting statement are set forth below.
“Resolution On Significance And Enforceability Of Stockowner Votes” The Proposalist has notified the Alaska Air Group, Inc. that he intends to present the following proposal at the 2006 Annual Meeting.
Resolved: That the stockowners of Alaska Air Group, Inc. (“Company”) hereby request that for each item of business to be voted on at a stockowner meeting, the proxy statement shall include a statement of: 1. the percentage of the vote required for approval. 2. the legal effect of the approval. This would include stating if an effect automatically occurs or if some other specified action(s) would be required to be taken in order to be implemented. If any other specified action(s) would be required, an intended timetable of these actions would be presented. 3. if an item of business is approved, how a stockowner can be informed as to what action the board or management has taken to implement it. This would include whether the board and management will make a report that is distributed to all stockowners, or whether a stockowner would need to make a request (with details of how the request would be made). This would also include an intended timetable Statement Proxy for board and management to implement it. 4. if an item of business is approved which requests that the board or management take (or refrain from taking) some action, and if the board or management fails to take (or refrain from taking) such action, the rights of stockowners to enforce the approved item of business (a) by a process within the corporation and (b) by court action.
Supporting Statement When we stockowners vote on items of business at stockowners meetings, we should know the consequences of all the votes. We should also be informed of the follow-up by the board and management.
The right to know what actions are taken (or the failure to take such actions) is important for proper corporate governance. Boards and managements must be accountable for the votes of stockowners, and prompt and full compliance with them.
Perhaps the best argument for this resolution is that the proxy statement you are reading does not include a complete statement about the significance and enforceability of each item of business, as is requested in this resolution.
Vote yes, and future proxy statements may well have such vital information. If this resolution is approved, wouldn’t you like to know how and whether it is implemented?
49 MANAGEMENT RESPONSE: THE BOARD OF DIRECTORS RECOMMENDS A VOTE AGAINST PROPOSAL 7 FOR THE FOLLOWING REASONS:
The Board opposes the Proposal because it believes that the adoption of the Proposal is unnecessary. First, voting information about matters that are submitted to a vote of stockholders is already presented in the Company’s Quarterly Report on Form 10-Q for the quarterly period in which the annual meeting takes place. This information includes a brief description of each matter voted upon and the number of votes cast for, against or withheld, as well as the number of abstentions and broker non-votes. Second, if the adoption of a stockholder proposal leads to a change in the Company’s governance documents, then such changes will be publicly disclosed. If such changes involve the Company’s Bylaws or Certificate of Incorporation, then such changes will be disclosed on a Current Report on Form 8-K that the Company files with the Securities and Exchange Commission (see Item 5.03 of Form 8-K, Amendments to Articles of Incorporation or Bylaws; Change in Fiscal Year). If such changes involve a corporate policy, then the changes or the new policy will generally be disclosed in the Corporate Governance section of the Company’s website.
The Proposal also seeks disclosure in the proxy statement of “the legal effect of the approval.” Generally speaking, the legal effect of a proposal or matter being submitted to the stockholder is already set forth in the proxy statement. For example, in Proposal 1 (Election of Directors) it is quite clear that if the nominees for election to the Board are approved, then they shall be elected to the Board. Generally speaking, shareholder proposals (like this one) are precatory in nature and are not binding. Shareholders also know that, absent compelling or unusual circumstances, if the Board opposes a shareholder proposal then it will generally not be implemented.
The Proposal also seeks the Board and management to prepare and distribute reports about the implementation of stockholder approved proposals. The Board believes that such reports are not necessary and are not an efficient use of the time and resources of the Board and management.
ACCORDINGLY, THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE
Proxy Statement “AGAINST” PROPOSAL 7.
50 PROPOSAL 8. EQUAL OWNERSHIP RIGHTS FOR WORKER “401(k)” SHAREHOLDERS
A stockholder has advised the Company that he intends to present the following resolution at the Annual Meeting. In accordance with applicable proxy regulations, the proposed resolution and supporting statement are set forth below.
Resolve: Complete the appropriate process to amend the Company’s governance documents (certificate of incorporation and/or bylaws) to provide 401(k) plan participant shareholders a status effectively equal in opportunity to exercise their ownership rights in votes, nominations and all other rights as those enjoyed by registered shareholders. Such changes are to be effective as soon as practical but without fail prior to the time for shareholder participation in the 2007 annual meeting. SPECIFIC WORDING OF CHANGES TO GOVERNANCE DOCUMENTS AND STEPS TO ACCOMPLISH THIS GENERAL GOAL ARE IN THE HANDS OF THE BOARD OF DIRECTORS.
The Proposalist has notified the Alaska Air Group, Inc. that he intends to present the following proposal at the 2006 Annual Meeting.
Supporting Statement: Worker stockholders can’t nominate a candidate for election to the board. We can’t attend the annual meeting and vote on issues that come up for a vote. These are just some of the restrictions placed on worker stockholders in the 401(k) plan. I don’t think this is right. This proposal is limited to 500 words. That’s why I’m Statement Proxy leaving the specific wording of these changes to the Board of Directors.
The company knows us participants. In fact, the company knows more about the 401(k) stockholder group than it knows about any other group of shareholders. I believe any impediments related to trusts, etc., can be overcome by honest effort. Provisions can be made to provide any services or protections for 401(k) plan participants shareholders that they would otherwise have under the current structures. The simple truth is that there is no good reason to deny worker shareholder the same rights as registered shareholders.
I don’t know about you, but I believe that the laws and regulations set the lowest minimally acceptable standards for corporate governance, and that DOES NOT mean that shareholders are prohibited from acting to set a BETTER or HIGHER standard for THEMSELVES in the corporation that THEY OWN.
It is important to adopt the above RESOLVED statement since our 2005 governance was not impeccable. In 2005, The Corporate Library (http://www.thecorporatelibrary.com/), a pro-investor research firm, rated our company thusly from its published reports: • “D” in Board Composition • “F” in Shareholder Responsiveness • For years our board routinely has refused to adopt numerous shareholder proposal topics that received majority support • We had no Independent Chairman and not even an Independent Lead Director –– oversight concern • Under plurality voting, our directors can be reelected with only one yes-vote from our 27 million shares • We would have to marshal an awesome 80% shareholder vote to make certain key governance improvements –– entrenchment concern • Cumulative voting was not allowed
51 • There are too many active CEOs on our board with seven – over-commitment concern • Four directors owned only 90 to 946 shares each –– company confidence concern
MANAGEMENT RESPONSE: THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE AGAINST PROPOSAL 8 FOR THE FOLLOWING REASONS: By law, shares of Company common stock held in the Company’s 401(k) retirement plans are held of record by the trustees of those plans, not by the employee/beneficiaries. Under Delaware law, only the record holders or persons to whom the record holder grants proxies to act on its behalf may vote. Accordingly, under Delaware law, an amendment to the Company’s Restated Certificate of Incorporation and/or the Bylaws providing employee participants in the Company’s 401(k) retirement plans or in any other 401(k) plan with the rights of record holders in derogation of the rights of the actual record holders would be ineffective. It should be noted that all participants in the Company’s 401(k) retirement plans can instruct the trustee how to vote his or her shares by using the voting instruction form provided by the trustee or by telephone or by the internet.
Similarly, as a result of laws applicable to 401(k) plans and under Delaware law, amendments to the Company’s Restated Certificate of Incorporation and/or Bylaws providing employee participants with rights to directly receive dividends or to directly exercise dissenters’ rights would be ineffective.
Because applicable laws would cause the requested changes noted above in the Company’s Restated Certificate of Incorporation and/or Bylaws to be ineffective, the Board has determined that it will not implement the resolution if adopted.
ACCORDINGLY, THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “AGAINST” PROPOSAL 8. Proxy Statement
52 PROPOSAL 9. Shareholder Proposal to Elect Directors Annually
A stockholder has advised the Company that he intends to present the following resolution at the Annual Meeting. In accordance with applicable proxy regulations, the proposed resolution and supporting statement are set forth below.
Resolve: Commence and complete the appropriate process to amend the Company’s governance documents (certificate of incorporation and/or bylaws) to ensure that ALL Director nominees are elected annually in 2007 and thereafter.
Supporting Statement Hi! I’m a 27-year pilot with Alaska Air Group, Inc. (“AAG”), and longtime stockholder. I’m guessing many AAG stockholders share my concern that our board has ignored another majority vote — this one being a SUPERMAJORITY decision that we participated in last year mandating the election of our directors annually. This proposal also won majority votes in 2001 and 2003.
In 2005, we voted FOR this change by a total of almost 76% of votes cast at the meeting, and 68% of all shares outstanding. In fact, these votes met the thresholds of the AAG’s bylaws to amend the bylaws. Yet, our board refused to comply with the company’s own bylaws, citing in a July 19, 2005 letter a technicality that this bylaw change would also require a change to the AAG’s certificate of incorporation.
Stockholders don’t manage the company. However, I believe the proposal compelled the board do Statement Proxy whatever was necessary to carry out our instructions. I’m hoping this year’s proposal is sufficiently specific. Apparently, we have to vote on this again…
Some Experts Weigh In Arthur Levitt, Chairman of the SEC (1993-2001) said: “In my view it’s best for the investor if the entire board is elected once a year. Without annual election of each director, shareholders have far less control over who represents them.” (Source: “Take on the Street” by Arthur Levitt).
The Council of Institutional Investors
I believe the opinion that annual election of each director could leave our company without experienced Directors –– is preposterous. I think it most unlikely that the shareholders will vote to replace all Directors. Such an occurrence would express overwhelming dissatisfaction with an incumbent board.
I believe it is imperative to take this step. I believe in 2005 by refusing to act on two binding resolutions passed by supermajority votes that the incumbent board demonstrated it did not respect the will of the company’s true owners—us stockholders. Over the last six years, our board has ignored seventeen majority votes.
I’m just an average Joe worker, but I’ve been around this company for a long time. I have forgotten how many takeoffs and landings I’ve made, and the number of customers I’ve carried (perhaps even some of you), but you just might want to talk with me face to face. Nothing rehearsed, just straight talk about how stockholders participating in corporate governance and representation on the AAG board is economically advantageous for ALL.
Thanks,
P.S. Have a nice day!
53 MANAGEMENT RESPONSE: THE BOARD OF DIRECTORS RECOMMENDS A VOTE AGAINST PROPOSAL 9 FOR THE FOLLOWING REASONS: The Board recommends a vote against the Proposal because the Board is submitting Proposal 3 in lieu thereof. Subject to approval by our stockholders at the Annual Meeting, the Board of Directors, upon the recommendation of its Governance and Nominating Committee, has approved an amendment to the Company’s Restated Certificate of Incorporation to adopt the annual election of directors. Please refer to Proposal 3.
The Company will provide the names and addresses of the proponents of the stockholder proposals and the number of shares held upon oral or written request for such information. Requests may be sent to the Corporate Secretary, Alaska Air Group, Inc., P.O. Box 68947, Seattle, Washington 98168, or by calling 206-392-5731.
ACCORDINGLY, THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “AGAINST” PROPOSAL 9.
OTHER MATTERS TO COME BEFORE THE MEETING Other than the election of directors and the stockholder proposals included in this proxy statement, we are not aware of any matters to be properly presented for a vote at the Annual Meeting.
OPPOSING SOLICITATION On March 20, 2006, a preliminary proxy statement was filed by Messrs. Richard D. Foley, Stephen Nieman, Bill Davidge and Terry Dayton referencing their intention to solicit proxies for the annual meeting. The preliminary proxy statement states that Messrs. Nieman, Foley and Dayton intend to seek election to the Company’s Board of Directors. Regardless of the outcome of the opposing solicitation, each of the Board of Directors’ nominees intends to serve if elected. The preliminary proxy statement also solicits support for certain stockholder and Company proposals.
Proxy Statement The Company is providing the following information pursuant to SEC regulations that require certain disclosures if the Company knows of a solicitation in opposition.
54 PARTICIPANTS IN THE SOLICITATION Under the SEC regulations, each member of the Board of Directors is deemed to be a “Participant” in the Company’s solicitation of proxies in connection with the Annual Meeting. Set forth below are the name and principal occupation of each member of the Board (four of whom are also nominees), and the name, principal business and address of any corporation or other organization in which that director’s occupation or employment is carried on. For additional information concerning each of the directors, see “Nominees for Election” and “Continuing Directors” in this Proxy Statement. Principal Business of Name and Principal Occupation Business Address Employer William S. Ayer ...... Alaska Air Group, Inc. and Air transportation Chairman, President & CEO Alaska Airlines, Inc. P.O. Box 68900 Seattle, WA 98168 Patricia M. Bedient ...... Weyerhaeuser Company Forest products Vice President, Strategic Planning 33663 Weyerhaeuser Way So. Federal Way, WA 98003 Phyllis J. Campbell ...... The Seattle Foundation Philanthropic President & CEO 425 Pike Street, Suite 510 Seattle, WA 98101 Mark R. Hamilton ...... University of Alaska System Education President 202 Butrovich Bldg.
910 Yukon Drive Statement Proxy Fairbanks, AK 99775 Bruce R. Kennedy ...... Alaska Air Group Air transportation Chairman Emeritus 19550 International Blvd., Suite 204 Seattle, WA 98188 Jessie J. Knight, Jr ...... San Diego Regional Economic development President & CEO Chamber of Commerce 402 W. Broadway, Suite 1000 San Diego, CA 92101 R. Marc Langland ...... Northrim Bank Banking Chairman, President & CEO P.O. Box 241489 Anchorage, AK 99524 Dennis F. Madsen ...... Seatab Software Software CEO P.O. Box 112 Mercer Island, WA 98040 Byron I. Mallott ...... First Alaskans Institute Development of Alaska President 102 Cordova Native peoples and their Juneau, AK 99801 communities John V. Rindlaub ...... Wells Fargo Bank Banking CEO, Pacific Northwest Region 999 Third Avenue, Suite 4700 Seattle, WA 98104 J. Kenneth Thompson ...... Pacific Star Energy LLC Energy President & CEO 3601 “C” Street, Suite 1400 Anchorage, AK 99503 Richard A. Wien ...... Florcraft, Inc. Retail flooring Chairman & CEO 1991 Fox Avenue Fairbanks, AK 99701
55 Other Participants The following employees of the Company are also deemed to be Participants. The principal business address of each is that of the Company, P.O. Box 68947, Seattle, WA 98168.
Shannon K. Alberts Managing Director/Investor Relations and Assistant Corporate Secretary of Alaska Airlines, Inc.
Karen Gruen Managing Director, Corporate Affairs, Associate General Counsel and Assistant Corporate Secretary of Alaska Airlines, Inc.
Keith Loveless Vice President/Legal and Corporate Affairs, General Counsel and Corporate Secretary of Alaska Air Group, Inc. and Alaska Airlines, Inc.
Bradley D. Tilden Executive Vice President/Finance and Chief Financial Officer of Alaska Air Group, Inc. and Alaska Airlines, Inc.
Information Regarding Ownership of the Company’s Securities by Participants The number of shares of common stock held by each director and Mr. Tilden at March 31, 2006, is set forth in the “Security Ownership of Certain Beneficial Owners and Management” section of this Proxy Statement.
At March 31, 2006, Mr. Loveless, Ms. Alberts and Ms. Gruen owned 92,356, 12,486, and 6,892 shares,
Proxy Statement respectively, of which 65,568, 4,900 and 4,000 shares, respectively, were shares that may be acquired by exercise of employee stock options exercisable on or before June 6, 2006. No Associate (as that term is used in SEC regulations) of a Participant owns any common stock of the Company. No Participant or Associate of any Participant owns shares of record that are not also owned beneficially.
56 Information Regarding Transactions in the Company’s Stock by Participants The following table sets forth all transactions that may be deemed purchases or sales of the Company’s common stock by the Participants since January 1, 2004.
Number of Shares of Common Stock Purchased or Name Date (Sold/Exchanged) Footnote Shannon K. Alberts ...... 1/1/04 — 12/31/04 120 (1) 2/27/04 25 (4) 5/28/04 27 (4) 6/8/04 500 (9) 6/8/04 (500) (9) 8/31/04 22 (4) 11/30/04 27 (4) 11/30/04 (170) (4) 1/1/05 —12/31/05 752 (1) 2/28/05 23 (4) 11/30/05 21 (4) William S. Ayer ...... 1/1/04 — 12/31/04 251 (1) 11/17/04 15,400 (3) 1/1/05 — 12/31/05 228 (1) 8/30/2005 14,000 (3)
10/28/05 10,200 (3) Statement Proxy 12/15/05 (1,500) (7) Patricia M. Bedient ...... 12/01/04 90 (8) 5/17/05 1055 (8) Phyllis J. Campbell ...... 5/19/04 215 (8) 5/17/05 527 (8) Karen A. Gruen ...... 12/31/04 591 (1) 12/31/05 675 (1) Kevin P. Finan ...... 12/3/04 4,425 (9) 12/3/04 (4,425) (9) 8/17/05 4,425 (9) 8/17/05 (4,425) (9) Mark R. Hamilton ...... 5/19/04 215 (8) 5/17/05 527 (8) Bruce R. Kennedy ...... 5/19/04 429 (8) 5/17/05 1,055 (8) 11/9/05 (5,682) (8) Jessie J. Knight, Jr...... 5/19/04 857 (8) 5/17/05 1,055 (8) R. Marc Langland ...... 5/19/04 536 (8) 5/17/05 527 (8) Keith Loveless ...... 11/05/04 (1,294) (2) 11/17/04 3,680 (3) 7/22/05 7,282 (9) 7/22/05 (7,282) (9) 8/30/05 6,680 (3) 12/31/05 278 (1)
57 Number of Shares of Common Stock Purchased or Name Date (Sold/Exchanged) Footnote Dennis F. Madsen ...... 5/19/04 857 (8) 5/17/05 1,055 (8) Byron I. Mallott ...... 5/19/04 429 (8) 5/17/05 527 (8) John V. Rindlaub ...... 5/19/04 215 (8) 5/17/05 527 (8) J. Kenneth Thompson ...... 5/19/04 857 (8) 5/17/05 527 (8) Bradley D. Tilden ...... 1/1/04 — 12/31/04 257 (1) 11/17/04 5,350 (3) 1/1/05 — 12/31/05 207 (1) 7/27/05 2,725 (9) 7/27/05 (2,725) (9) 8/30/05 5,350 (3) Richard A. Wien ...... 5/19/04 215 (8) 5/17/05 527 (8) (1) Investment in 401(k) plan. (2) Transfer within 401(k) plan. (3) Shares acquired upon exercise of employee stock option. (4) Purchase (Sale) through Employee Stock Purchase Plan. (5) Open market purchase. (6) Open market sale. Proxy Statement (7) Gift. (8) Director fees paid in stock. (9) Same-day exercise and sale of employee stock option.
Understandings with Respect to Securities of the Company The nonemployee directors receive 50% of their annual retainers for service as directors in the form of shares of common stock and may elect to receive additional shares in lieu of all or a portion of their annual cash retainers. See “Equity Compensation Plan Information” in this Proxy Statement.
The following Participants have employee stock options for the indicated number of shares of common stock: Ms. Alberts, 11,540; Mr. Ayer, 537,800; Ms. Gruen, 6,025; Mr. Loveless, 92,078; and Mr. Tilden, 140,800. See the “Aggregated Option Exercises in 2005 and Year-End Option Values” table in this Proxy Statement for additional information.
Except as described in this Proxy Statement, no Participant has and during the last year has not had any arrangement or understanding with any person with respect to any securities of the Company.
Understandings with Respect to Future Employment by the Company Messrs. Ayer, Loveless and Tilden have agreements with the Company under which they would receive severance pay for up to 36 months in the event that they were terminated within 36 months after a change in
58 control of the Company. Ms. Alberts and Ms. Gruen have an agreement with the Company under which they would receive severance pay for up to 24 months in the event that they are terminated within 24 months after a change in control. See “Change-in-Control Arrangements” in this Proxy Statement. No other Participant, nor any Associate of any Participant, has any understanding with respect to future employment. No Participant or any Associate of any Participant has any arrangement or understanding with respect to future transactions to which the Company or any of its affiliates will or may be a party.
SUBMISSION OF PROPOSALS FOR NEXT ANNUAL MEETING The Company expects to hold its next annual meeting on or about June 12, 2007. If you wish to submit a proposal for inclusion in the proxy materials for that meeting, you must send the proposal to the Corporate Secretary at the address below. The proposal must be received at the Company’s executive offices no later than December 12, 2006, to be considered for inclusion. Among other requirements set forth in the SEC’s proxy rules and the Company’s Bylaws, you must have continuously held at least $2,000 in market value or 1% of the Company’s outstanding stock for at least one year by the date of submitting the proposal, and you must continue to own such stock through the date of the meeting.
If you intend to nominate candidates for election as directors or present a proposal at the meeting without including it in the Company’s proxy materials, you must provide notice of such proposal to the Company no later than March 14, 2007. The Company’s Bylaws outline procedures for giving the required notice. If you would like a copy of the procedures contained in our Bylaws, please contact: Corporate Secretary
Alaska Air Group, Inc. Statement Proxy P.O. Box 68947 Seattle, WA 98168
59 Proxy Statement TI AEITNINLYLF BLANK] LEFT INTENTIONALLY PAGE [THIS Annual Report on Form 10-K Annual Report Annual Report TI AEITNINLYLF BLANK] LEFT INTENTIONALLY PAGE [THIS Annual Report ‘ È Part III Non-accelerated filer Name of Each Exchange on Which Registered ‘ Part Hereof Into Which Document is to be Incorporated [NO FEE REQUIRED] OR Accelerated filer FORM 10-K È Commission File Number 1-8957 (Address of Principal Executive Offices) [NO FEE REQUIRED] WASHINGTON, DC 20549 UNITED STATES (Exact name of registrant as specified in its charter) For the fiscal year ended December 31, 2005 For the transition period from to Securities registered pursuant to Section 12(b) of the Act: 19300 International Boulevard, Seattle, Washington 98188 DOCUMENTS TO BE INCORPORATED BY REFERENCE Securities registered pursuant to Section 12(g) of the Act: None È Delaware 91-1292054 Registrant’s telephone number, including area code: (206) 392-5040 È Title of Document ‘ Title of Each Class ALASKA AIR GROUP, INC. ‘ No Large accelerated filer No No No ‘ Common Stock, $1.00 Par Value New York Stock Exchange ‘ È È SECURITIES AND EXCHANGE COMMISSION 2006 Annual Meeting of Shareholders Definitive Proxy Statement Relating to TRANSITION REPORT PURSUANT TO SECTIONSECURITIES 13 EXCHANGE OR ACT 15(d) OF OF 1934 THE ANNUAL REPORT PURSUANT TO SECTIONEXCHANGE 13 ACT OR OF 15(d) 1934 OF THE SECURITIES Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated Indicate by check mark whether the registrant is a shellAs company of (as December defined 31, in 2005, Rule shares 12b-2 of of common the stock Exchange outstanding totaled 33,454,146. The aggregate market value of (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) Act. Yes ‘ the Act. Yes (Mark One) È the Securities Exchange Act ofrequired 1934 to during file the such preceding reports),days. 12 and months (2) (or has for been Yes such subject shorter to period such that filing the requirements registrant for was the past 90 herein, and will not beincorporated contained, by to reference the in best Part of III registrant’s of knowledge, this in Form definitive 10-K proxy or or any information amendment statements to this Form 10-K. filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one): Act.): Yes the shares of common stockmillion of (based Alaska on Air the Group, closing Inc. price held of by $29.75 nonaffiliates per on share June on 30, the 2005, New was York approximately Stock $991 Exchange on that date). Annual Report PARTIII 53 ...... 15 PARTII ...... A T ...... 3 PARTI ...... hsFr 0K npg 2 ne h ato Ie A ikFcos”adbgnigo ae4 ne h caption the report. forward-looking under this our 42 read consider page you Please on as carefully. beginning risks review and those should Factors,” in of you Risk described light which 1A: are in below, “Item difference statements 7 caption a Item the such and under under cause significant Factors” 12, could be “Risk page that might on factors differences 10-K, important such Form Many and achievements this shareholders. statements, or actual our forward-looking performance our to our results, time, adverse by anticipated Over materially implied expressly the statements. or We from those subsequent expressed SEC. differ in if are the likely discussed even that with will matters statements, filed achievements the forward-looking was or regarding our report performance change to this results, to revisions which expectations or on information our updates date the cause any the on events issue of based to as are unpredictable obligation only statements other any speak forward-looking and disclaim and Our uncertainties us control. risks, statements to our unknown forward-looking available beyond and our currently are known on uncertainties which to reliance or of subject undue trends many are place known factors, describe not of of they should effects effects matters You future future the assured. the possible because or that the guaranteed, indicate discuss not predicted, sufficiency which which do be the or statements which cannot and uncertainties, limitation, statements years or without include recent trends as, statements in known such forward-looking operations current facts, Other of historical impact. results and to that our plans solely absorb of conditions, relate to us economic resources on overall financial impact needs, our the and of and plans operations, financing including future future conditions, for costs, financial objectives and and revenues operations capacity, concerning in expectations changes our similar limitation, other without or include, statements “assume” containing statements not forward-looking “project,” statements do all 1934, “estimate,” as that not of “intend,” statements and although Act “anticipate,” forward-looking trends expressions, Exchange “will,” identify or Securities “expect,” generally events the “believe,” can future of words You describe 21E the matters. or Section historical predict and to that amended, solely those as relate are 1933, statements of Forward-looking Act amended. Securities as the of 27A Section of SIGNATURES A T V...... 54 PARTIV ...... TM9B. ITEM 9A. ITEM 7A. ITEM TM1B. ITEM 1A. ITEM TM12. ITEM 7. ITEM TM11. ITEM 9. ITEM 8. ITEM 6. ITEM TM10. ITEM 5. ITEM TM4. ITEM 3. ITEM 2. ITEM 1. ITEM nadto ohsoia nomto,ti om1- otisfradloigsaeet ihntemeaning the within statements forward-looking contains 10-K Form this information, historical to addition In TM15. ITEM TM14. ITEM TM13. ITEM AAEETSDSUSO N NLSSO IACA ODTO AND CONDITION FINANCIAL OF ANALYSIS AND DISCUSSION MANAGEMENT’S XCTV COMPENSATION EXECUTIVE INFORMATION OTHER PROCEDURES AND CONTROLS AND ACCOUNTING ON ACCOUNTANTS WITH DISAGREEMENTS AND IN DATA CHANGES SUPPLEMENTARY AND STATEMENTS RISK FINANCIAL MARKET CONSOLIDATED ABOUT DISCLOSURE QUALITATIVE AND QUANTITATIVE DATA OPERATING AND FINANCIAL CONSOLIDATED SELECTED IETR N XCTV FIESO H REGISTRANT THE OF OFFICERS EXECUTIVE AND DIRECTORS STOCKHOLDER RELATED STOCK, COMMON REGISTRANT’S THE FOR MARKET UMSINO ATR OAVT FSCRT HOLDERS SECURITY OF VOTE A TO MATTERS OF SUBMISSION PROCEEDINGS LEGAL PROPERTIES COMMENTS STAFF UNRESOLVED FACTORS RISK BUSINESS EUIYONRHPO ETI EEIILONR N MANAGEMENT AND OWNERS BENEFICIAL CERTAIN OF OWNERSHIP SECURITY XIIS OSLDTDFNNILSAEETSCHEDULES STATEMENT FINANCIAL CONSOLIDATED EXHIBITS, RNIA CONATFE N SERVICES AND FEES ACCOUNTANT PRINCIPAL ETI EAINHP N EAE TRANSACTIONS RELATED AND RELATIONSHIPS CERTAIN ...... 55 ...... EUT FOPERATIONS OF RESULTS IACA DISCLOSURE FINANCIAL ATR,ADISE UCAE FEUT SECURITIES EQUITY OF PURCHASES ISSUER AND MATTERS, nulRpr nFr 0Kfrteya ne eebr3,2005 31, December ended year the for 10-K Form on Report Annual atoayNt eadn owr-okn Statements Forward-Looking regarding Note Cautionary ...... 3 ...... 12 ...... 12 ...... LSAARGOP INC. GROUP, AIR ALASKA ...... 52 ...... 13 ...... AL FCONTENTS OF TABLE ...... 51 ...... 23 ...... 53 ...... 51 ...... 12 ...... oti hs dniyn od.Forward-looking words. identifying these contain 2 ...... 53 ...... 53 ...... 53 ...... 17 ...... 15 ...... 14 ...... 54 ...... 50 ...... 51 ...... 53 Annual Report 3 PART I . The information contained on our website is not a part of this annual report on www.alaskaair.com BUSINESS Alaska Airlines, Inc. is an Alaska corporation that was organized in 1932 and incorporated in 1937. Alaska Horizon Air Industries, Inc., a Washington corporation, was acquired by Air Group in 1986. It is the largest Alaska Air Group, Inc. (Air Group or the Company) is a holding company that was incorporated in Air Group’s corporate offices are located at 19300 International Boulevard, Seattle, Washington, 98188. Air Form 10-K. As used inAir this Group, Form Inc. 10-K, and the its terms subsidiaries, “Air unless Group,” the “our,” context “we” indicates and otherwise. the “Company”Alaska refer to Alaska principally serves destinations in theCanada state and of Mexico. Alaska Alaska and also North/Southcarried provides service 16.8 East/West between million service cities revenue to in passengers. 8 theAlaska In cities, Western and each primarily U.S., the year from U.S. since Seattle. mainland 1973, In2005 than Alaska 2005, revenue any has Alaska passenger other carried miles, airline. more passenger West passengersaccounted traffic Coast between for within passenger 20%, Alaska traffic the and accounted Mexico between formarkets markets Alaska 47% accounted accounted and of for for the Alaska’s 18%. 10%, U.S. Based the mainland Angeles, on Canada Portland passenger markets and enplanements, accounted Anchorage. Alaska’s for Based leading 5%,Seattle-Los on airports and Angeles, 2005 are other and revenues, Seattle, Seattle-San its Los Diego. leadingaircraft. At nonstop December routes 31, are 2005, Seattle-Anchorage, Alaska’s operating fleet consisted of 110 jet Horizon regional airline in the PacificHorizon Northwest, brand. and The serves Horizon 40 brand citiesAlaska. flying in In consists seven addition of states to Horizon’s and operating native sixjet under network cities service the flying in branded Horizon and Canada as brand, contract under Frontier on flyingoperating the JetExpress January for nine under 1, 70-seat a 2004, Bombardier 12-year Horizon CRJ-700 agreement beganapproximately aircraft with operating 23% under Frontier regional of the Airlines. total Frontier Horizon Horizon JetExpress isHorizon capacity brand, currently carried and representing 6.5 approximately million 9% revenue offlown passengers. total domestically, Approximately Horizon primarily 95% revenue in of in the Horizon’s 2005.5% states revenue In of of passenger 2005, revenue Washington, miles passenger Oregon are miles andSeattle, in Idaho. Portland, 2005. The Boise, Based Canada and on markets Spokane. passenger accountedSpokane-Seattle, Based enplanements, for and on Horizon’s Seattle-Vancouver. revenues leading At in airports December 2005, are and 31, its 46 2005, leading turboprop Horizon’s nonstop aircraft. operating routes Except fleet areunder for consisted Portland-Seattle, the those of Alaska flights 19 Airlines operating jets designator as code Frontier in JetExpress, airline Horizon reservation flights systems. are listed ITEM 1. GENERAL INFORMATION Delaware in 1985. Our twoInc. principal (Horizon). subsidiaries Both are subsidiaries Alaska operate Airlines,risks as Inc. differ airlines, (Alaska) substantially. although and Alaska their Horizon is business Airis a plans, Industries, 1,009 major competition, miles. airline, and Horizon operates economic is an382 a all-jet miles. regional fleet, Individual airline, and financial operates its information jet averageFinancial for and passenger Statements. Alaska turboprop trip and aircraft, length Horizon and is its reported average in passenger Note trip 13 is to the Consolidated Group’s filings with the Securitiesquarterly and reports Exchange on Commission, Form including 10-Q, itsof current annual charge reports report at on on Form Form 8-K 10-K, and amendments to those reports are accessible free Annual Report atrgot lwdi h eodhl f20;hwvr eeusrmie togdet mrvn ilsas yields improving to due strong prices. remained fuel revenues high however, record 2005; to of responded half industry second the the in in slowed 14% growth and factor 2004 in 39% 2005, in is 21% (which increased gallon hedges) per fuel cost settled fuel of economic benefit gallon Our the per respectively. after 2003. cost 2003, pay fuel and we Our 2004 price years. 2005, net three in the past 15% the and over 44%, significantly 36%, increased increased have prices Fuel uncontrollable. largely increases versus 2005, in 5% decreased respectively. costs 2003, benefit and which and 2004 of wage in all Our 10% reorganization, 2004. and maintenance management of 3% heavy our months of our and six ramp of services, last our closure fleet the subcontracting the our during 2005, 2005, of 2005 occurred May of subcontracting during in quarter the costs effect second Oakland, benefit took the in and which in facility wage wages beginning our pilot Seattle downward reduce in in costs to reduction operation labor able a services adjust been of to have result ability We a the competition. as have new primarily not to labor may respond higher and to are have forces, enough who forces work fast groups work unionized employee unionized without have with carriers ours, airlines than including Often, costs to airlines, agreements. 30% major bargaining up Most collective make costs. by generally operating represented costs total Labor airline’s agreements. an vendor of and 40% agreements bargaining collective of now, renegotiation carriers these of many we with future. entry, compete the to We in barriers continue. entrants low to new relatively carriers with the fare compete of low to Because and expect have prices. cost and fares fuel low although high of levels, to expansion LCCs historical response the advantage, from in expect cost prices 2005 their ticket in of on average and Because pressure on rapidly traffic. downward increased grow passenger exert to domestic to continued U.S. continue have total and (LCCs) of have Carriers” 30% Cost than “Low more and significantly called carry Airlines by so currently Delta advantage addition, including competitive In year, a costs. the gain their during carriers reducing carriers reorganization, “legacy” bankruptcy major Under the Airlines. of Northwest several by filings bankruptcy in economy, the of state general the by operations. influenced of measure, capacity. results large industry our a and minor on to events a impact are, current Accordingly, negative prices results. disproportionately ticket financial a and passengers and cause demand of operating could Passenger number airline’s levels the an revenue not in on expected do change effect in flight small disproportionate shortfall a relatively a of a has expenses carried, pricing Because passengers in rents. of or facilities number and the costs with ownership significantly aircraft vary fuel, aircraft wages, for primarily Conditions Industry studies independent by recognized regularly travelers. a are air aircraft, amenities of well-maintained other surveys program, and and assignments, flyer aircraft, seat frequent Alaska advance generous aboard of a section customer form needs, first-class of the customer level in to in higher service attention 28% a excellent check-in, to providing and expedited compared by employees Alaska competitors outstanding by from airlines’ operated themselves The flights distinguish service. to to connected endeavor passengers airlines Horizon’s Both of 2004. 24% 2005, In systems. their lsaadHrznitgaeterfih ceue opoiesriebtenaytopit evdby served points two any between service provide to schedules flight their integrate Horizon and Alaska uig20 n 04 odfcosicesdi h aeo togdmn n elh cnm.Load economy. healthy a and demand strong of wake the in increased factors load 2004, and 2005 During and volatile be can prices Fuel costs. operating airline’s an of 25% to 15% represent generally costs Fuel including costs, operating cut to aggressively working are Alaska, including carriers, US major Most resulting 2005, in challenged be to continued industry airline The flux. of state a in currently is industry The costs, fixed high and margins profit low by characterized is and competitive highly is industry airline The 4 Annual Report Code sharing— by Alaska/Horizon On Flights Operated Other Airline Flight # Alaska Flight # Code sharing— by Other Airline on Flights Operated Flyer Frequent Agreement 5 ...... Yes Yes Yes ...... Yes No No ...... Yes Yes Yes ...... No...... Yes No Yes Yes Yes ...... Yes Yes Yes ...... Yes* Yes No ...... Yes No No ...... Yes* Yes No ...... Yes No Yes ...... Yes...... Yes* No Yes Yes No ...... Yes Yes Yes earn and redeem miles on this airline’s route system. Competition in the airline industry is intense. We believe the principal competitive• factors in the industry safety record and• reputation; flight schedules; • fares; Alaska and Horizon have marketing alliances with other airlines that provide reciprocal frequent flyer Most of our code share relationships are free-sell code shares, where the marketing carrier sells seats on the * This airline does not** have its own frequent Capacity flyer purchase program. arrangement However, as Alaska’s described Mileage under Plan “Business—General members Information—Horizon.” can Competition that are important to customers are: Cathay Pacific Airways KLM...... Lan Chile No No Yes Major U.S. or International Airlines American Airlines/American Eagle British Airways Continental Airlines Delta Frontier Airlines** Hawaiian Airlines Northwest Airlines Qantas Commuter Airlines Era Aviation PenAir Big Sky Airlines MARKETING AND COMPETITION Alliances with Other Airlines mileage credit and redemption privilegesenhance and Alaska’s code and sharing Horizon’s on revenues certaincredit/redemption by flights opportunities offering as and our set by customers forth gaining more below.providing us travel Alliances members access destinations of to and our more better alliance connecting mileage Horizon partners’ traffic while frequent from earning flyer other mileage programs airlines, credit antermination and in opportunity by dates our to and partners’ travel at programs. on any Our Alaskawere time, marketing and terminated, one agreements it or have could more various adversely maySeptember impact be 2005, revenues in both and the Northwest increase process and the offollowed Delta costs renegotiation. by filed of If Era for our a Aviation protection other significant in under marketingwould agreement December Chapter agreements. seek 2005. 11 In to Any of modify of the or these Bankruptcy terminate carriers Code, some could or propose all plans of of these reorganization agreements. that operating carrier’s flights from theidentifies operating our carrier’s marketing inventory, alliances but with takes other no airlines inventory as risk. of The December table 31, below 2005. Annual Report 1 n 5 forttloeaigepne n20 n 04 respectively. 2004, approximately and represented 2005 benefits in and expenses salaries operating Wages, total at 2004. our (10,850 31, of 14,584 December 35% to of and compared as 31% 2005, Horizon) 31, at December 3,734 at and employees Alaska part-time and full-time active respectively) with compete to ability EMPLOYEES our on effect their or channels, other or these in participate airlines. to other continue to able be may Distribution Ticket its automobile to and Due bus serve. train, we including that transportation, compete markets ground to the with unable in competes travel transportation. be fares also for may discounted Horizon fare we or markets, lower such, service haul a As introduce short charge yields. that to on airlines ability pressure other the downward against significant have exert effectively places they thus States, since and United carriers cities the network similar in other between America, and Airways, Virgin us AirTran of on or Airlines, emergence pressures fares, Southwest the competitive their including and reduce carriers, Airways, service, low-cost jetBlue add of Airlines, to growth Frontier labor, chosen Continuing renegotiated have markets. from competitors our derived these in competitors costs of both, addition, operating Some In lower agreements. loyalty. have financing customer could and enhance bankruptcy supply institute and of may flows out and cash reorganize protection maintain lower successfully court to or who bankruptcy order recognition under in name operating discounts and are fare resources Others Many substantial financial company. carriers. greater our these significantly than of have costs some and operating with larger Continental associated are foreign Airlines, affiliates airlines or Northwest regional these domestic Airlines, and of more United Airlines or Airlines, Delta one Southwest Airlines, with including American compete routes, Airlines, Horizon their approximately and of carry Alaska most Horizon traffic. on and passenger airlines to Alaska domestic allowed Together, U.S. is States. all (FAA) United of Administration the 3.3% Aviation in Federal service the passenger from scheduled certificate operate operating an and (DOT) Transportation n oetcarcririse etfct fpbi ovnec n eest yteDprmn of Department the by necessity and convenience public of certificate a issued carrier air domestic Any relationships. code-sharing and • aircraft of type • amenities; on-board • arrivals; on-time • programs; flyer frequent • served; routes • service; customer • h iln uiesi ao nesv.ArGophd1,6 Aak n oio a ,6 n 3,902, and 9,866 had Horizon and (Alaska 13,768 had Group Air intensive. labor is business airline The we which on terms the predict cannot we but channels, distribution these of all in participate currently We centers. call reservation Telephone • while shrinking, is agencies travel traditional on reliance Consumer these agents. through travel sell online to and us Traditional for expensive less is It • horizonair.com. or alaskaair.com as such websites Airline channels: • primary three through distributed are tickets Airline oknsmd hog hs gnisrsl nafe h GSfe,ta scagdt h airline. the to charged is that fee”, airlines. “GDS from the data fee, inventory a and in fare result use their agencies typically obtain these agencies to through travel Sabre, made online as Bookings and such traditional (GDS), Both Systems increasing. Distribution is Global agencies travel online of capabilities. usage online in invest to continue we result, a as and, channels direct 6 Annual Report In Negotiations In Negotiations Contract Status Contract Status 88 Amendable 2/14/07 630 707 Amendable 10/01/09 450 Amendable 11/30/08 2,868 Employees Employees Number of Number of 7 classifications Station personnel in Vancouver and Victoria, BC, Canada PilotsRamp service and stock clerks Clerical, office and passenger service 1,450 Amendable 5/01/07 Employee Group Employee Group Mechanics, inspectors and cleaners Horizon’s union contracts at December 31, 2005 were as follows: At December 31, 2005, labor unions represented 84% of Alaska’s and 46% of Horizon’s employees. Our Alaska’s union contracts at December 31, 2005 were as follows: TWUNational Automobile, Aerospace, Transportation and General Workers Dispatchers 21 Amendable 9/9/07 Union International Brotherhood of Teamsters (IBT)AFA PilotsAMFA 696 Amendable 9/12/06 Flight attendants Mechanics and related 544 Amendable 11/21/07 * Collective bargaining agreement contains interest arbitration provision. Union Air Line Pilots Association International (ALPA) Association of Flight Attendants (AFA)International Association of Machinists and Aerospace Workers (IAM/RSSA) Flight attendants 2,486 In Negotiations Aircraft Mechanics Fraternal Association (AMFA) Mexico Workers Association of Air TransportTransport Workers Union of America Mexico (TWU) airport personnel Dispatchers 79 Amendable 9/29/06 34 Amendable 7/01/10* relations with our labor organizationscollective are bargaining governed agreements by between the the Railwayinstead respective Labor become airlines Act amendable and (RLA). as these Under of organizations thisit a do act, must stated not the notify date. expire the If but other eitherreceipt party party of in wishes such the to notice, manner modify the prescribed themay parties by terms request must the of the meet RLA any National for and/or such Mediation direct describedmediation, agreement, Board negotiations, in the to and the National appoint if agreement. Mediation a no After Board federal agreementMediation may mediator. is Board declare If reached, proffers that no either binding an agreement party arbitration impasse isarbitration to exists, reached is the at in rejected parties. which by Either point either party thePresidential party, may National Emergency a decline Board 30-day to may “cooling submit be off” tosolution. established, period arbitration. The which commences. If Presidential examines During Emergency the that Board parties’ period,of process positions a 30 lasts and days. for recommends At 30 a the daysthe end and labor of is organization a followed may “cooling by strike off” aof and period, “cooling its the unless off” proposed airline an period amendments may agreement and resort is the to reached hiring “self-help”, or of including action workers the is to imposition taken replace of by strikers. any Congress, or all Annual Report sesetfru a o aeil eaaefo h S seset h ..Cnrs scurrently fee. is security Congress this additional U.S. increase The the significantly resolution. assessment, could a TSA that has on the law industry TSA from In new The the Separate 2003. a security. with material. in considering of working not million cost is was $8.4 the and us and for assessment for 2004, assessment higher assessment and increased the 2005 an with both of disagrees in in carriers and property charge air of opposed and security notified cost passengers this TSA total screening for the the for TSA 2006, cover paid to January to carriers million TSA air $12.6 security the the paid enhanced to amount We these amount the 2000. for additional to pay an equal to pay measures government to security the required providing to are submitted carriers and addition, carriers In air measures. the by collected is which on present be to marshals air also federal TSA requires The and employees. aircraft federal of carried own decks flights. be its flight certain will with on that functions security passengers articles these increased all other performs for of and TSA provides screening baggage, The the checked aircraft. for and passenger provide carry-on a shall cargo, aboard TSA mail, responsible the U.S. is that including (TSA) mandates property, Administration Act and Security Security Transportation The the security. Act, aviation Security for the to Pursuant measures. security agencies. foreign of regulations and certain countries to foreign subject to be fly may to we union continue carriers, to we international relating extent with unions the alliances Board labor To pursue Mediation and agreements. National airlines bargaining the between collective air in disputes and the vests to in representation which respect relations Act, with Labor Labor functions services. Railway certain related the (NMB) and under mail regulated of are transportation industry the transportation of aspects certain over jurisdiction position this financial At our ADs. affect or materially FARs either the could operate. of that to requirements proceedings authority the enforcement our of any impact violations of or actions, alleged aware enforcement for not the routine FAA are within to the we ADs subject by time, these are brought of Horizon, time, requirements and to applicable Alaska time all including from and with airlines, program compliance All maintenance in periods. the aircraft be time time our to required to into expect time incorporated and From be are overhauls. must We ongoing major that operations. the to (ADs) for inspections directives provides routine airworthiness program frequent issues a maintenance from FAA and The ranging specifications operate. aircraft, operations we such to our aircraft of Pursuant both of maintenance FAA. approved, type the has each by FAA for issued the program certificate and maintenance carrier-operating established, air have valid we standards. a regulations, operation hold these flight to and required maintenance are personnel, airlines establishing Domestic including operations, airline of aspects liability. baggage and compensation boarding and denied international authorities advertising, of route as approval international such the airlines, matters, over major protection or jurisdiction domestic consumer orders maintains between of certain regulations, DOT agreements is statutes, the alliance certificate aviation addition, agreements, A federal In share U.S. with itself. code the comply certificate in to the points failure of two for terms other any revoked the and between be public noise operate may of capacity, to but certificate airport carrier duration, a individual air unlimited hold certain an to to permits required Subject certificate is DOT. this airline the provide restrictions, domestic by to a issued order U.S., necessity In the and carriers. in convenience air transportation over air Federal authority cargo the regulatory and and significant passenger (DOT) exercise Transportation still of (FAA) Department Administration the Aviation However, transportation. freight and passenger General REGULATION h euiyAtipssa$.0prepaeetscrt evc e mxmm$.0oewyfee), one-way $5.00 (maximum fee service security enplanement per $2.50 a imposes Act Security The aviation enhanced for provides generally Act) Security (the Act Security Transportation and Aviation The has Service Postal U.S. The matters. antitrust airline over jurisdiction has Justice of Department The all regulates generally (FARs), Regulations Aviation Federal the of promulgation the through FAA, The of regulation economic domestic most eliminated amended, as 1978, of Act Deregulation Airline The 8 Annual Report 9 Airlines are permitted to establish their own domestic fares without governmental regulation, and the Although we do not currently anticipate such, to the extent legislation is enacted that would inhibit our We are subject to various laws and government regulations concerning environmental matters and employee The Airport Noise and Capacity Act recognizes the rights of airport operators with noise problems to At December 31, 2005, all of our aircraft met the Stage 3 noise requirements under the Airport Noise and Although we do not currently anticipate that these regulatory matters, individually or collectively, will have Along with other domestic airlines, we have implemented a Customer Service Plan to address a number of Airline Fares industry is characterized by vigorous(generally price outside competition. of The North DOT America) maintainsjurisdiction fares, authority of rates over the and international governments charges. of Internationaladhere the fares to foreign and international countries rates fare we are and serve. alsobrokers rate While subject and tariffs, air to wholesalers substantial carriers the characterize commissions, are many overrides required international and to markets. discounts file to and travel agents, flexibility with respect to fares,service our operations, revenue our management financial system, results our could operations be or adversely other affected. aspects of our customer Environmental Matters safety and health in theAirport U.S. Noise and and other Capacity countries. Act U.S.Clean of federal Water 1990, laws Act, the that the Clean have Safe Air aand Drinking Act, particular Liability Water the impact Act, Act, Resource on or and Conservation us Superfund the andAdministration, include Act. Comprehensive Recovery known the We Environmental Act, as are Response, the OSHA, also Compensation concerning subjectProtection employee to Agency, safety the or and oversight EPA, health of OSHA, matters. thethat and The Occupational have other U.S. Safety an federal Environmental and impact agencies Health on havecertain our been authorities operations. authorized under In to the addition promulgate aforementioned to regulations environmental federal these and statutes. federal employee Many activities, safety state various and and statesrequirements. health local have We laws governments been maintain and have delegated our regulations, adopted own someexceed continuing of these safety, which requirements. health are and similar environmental to programs federal in order to meet or implement local noise abatement programsforeign so commerce long or as the they national doaircraft air not noise transportation interfere reduction system. unreasonably programs, Authorities with including in interstateAct the several or generally imposition cities requires of have FAA nighttime promulgated approval curfews.continue of The to local Airport have noise Noise sufficient restrictions and scheduling on Capacity flexibility aircraft. to We accommodate have local had noise and restrictions. believe we will Capacity Act of 1990. However,Horizon special and noise other ordinances airlines restrict at theO’Hare, Burbank, timing and Long of Palm Beach, flights Springs. Orange operated In County, bytype addition, San Alaska, of Orange Diego, aircraft County, San and Reagan Jose, number National, Sun of and Valley, flights. Long Chicago Beach airports restrict the a material impact on ourregulations financial or condition, compliance results issues of that operationsof we or operations do cash or not flows, cash currently we flows anticipate cannot in will be future not assured periods. harm that our new financial condition, results Customer Service service goals, including, but notdiversions, limited baggage to, delivery goals and relating liability, to guaranteed lowest fares fare and availability, ticket delays, refunds. cancellations and Annual Report srvnewe h wr rnpraini rvddo lsao nte ate iln.Tedfre proceeds deferred The airline. partner proceeds another these or recognizes Alaska and on proceeds, provided mileage sales is sells the transportation also of award Alaska majority the The profit. a when accumulated. or defers revenue are cost, Alaska as miles aircraft partners. as overhead, non-airline liability to its a contribution to as a credits accrued include and not expense does selling cost a incremental as recognized is awards travel 174,000, partners. and airline 212,000, on 239,900, flown flown approximately and miles 2003, redeemed passenger and were total 2004, awards the 2005, flight of years round-trip respectively, the respectively, represent 2003, For awards and Horizon. Those 2004, and Horizon. 2005, Alaska and and for on 631,000, Alaska 8.7% 750,000 on and approximately flown 7.3%, 2003, and 7.9%, and redeemed approximately those 2004, were of 2005, awards 88% years flight approximately the round-trip that For 606,000, estimated redeemed. round-trip Alaska be free awards, ultimately 20,000-mile eligible would the those for awards exceeding Of eligible credits threshold. Alaska were mileage award 2004, awards have ticket and flight who domestic 2005 round-trip members 31, respectively, Plan December million, Mileage of 2.5 by As and redemption generally account. million are member’s 3.0 accounts that approximately flight Plan in that free Mileage inactivity estimated the seating. of of capacity-controlled years 75% to three Over subject after selection. are deleted award Horizon their and of Alaska Alaska on notify awards members mileage, necessary the accumulating terms, Plan program. Mileage the it the terminate miles change or the to levels for ability award partners the and non-airline has credits, store by Alaska mileage grocery paid notice, partners, a is advance conditions, partner, Alaska With card agencies. accounts. credit rental member a car to participating include and credits other which hotels, and partners, company, Horizon non-airline telephone Alaska, of a on services chain, flying the by using mileage by earn and to airlines, members allows Plan Mileage Alaska’s PROGRAM PLAN MILEAGE the in reductions affected. major adversely oil were be crude there would of If business importation business. our or and/or our fuel, hostilities production affect jet significant the adversely of of in could availability event reductions which the be increases, and In could price transportation fuel. there resulting production, jet areas, and fuel of producing jet availability oil on future in policy the conflicts government predict other in to changes impossible of it possibility make the marketing and oil crude of activities. imports hedging fuel our of discussion and a few Discussion for last “Management’s Operations,” the 7, of over Item Results prices See and fuel savings. Condition rising significant Financial of in of Because resulted prices Analysis revenues. has fuel lower program some lower and fuel-hedging although, of competition our fares; benefit fare industry, years, increasing potential increased airline by any by the customers Conversely, offset of to recently. be nature prices occurred may competitive fuel have the increased increases that to on fare agreement Due pass industry purchase prices. to fuel-related fuel fuel unable a jet been into and have entered prices often have oil airlines we crude addition, between in spread and, the agreements fixes collar and options call include operating that prices. believe fuel We high the million. of in $4.0 effect change approximately the one-cent by mitigate outside a costs to and Currently, fuel helps volatile results. annual aircraft are operating affects fuel-efficient which our gallon the prices, on per before fuel impact price 2003, unhedged, significant fuel in or a economic 15% Raw, have and period. can 2004, the control, in during our 19% settled of 2005, that in hedges expenses fuel operating of total benefit our of 24% approximately were FUEL o ie andb ligo lsaadtae ates h siae nrmna oto rvdn free providing of cost incremental estimated the partners, travel and Alaska on flying by earned miles For Upon awards. industry travel other for and travel discounted or free for redeemed be can Mileage loyalty. passenger increasing of way a as programs flyer frequent developed have airlines major All foreign on dependency availability, fuel in reduction significant a anticipate currently not do we While that contracts hedge fuel purchase we fuel, jet of price the in fluctuations to exposure our reduce to order In costs Fuel fuel. jet of availability the potentially, and, price the by affected significantly are operations Our 10 Annual Report 11 existing operation and anticipated growth, markets and Our results of operations for any interim period are not necessarily indicative of those for the entire year, In addition to passenger loads, factors that• could cause our quarterly operating changes results in to• fuel, vary security include: and insurance costs, increases in personnel, marketing, aircraft ownership and• other operating expenses to support the our timing• and amount of maintenance expenditures, the timing and success of our growth• plan as we increase flights pricing in initiatives. existing markets andIn enter addition, new seasonal variations in traffic, the timing of various expenditures and weather affect our The results of operations in the air transportation business have also significantly fluctuated in the past in No material part of our business or that of our subsidiaries is dependent upon a single customer or very few We carry insurance for passenger liability and property and aircraft damage in amounts andAs of a the result type of the events of September 11, 2001, aviation insurers have significantly reduced the maximum are recognized as passenger revenuefor for awards awards issued issued and and flown flownliability on on for other Alaska providing airlines. or free At Horizon travel December and$466.8 on 31, as million Alaska 2005 other and and and revenue-net $409.3 Horizon 2004, million, and themileage respectively, for deferred credits. the estimated revenue Revenue majority payments and attributable of to the to which partnerin total the is airlines 2005, Mileage deferred was 2004 Plan revenue and was from 2003, $180.2 the respectively. million, sale $143.1 of million, and $139.0 million OTHER INFORMATION Seasonality and Other Factors because our business is subjectgreatest) to during seasonal the fluctuations. first Our and operatingweather fourth income conditions, quarters is generally due generally increases principally lowest in to (orthird the lower loss quarter second traffic the as quarter and a and sometimes result generally due of reaches to spring its adverse and highest summer level vacation during travel, the including increased activity in the state of Alaska. operating results from quarter toconditions quarter. in Many the of winter, our causing areasaccommodating increased of displaced costs operations passengers. associated experience Due with inclement to deicing weather adverse our aircraft, weather geographic canceled conditions area flights (particularly of and in operations,competitors, the we who State can may of be be Alaska more better and susceptible able in to to the spread Pacific weather-related Northwest) risks than over some larger of route our systems. response to general economic conditions.factors Fare could initiatives, impact fluctuations this in seasonal fuel pattern. prices, labor actions and other customers. Consequently, the loss offinancial our condition, largest results few of customers operations would or not cash have flows. a material adverse effectInsurance upon our generally consistent with industry practice. amount of insurance coverage availableacts to of commercial terrorism, air war carriers or for similarcoverage third-party events. as liability At well for the as claims same resulting for time, from are aviation they still insurance significantly somewhat in increased general. above the Although pre-September premiums insurance 11 for rates levels such have and will declined since likely that remain there time, for they the foreseeable future. Annual Report aeteoto oetn oto h essfradtoa eid,o h ih oprhs h icata h end the at aircraft the purchase aircraft. to the right of the value or then-fair-market periods, the Horizon additional at and for usually Alaska leases term, aircraft respectively. the lease 700 2020, of the CRJ and most of and 2018 extend Q400 between to leased and option Horizon’s 2018 the respectively. and leased have between 2013, 2006 Alaska’s 2016, and between credit. and 2007 dates of 2006 between expiration line between and have million dates 2015, $160 expiration in our lease 2010, on have and collateral aircraft 2006 as MD-80 serve and aircraft 737-800 owned 737-700, other 737-400, the of majority the and aircraft. additional 2006. for February options in and expire orders to future set discusses lease operating short-term a under 700 CRJ one operates also Horizon * 700* CRJ Bombardier Q400 Bombardier Q200 Bombardier Air Horizon MD-80 Boeing 737-900 Boeing 737-800 Boeing 737-700 Boeing 737-400 Boeing 737-200C Boeing Airlines Alaska Type Aircraft Aircraft 2. ITEM items. these 1B. of ITEM discussion full a Please for large conditions. 42 finance economic page to general on need and Factors” the incidents “Risk force, aircraft see labor potential unionized regulation, largely government a expenditures, prices, capital fuel volatile competition, intense instability, The call-up. 1A. military ITEM a aircraft. of such event of the use in the aircraft for of us number reimburse certain would a government government federal the to available 2006. 31, August through insurance Matters risk Government offered, war Other has commercial Government replace the to 2005, insurance Act, risk Appropriations war Consolidated accepted, the have by we amended and as 2002, of Act Security usatt uhrt rne nteArTasotto aeyadSse tblzto c,teHomeland the Act, Stabilization System and Safety Transportation Air the in granted authority to Pursuant so eebr3,20,3 fte6 icatondb lsaaesbett in euigln-emdebt long-term securing liens to subject are Alaska by owned aircraft 62 the of 32 2005, 31, December Operations,” of of As Results and Condition Financial of Analysis and Discussion “Management’s 7, Item II, Part 2005: 31, December at age average their and operate we aircraft the describe tables following The None industry and global as such uncertainties, various to subject are results financial and operations Our make to agreed have we whereby program, Fleet Air Reserve Civil the in participate to elected have We PROPERTIES COMMENTS STAFF UNRESOLVED FACTORS RISK ...... 101 126 11 15 140 ...... 6 0.7 3.4 4.8 3 12 1 22 — 40 5 12 2 31 172 17 9 160 ...... 124 ...... 144 ...... 431 84.0 7.8 18 15 28 28 3 — 74 37 ...... 7 — 7 111 ...... 7 81 3.6 19 18 1 70 ...... 12 Passenger Capacity Owned 24 1 10.1 110 48 62 16 5.5 65 61 4 Leased Total vrg Age Average nYears in 13.8 10.7 24.5 Annual Report 13 LEGAL PROCEEDINGS Alaska and Horizon lease ticket counters, gates, cargo and baggage space, office space, and other support Alaska has centralized operations in several buildings located at or near Seattle-Tacoma International Horizon owns its Seattle corporate headquarters building. It leases an operations, training, and aircraft During 2005, Alaska subcontracted its ground handling services at the Seattle-Tacoma International Airport In May 2005, the Air Line Pilots Association filed a lawsuit in federal district court in Seattle to overturn the In March 2005, Alaska filed a lawsuit in federal district court in Seattle against the International Association In addition to the cases noted above, we are a party to routine litigation incidental to our business and with Ground Facilities and Services areas at the majority ofof the Alaska. airports they serve. Alaska also owns terminal buildings in various cities in the state Airport (Sea-Tac) in Seattle, Washington.property, The include owned a buildings, three-bay including hangar landair facility unless cargo with located facility, maintenance on an shops, leased information-processing a airport Alaska center, flight also several operations leases office and a buildings training two-bay and center,Kent, hangar/office our an WA, facility corporate and at headquarters. a Sea-Tac, reservation abuilding center warehouse and in and hangar Boise, reservation/office in ID. facility Anchorage, Alaska’sPhoenix. in an other air major cargo facilities facility, include leased a land regional in headquarters Anchorage, and a reservations center in maintenance facility in Portland and maintenance facilities in Boise, Pasco, Seattle and Spokane. to a vendor that providesFrancisco. similar Alaska services continues to to Alaska use atAlaska. its airports, Other own including airports employees Portland, throughout for Los our ground Angeles system handling and are services San contracted at to airports various in third-party the vendors. stateITEM of 3. current labor contract covering Alaska’sOn pilots July as 21, established 2005, by Alaska anAlaska’s filed arbitrator, motion a which to motion was dismiss. to effective This dismiss May matter the 1, is lawsuit. 2005. closed. On October 28, 2005, the district court granted of Machinists (IAM) seeking tobargaining compel agreement, arbitration of of subcontracting a of disputeIAM Alaska’s regarding filed ramp the a service permissibility, counter operation under claim in theengaged against Seattle. collective in Alaska On bad alleging May faith that 10, bargaining Alaska 2005,it by, violated the could among the not other Railway reach things, Labor agreement stating Actsubcontracted with that status the the it quo ramp IAM would and service on subcontract operation an theemployees in acceptable Seattle represented Seattle, new ramp by resulting labor work the in contract. if IAM. the Onseeking Shortly immediate May to after reduction 13, reverse this of 2005, the event, approximately Alaska subcontracting theJune 475 by IAM 2, Alaska. filed 2005. That a Alaska motion motion filed was forclaim, a heard preliminary and motion and injunction the to denied bad dismiss by faith the aopposed bargaining IAM federal to claim counterclaim. court other to The judge conduct the court on during extent dismissedcounterclaim the it the by parties’ was IAM’s January negotiations). based status 18, The on quo 2006, court thedirecting but stated Seattle the the that ramp IAM IAM the subcontracting to did IAM (as show not shallsubmitted cause do file its why so. an response its On amended to counterclaim February the should 6,ruling court’s not 2006, on order be the the to dismissed court matter. show for entered A cause failure an trial on to order date February prosecute. has 16, The been 2006, IAM set but for the September court 2006. has not yetrespect issued to a which no materialis liability not is likely expected. to Management materially believesbased affect the on our ultimate management’s financial disposition current position of understanding or theseincluding of results matters the the of potential relevant operations. costs law This and and forward-looking risks facts; statement associated it is with is litigation subject and to the various actions contingencies, of judges and juries. Annual Report a ae rsdn n E fHrznAir. Horizon of CEO and President named was Vice Executive elected was Airlines. 2002 Alaska January of in Planning and and Planning, President/Marketing and President/Marketing Vice Senior became and Counsel General Airlines. Affairs, Alaska Corporate and and Group President/Legal Air Vice Alaska named of was Secretary he Corporate 1999, In 1996. in Airlines had and Operations President/Flight Vice was Finan 2000. Mr. since appointment, position his that to held Prior retirement. his upon Bagley 2002. January in President/Finance Vice Executive and 2000 February Board. in Advisory CFO School 1994, Business Washington of Inc., University America, the Flight on on Angel serves serves Foundation, also Ayer Airlines He Mr. Alaska Flight. 1995. the of January Energy, Museum from Sound the Air Puget and 1995. Horizon Airlines, August of Alaska from President/Operations of Planning Vice boards and Sr. the and President/Marketing as Marketing Vice served Service, and he and President/Customer 1997, thereto, 2002 Vice January Prior January Sr. from since was Airlines He Officer he Alaska Airlines. Executive thereto, of Alaska Chief Prior Planning of as 1997. Officer 2003, November Executive February since Chief since President and Chairman as President Airlines’ Chairman, Alaska also as is served Ayer has Mr. 2003. May in Officer Pinneo D. Jeffrey Saretsky Gregg Loveless Keith Finan Kevin Tilden D. Bradley Ayer S. William Name follows: as are 2006) 1, February of (as ages respective their and positions REGISTRANT THE OF OFFICERS EXECUTIVE 4. ITEM r Pinneo Mr. Saretsky Mr. Loveless Mr. Finan Mr. Tilden Mr. Ayer Mr. their Horizon), and Alaska subsidiaries its (including Inc. Group, Air Alaska of officers executive The None UMSINO ATR OAVT FSCRT HOLDERS SECURITY OF VOTE A TO MATTERS OF SUBMISSION ...... a enorPeietsneFbur 03adbcm u himnadCifExecutive Chief and Chairman our became and 2003 February since President our been has eaeEeuieVc rsdn/prtosi aur 06t iltepsto edb George by held position the fill to 2006 January in President/Operations Vice Executive became ondAak ilnsi 91 eaecnrle fAak ilnsadAak i ru in Group Air Alaska and Airlines Alaska of controller became 1991, in Airlines Alaska joined ...... Vice...... eaeVc rsdn/asne evc fHrznArIdsre n19.I aur 02he 2002 January In 1990. in Industries Air Horizon of Service President/Passenger Vice became ..... C ...... ondAak ilnsi ac 98a iePeietMreigadPann.I 00he 2000 In Planning. and President/Marketing Vice as 1998 March in Airlines Alaska joined eaeCroaeSceayadAssatGnrlCuslo lsaArGopadAlaska and Group Air Alaska of Counsel General Assistant and Secretary Corporate became ...... rsdn n he xctv fie fHrznAir Horizon Inc. of Industries, Officer Executive Chief and President Inc. Airlines, of Alaska Planning and President/Marketing Vice Executive Inc. Inc. Group, Airlines, Air Alaska Alaska and of Secretary Corporate and Counsel Airlines, Inc. Alaska of Inc. President/Operations Airlines, Vice Alaska Executive and Inc. Group, Air Alaska of Financial Officer Chief and President/Finance Vice Executive Inc. Airlines, Alaska and Inc. Group, Air ara,PeietadCifEeuieOfcro Alaska of Officer Executive Chief and President hairman, rsdn/ea n oprt far,General Affairs, Corporate and President/Legal 14 Position Age 91990 49 1998 46 1996 49 2000 58 1994 45 1985 51 rSubsidiary or fie Since Officer i Group Air Annual Report Low (a)) under Equity 2004 for Future Issuance Compensation Plans Reflected in Column (excluding Securities Remaining Available Number of Securities High 27.1725.70 19.26 33.67 18.74 22.93 $29.27 $22.30 Low and Rights Outstanding Exercise Price of Weighted Average Options, Warrants 2005 High 31.5035.72 25.55 37.86 28.38 28.22 $34.00 $27.45 (a) (b) (c) 807,570 32.7568 — and Rights Number of Exercise of 1,696,8092,504,379 32.2876 32.4389 1,229,955 1,229,955 Issued Upon Outstanding Securities to be Options, Warrants 15 PART II ...... MARKET FOR THE REGISTRANT’S COMMONMATTERS, STOCK, AND RELATED ISSUER STOCKHOLDER PURCHASES OF EQUITY SECURITIES ...... The shares to be issued under plans not approved by stockholders relate to the Company’s 1997 Long-Term The 1997 Plan terminated on November 3, 2002 and no further awards may be made. Awards granted First Quarter As of December 31, 2005, there were 33,454,146 shares of common stock of Alaska Air Group, Inc. issued The following table shows the trading range of Alaska Air Group, Inc. common stock on the New York Second Quarter Third Quarter Fourth Quarter None The Company has a shareholder-approved equity plan that enables the Compensation Committee of the The table below provides information, as of the end of the most recently completed fiscal year, concerning holders holders Plan Category Equity compensation plans not approved by security Total Incentive Equity Plan. This planapproval was because adopted no by grants the to Board executive of officers Directors were in allowed 1997 under and the did plan. not1997 require Long-Term stockholder Incentive Equity Plan (the “1997 Plan”) before that date remain outstanding in accordance with their terms. Equity compensation plans approved by security ITEM 5. and outstanding and 3,875 shareholdersmillion. of We record. have We not also paid heldYork dividends 2,478,779 Stock on treasury Exchange the shares (symbol: common at ALK). stock a since cost 1992. of Our $56.6 common stock is listed on theStock New Exchange. Sales of Non-Registered Securities Equity Compensation Plan Information Board of Directors to makeattract awards and of retain equity-based key compensation, employees. which we believe are an important tool to securities authorized for issuance under current and former equity compensation plans. Annual Report h hrsaentfretdwe atcpnslaeteBado tews eoeieiil ocniu nthe in continue to ineligible become otherwise or Board the leave participants Plan. when 2004 forfeited not are stock shares the The date same the on reduction the of amount the to made. value is in above equal described stock payment common of shares of number is year coming $15,000. the of for value director total of a a meeting as having annual services stock year’s for common that retainer of following annual shares day director’s in business eligible paid first an the of on portion year a Each stockholders, director. eligible an is subsidiaries below. awards. described stock or SARs Plan. options, 2004 stock the of administers executive form Directors director, the of board in Board any made the to be of made can Committee be Awards Compensation can Company. The awards the Plan, of 2004 employee the or Under officer Board. the by earlier terminated Plan”) “2004 (the Plan Equity Incentive Long-Term 2004 ietr aetergtt oeadrciedvdnso hrsta aebe sududrte20 Plan. 2004 the under issued been have that shares on dividends receive and vote to right the have a Directors instead receive to and retainer cash annual her or his reduce to elect may director eligible each addition, In its of any or Company the by employed not is who Company the of Directors of Board the of terms member the Each to according members board to shares of granting the authorizes Plan 2004 the addition, In otherwise unless 2014 18, May on terminate shall and 2004 18, May on effective became Plan 2004 The 16 Annual Report 2001 2002 2003 72.9% 70.0% 68.1% 68.4% 69.3% 63.9% 62.4% 62.8% 59.2 46.5 (8.6) 62.8 0.89 1.22 0.28 0.48 (79.8) (17.5)(20.6) (93.2)(15.3) 29.0 (126.3) 13.5 (101.8) (67.2) (63.5) (0.57) (43.4) (0.57) 0.51(0.57) 0.51 (4.47) 0.51 (1.64) (2.53) (4.47) (1.64) (1.64) 12.47¢10.02¢ 12.65¢10.41¢9,968 9.74¢ 12.65¢ 9.84¢ 10,040 13.12¢ 9.47¢5,930 9.87¢ 10,1422,155 9.84¢ 3,107 4,934 10.24¢ 10,115 1,64022.61¢ 2,569 4,81516.20¢ 1,514 26.96¢15.90¢ 2,428 4,668 18.06¢3,423 26.02¢ 1,350 17.76¢ 17.29¢ 2,148 28.15¢ 3,359 17.87¢ 19.02¢ 21.02¢ 3,476 3,764 989.6664.8 906.9 674.2 856.7 655.7 852.2 851.3 2004 16,29516,231 15,04722,276 14,554 14,154 20,804 13,186 13,668 19,360 12,249 17,919 26.85926.859 26.648 26.730 26.546 26.546 26.499 26.499 2,803.6 2,462.3 2,317.3 2,279.1 $2,723.8 $2,444.8 $2,224.1 $2,152.8 $ (15.3) $ 13.5 $ (118.6)$ $ (0.57) (43.4) $ 0.51 $ (2.53) $ (1.64) $3,335.0 $3,259.2 $2,880.7 $2,950.5 (7.4) 75.9% 72.8% 84.5 2.65 1.77 (0.21) (0.01) 12.91¢ 10.84¢ 10.89¢ 9,065 6,481 2,475 3,400 21.98¢ 16.36¢ 16.18¢ 3,456 144.6 137.2 969.1 827.6 2005 16,759 16,915 22,292 27.609 33.917 2,982.7 $2,975.3 $ (5.9) $ 3.06 $3,792.0 17 ...... SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA ...... 2005, 2004, 2003, 2002, and 2001, respectively. effect of the accounting change in connection with thefor impairment the of $90.4 goodwill. million, netengine of overhauls. tax, cumulative effect of the change inand accounting $69.1 policy million, for respectively. major See airframe Exhibit and 12 to this Form 10-K. change change change current amounts): (a) Includes capitalized interest of $8.9(b) million, $1.7 million, $2.3 For million, 2002, $2.7 basic million and and diluted $10.6 earnings(c) million per for share include For $(1.94) 2005, per basic share and for diluted the earnings $51.4 per million share cumulative include $(3.27)(d) per share and For $(2.66) 2004, per 2002 share, and respectively, 2001 earnings(e) are inadequate to Includes cover Horizon fixed services charges operated by as $17.4 Frontier million, JetExpress $99.5 in million, 2005 and 2004. Revenue passenger miles (RPM) (000,000) Available seat miles (ASM) (000,000) Revenue passenger load factor Yield per passenger mile Operating revenues per ASM Operating expenses per ASM Average number of full-time equivalent employees Horizon Air Operating Data (e): Revenue passengers (000) Revenue passenger miles (RPM) (000,000) Available seat miles (ASM) (000,000) Revenue passenger load factor Yield per passenger mile Operating revenues per ASM Operating expenses per ASM Average number of full-time equivalent employees Alaska Airlines Operating Data: Revenue passengers (000) At End of Period (inTotal millions, assets except ratio): Operating Expenses Operating Loss Nonoperating income (expense), net (a) Income (loss) before income tax and accounting Income (loss) before accounting change Net Income (Loss) Average basic shares outstanding Average diluted shares outstanding Basic earnings (loss) per share before accounting Basic earnings (loss) per shareDiluted (b)(c) earnings (loss) per share before accounting Diluted earnings (loss) per share (b)(c) Long-term debt and capital lease obligations, net of Shareholders’ equity Ratio of earnings to fixed charges (d) ITEM 6. Consolidated Financial Data: Year Ended December 31 (in millions, except per share Operating Revenues Annual Report a e oeAo ae20. page on A Note See (a) Meaningful Not = NM period-end at fleet Operating hrs/day) (blk utilization Aircraft equivalent full-time of number Average (000,000) gallons (a) Fuel gallon per cost fuel (a) Economic gallon per cost fuel (a) GAAP gallon per cost fuel Raw fuel, excluding ASM per expenses Operating (a) ASM per expenses Operating ASM per revenue Operating mile passenger per Yield factor load Passenger (000,000) ASMs (000,000) RPMs (000) passengers Revenue Statistics: Operating Accounting and Tax Income Before (Loss) Income Other—net (losses) gains hedging Fuel capitalized Interest expense Interest income Interest Loss Operating Expenses Operating parts Total spare related and aircraft of Impairment charges Restructuring Other rentals other and fees Landing amortization and Depreciation expenses Selling service beverage and Food rent Aircraft maintenance Aircraft fuel Aircraft services Contracted benefits and Wages Expenses: Operating Revenues Operating Total Other—net mail and Freight Passenger Revenues: Operating millions): (in Data Financial employees (a) charges impairment and restructuring refund, fee navigation Change ...... lsaArie iaca n ttsia Data Statistical and Financial Airlines Alaska ...... 1.69 $ 1.99 $ 2.02 $ (46.3) $ $526.4 ure ne eebr31 December Ended Quarter 18 8,937 10.97¢ 10.57¢ 12.83¢ 5,556 4,104 4,043 609.4 170.9 181.2 587.2 2005 (21.5) (14.3) (22.2) (24.1) 10.8 85.7 7.90¢ 73.9% 39.0 40.4 32.5 29.0 12.5 29.6 41.7 32.9 38.9 21.9 (1.3) (0.3) 110 — 3.6 9.4 .020.7 27.6 1.40 $ 26.3 1.56 $ 1.60 $ NM (68.9) $ 10.2 $477.8 ,3 (5.3) 9,433 1.7 10.79¢ 6.7 12.02¢ 1.9 3.2 5,452 1.1 3,976 3,998 3.6 588.1 26.0 135.6 (3.6) 187.9 10.5 531.3 2004 (11.0) NM (56.8) (12.1) 59NM 25.9 080.0 10.8 (1.6) 87.1 1.0 7.83¢ 8.5 9.75¢ 1.0pts 72.9% 2.1 12.5 38.2 (1.2) 35.9 (6.8) 32.9 5.0 31.1 5.7 11.9 20.9 28.0 34.5 25.6 26.2 20.1 3.8 32.4 21.1 (0.9) (6.8) 0 1.9 108 —— 0.4 6.2 Change % 1.53 1.81 $ 1.84 $ $ 124.2 $ $2,183.0 2,426.9 2,416.1 22,292 16,915 16,759 2005 150.6 9,065 346.4 10.89¢ 10.84¢ 12.91¢ 158.7 161.9 125.4 126.9 116.8 185.2 626.6 119.9 737.4 142.8 135.0 (51.2) (10.8) erEddDcme 31 December Ended Year 20.4 10.8 8.01¢ 75.9% 32.5 47.7 90.3 (5.0) 110 — 8.1 .621.5 36.2 1.26 34.3 1.33 $ 1.37 $ $ NM (27.0) $ 7.9 $2,023.6 ,1. 4.7 2,318.4 8.2 2,233.0 2260.1 4.2 22,276 2.8 16,231 16,295 2004 ,6 (9.1) 9,968 (2.3) 354.7 4.6 8.1 10.41¢ 3.5 10.02¢ 12.47¢ 6.8 14.0 148.6 (2.1) 142.0 (4.0) 128.1 132.2 2.9 27.0 113.5 32.8 145.8 472.0 (7.8) 799.7 16.1 123.0 (44.1) NM (85.4) 75.3 NM 53.4 10(1.8) 11.0 1.1 7.92¢ 3.0pts 72.9% 26.2 NM 36.8 (4.2) 49.8 24.2 96.5 4.5 86.4 58.4 (0.1) 0 1.9 108 1.1 Change % Annual Report % Change 65 0.0 7.8 9.3 NM 1.1 0.6 8.3 4.8 3.9 (2.6) 2.1 19.0 3.4 NM (3.9) (0.2) 10.2 69.3% 3.5pts 49.7 3.2 12.0 (28.3) 20.768.7 15.0 38.3 40.0 73.9 13.1 (5.0) 26.513.4 9.8 41.4 25.4 42.0 15.2 0.5 2004 5,9302,155 9.3 3,107 14.8 9.4 22.61¢ (2.8) 16.20¢15.90¢ 1.0 1.8 13.58¢ (1.7) 3,423 1.0 503.2 10.6 163.5 9.1 493.9 11.4 $ 17.1 NM $ 1.42$ 1.38 33.8 $ 1.31 35.5 20.6 $487.3 11.6 65 6.2 1.6 0.8 8.7 3.8 8.6 2.5 — — (5.5) 20.2 23.3 72.8% 51.3 23.8 96.2 43.3 70.2 29.1 16.8 47.7 42.2 2005 Year Ended December 31 6,481 2,475 3,400 21.98¢ 16.36¢ 16.18¢ 13.35¢ 3,456 556.4 178.4 550.2 $ 26.4 $ 1.90 $ 1.87 $ 1.58 $544.0 % Change 65 0.0 0.2 0.2 8.5 2.4 0.92.9 0.0 (37.9) 5.3 15.1 0.56.6 20.0 3.7 6.1 29.7 0.6 NM 569793 11.1 8.2 (1.5) (0.1) NM (0.7) (1.0) (0.2) 71.7% 2.0pts 12.5 1.6 41.4 13.0 20.311.7 27.6 17.9 4.3 (2.8) 10.210.8 17.6 3.7 2004 1,568 2.9 21.99¢ (0.5) 16.25¢16.26¢ 1.0 3.2 13.62¢ 1.1 3,493 1.3 128.9 9.3 129.0 11.6 $ (1.6) NM $ 1.66$ 1.62 24.1 $ 1.48 25.9 17.6 $125.1 10.5 65 0.6 0.4 8.7 0.9 1.8 6.1 0.6 7.0 4.8 632 858 — (3.5) (3.1) (1.2) (3.2) (0.1) 73.7% 12.7 46.8 25.9 12.2 17.4 12.0 11.2 2005 1,613 21.87¢ 16.42¢ 16.78¢ 13.76¢ 3,537 140.9 144.0 Quarter Ended December 31 $ (6.6) $ 2.06 $ 2.04 $ 1.74 $138.2 19 ...... Horizon Air Financial and Statistical Data ...... Change impairment charges (a) Other—net NM = Not Meaningful (a) See Note A on page 20. Interest expense Interest capitalized Fuel hedging gains (losses) Income (Loss) Before Income Tax and Accounting Operating Statistics: Revenue passengers (000) RPMs (000,000) ASMs (000,000) Passenger load factor Yield per passenger mile Operating revenue per ASM Operating expenses per ASM (a) Operating expenses per ASM excluding fuel and Raw fuel cost per gallonGAAP (a) fuel cost per gallonEconomic (a) fuel cost per gallonFuel (a) gallons (000,000) Average number of full-time equivalentAircraft employees utilization (blk hrs/day) Operating fleet at period-end Operating Income (Loss) Interest income Total Operating Expenses Operating Expenses: Wages and benefits Financial Data (in millions): Operating Revenues: Passenger Freight and mail Other—net Total Operating Revenues Contracted services Aircraft fuel Aircraft maintenance Aircraft rent Food and beverage service Selling expenses Depreciation and amortization Landing fees and other rentals Other Impairment of aircraft and related spare parts Annual Report APicm ls)bfr ae n conigcag as change accounting and taxes before (loss) income parts GAAP spare related and aircraft received of interest impairment related Less: and refund fee navigation Add: charges restructuring Less: nonoperating in included (losses) gains hedging mark-to-market Add: excluding change, accounting and taxes before (loss) Income accounting and taxes before (loss) income GAAP to Reconciliation refund, fee navigation fuel, excluding ASM per expenses Operating (000,000) ASMs refund, fee navigation fuel, excluding expenses parts Operating spare related and aircraft of impairment Less: refund fee navigation Add: charges restructuring Less: fuel aircraft Less: expenses Operating ASM per expenses Operating (000,000) ASMs expenses Operating reconciliations: cost Unit millions) in ($ Inc.: Airlines, Alaska Inc.: Industries, Air Horizon and Inc. Airlines, Alaska both for measures financial airlines. measures network financial major to other comparable by more Transportation also of is are Department charges measures the In restructuring financial to important. and non-GAAP reported is impairment these income fuel without Finally, our without performance investors. in performance financial to portfolio of of useful hedge monitoring disclosure our and the of measurement believe political value the we and fair that addition, economic the view many in our to changes is subject record it are we statement, fuel and aircraft aircraft control hedging and of our fuel thereto, availability beyond our adjustments and factors with or cost associated charges the losses restructuring Because and refund, charges. gains fee impairment the navigation both (including the performance fuel appropriate), monitor aircraft where and of program basis. measure cost GAAP to the a ability without on the and reported management with measures provide financial measures comparable financial directly non-GAAP most The their to measures financial non-GAAP A: Note reported (expense) income charges impairment refund, and fee restructuring navigation (losses), gains hedging mark-to-market change: charges impairment and restructuring charges impairment and restructuring h olwn alsrcnieornnGA iaca esrst h otdrcl oprbeGAAP comparable directly most the to measures financial non-GAAP our reconcile tables following The reported of reconciliation the of disclosure providing are we S-K, Regulation of 10 Item to Pursuant ...... 20 ...... (46.3) $ 0.5 $ 438.8 $ 609.4 $ 609.4 $ ne eebr31, December Ended (170.9) 2005 5,556 10.97¢ 5,556 (47.1) he Months Three 7.90¢ — — — — 0.3 0.3 (68.9) $ (22.7) $ 426.6 $ 588.1 $ 588.1 $ (135.6) 2004 5,452 10.79¢ 5,452 (20.3) (25.9) (25.9) 7.83¢ — — — — 124.2 $ 85.8 $ $1,784.6 $2,426.9 $2,426.9 wleMnh Ended Months Twelve 22,292 22,292 (626.6) 2005 10.89¢ (20.4) (20.4) eebr31, December 53.1 8.01¢ — — 5.7 4.7 (27.0) $ 2.1 $ $1,763.9 $2,318.4 $2,318.4 22,276 22,276 (472.0) 2004 10.41¢ (36.8) (53.4) (36.8) (53.4) 50.1 11.0 7.92¢ 7.7 Annual Report Cost/Gal Cost/Gal 2004 2004 (3.7) (0.04) 87.1 (14.6) (0.04) (25.2) (0.07) (13.5) (0.16) 354.7 $486.6 $ 1.37 $472.0 $ 1.33 $446.8 $ 1.26 $ 50.1 $139.3 $ 1.60 $135.6 $ 1.56 $122.1 $ 1.40 $ (20.3) (in millions) (in millions) Cost/Gal Cost/Gal 2005 2005 Three Months Ended December 31, Twelve Months Ended December 31, (1.8) (0.03) 85.7 (97.5) (0.28) (11.3) (0.03) (25.6) (0.30) 346.4 $637.9 $ 1.84 $626.6 $ 1.81 $529.1 $ 1.53 $ 53.1 $170.9 $ 1.99 $145.3 $ 1.69 $ (47.1) $172.7 $ 2.02 (in millions) (in millions) 21 ...... (expense) cost) (expense) cost) Less: gains on settled hedges included in fuel expense Less: gains on settled hedges included in nonoperating income Economic fuel expense Fuel gallons (000,000) Mark-to-market gains included in non-operatingrelated income to (expense) hedges that settlereclassification in of future previously periods, recorded net mark-to-market ofgains gains the on to settled hedges included(expense) in nonoperating income Fuel expense before hedge activities (“raw” or “into-plane” fuel GAAP fuel expense Economic fuel expense Fuel gallons (000,000) Mark-to-market gains (losses) included in(expense) non-operating related income to hedges thatreclassification settle of in previously future recorded periods, mark-to-market netgains gains of on to the settled hedges included(expense) in nonoperating income Less: gains on settled hedges included inGAAP fuel fuel expense expense Less: gains on settled hedges included in nonoperating income Aircraft fuel reconciliations: Fuel expense before hedge activities (“raw” or “into-plane” fuel Annual Report es mareto icatadrltdsaeparts spare related and aircraft of impairment Less: parts spare related and aircraft of impairment Less: d:mr-omre egn an lse)icue nnnprtn income nonoperating in included (losses) gains hedging mark-to-market Add: (000,000) ASMs fuel aircraft Less: (000,000) ASMs akt-aktgisicue nnnoeaigicm epne eae to related (expense) income non-operating in included gains Mark-to-market (000,000) gallons Fuel (expense) expense income fuel nonoperating Economic in included hedges settled on gains Less: expense expense fuel fuel GAAP in included cost) hedges fuel settled “into-plane” on or gains (“raw” Less: activities hedge before expense Fuel (expense) income non-operating in included (losses) gains Mark-to-market (000,000) gallons Fuel (expense) expense income fuel nonoperating Economic in included hedges settled on gains Less: expense expense fuel fuel GAAP in included cost) hedges fuel settled “into-plane” on or gains (“raw” Less: activities hedge before expense Fuel reconciliations: fuel Aircraft reported as change accounting and taxes before (loss) income GAAP and charges impairment excluding change, change: accounting accounting and and taxes taxes before before Income (loss) income GAAP to charges Reconciliation impairment and fuel excluding ASM per expenses Operating charges impairment and fuel excluding expenses Operating expenses Operating ASM per expenses Operating expenses Operating reconciliations: cost Unit millions) in ($ Inc. Industries, Air Horizon (expense) ooeaigicm (expense) previously income of reclassification nonoperating the to of gains net mark-to-market periods, recorded future in settle that hedges (expense) of reclassification income nonoperating the in of to net gains periods, mark-to-market future recorded in previously settle that hedges to related (losses) gains hedging mark-to-market ...... an nstldhde nlddin included hedges settled on gains ...... an nstldhde included hedges settled on gains ...... 22 ...... i millions) (in millions) (in he otsEnded Months Three $8.6 1.58 $ 1.87 81.5 $ $ 1.90 96.2 $ $ 97.7 $ (7.0) $ 1.74 $ 2.04 22.1 $ $ 2.06 25.9 $ $ 26.1 $ (6.6) $ $0.4 $118.1 $144.0 $144.0 2005 13.76¢ 16.78¢ (25.9) 1.)(0.29) (14.7) 51.3 12.7 eebr31, December (7.0) 15 (0.03) (1.5) (0.30) (0.02) (3.8) (0.2) — — 858 858 wleMnh ne eebr31, December Ended Months Twelve he otsEddDcme 31, December Ended Months Three 2005 2005 Cost/Gal Cost/Gal (1.6) $ $1.8 $108.1 $129.0 $129.0 2004 13.62¢ 16.26¢ (20.3) (0.6) (0.6) (2.8) 793 793 i millions) (in millions) (in wleMnh Ended Months Twelve $6.8 1.31 $ 1.38 65.3 $ $ 1.42 68.7 $ $ 70.7 $ (2.8) $ 1.48 $ 1.62 18.5 $ $ 1.66 20.3 $ $ 20.8 $ 26.4 $ 17.8 $ $454.0 $550.2 $550.2 2005 3,400 3,400 13.35¢ 16.18¢ (96.2) 49.7 12.5 eebr31, December 34 (0.07) (0.04) (3.4) (2.0) (0.14) (0.04) (1.8) (0.5) — — 8.6 2004 2004 Cost/Gal Cost/Gal 17.1 $ 13.7 $ $421.8 $493.9 $493.9 2004 3,107 3,107 13.58¢ 15.90¢ (68.7) (3.4) (3.4) 6.8 Annual Report method. Accordingly, effective January 1, 2005, 23 direct expense method to the MANAGEMENT’S DISCUSSION AND ANALYSIS OFRESULTS FINANCIAL OF CONDITION OPERATIONS AND capitalize and amortize The following discussion should be read in conjunction with our financial statements and the related notes Alaska and Horizon operate as airlines. However, their business plans, competition, and economic risks Improved revenue from industry-wide fare increases, record load factors, and a 4.2% increase in passenger Although revenues and pre-tax income at Alaska improved over the prior year, we faced operational In December 2005, we completed an offering of 5.7 million shares of our common stock, resulting in net Effective January 1, 2005, we changed our method of accounting for major airframe and engine overhauls ITEM 7. contained elsewhere in this Annualreports Report of on historical Form information 10-K. or AllPlease descriptions statements consider of in our current the forward-looking accounting following statements policies discussioncautionary in are that note. light forward-looking are There of statements. not can the be risksresults no referred could assurance to differ that in materially actual this from developments report’spredict those will introductory or projected be control. as those For a anticipated a result by“Risk discussion of us. Factors” of a Actual beginning our number on risk of page factors, factors, 42. see some “Item of 1A: which Risk we Factors,” cannot beginning onGeneral page 12 and differ substantially. Alaska is aSouth major service airline between and cities principally in serves8 the destinations cities, Western in primarily U.S., the from Canada state Seattle. and ofHorizon It Mexico. Alaska is operates Alaska and a an also North/ regional all-jet provides airline fleet, East/WestIt serving and service operates primarily its to both the average jet Pacific passenger and Northwest, trip turboprop Northern in aircraft, California, 2005 and and was its Western 1,009 average Canada. miles. passenger tripYear in in 2005 Review was and 382 Current miles. Events traffic helped to define aflat positive compared story to for the 2005, prior despiteHorizon year relatively reported due flat significant to capacity increases actions at in taken Alaska.lower passenger in Alaska’s yield. traffic, response capacity Operating resulting to was expenses in the per increased operationalHorizon available revenues, difficulties to seat offset described 16.18 mile by below. cents increased slightly compared 4.6%highs to at during 2004. Alaska 2005 Although to and fuel 10.89 played prices centsnavigation a dipped and fee major in 1.8% refund, part the at restructuring in fourth and the quarter,is impairment increase fuel primarily charges in again due increased unit hit to 1.1% costs. record the to AtCompared capacity 8.01 Alaska, to reduction cents our 2004, during compared unit Horizon the to costs had summer 2004.at excluding a and This 13.35 fuel, 1.7% slightly cents. a decrease higher Overall, in non-fuel our unit operatingindustry operating costs costs. as results excluding a are fuel whole positive and and considering impairment several the charges, large continued coming carriers significant in seeking losses bankruptcy for protection the in 2005. difficulties during much of theCompany year during due 2005. to The the result combinedsummer was effects months. operational of However, performance the we that labor began was andSeptember to well operational and see below changes October; improvement our across although in goal our we on-time duringthe again arrivals much year. experienced and of In seasonal departures the order declines during to in muchoriginal improve these of expectations our metrics through operational in schedule performance, the reductions we latter and reduced months the our of elimination 2005 of summer certain capacity flights. from our Common Stock Offering proceeds of approximately $200 million. See Note 16 to the Consolidated FinancialAccounting Statements. Change from the Annual Report ehnc n ipthr n20 hog ihrtengtaino rirto rcs,a ute described further as process, arbitration or negotiation the either through below: 2005 in dispatchers and mechanics Negotiations and Costs Labor millions): in ($ 2005 31, December ended year the for and of as accrual restructuring Company’s charge restructuring tax). net after a million in ($12.7 the resulting million in recorded, $20.4 change were of a accruals year and original the efforts the for restructuring since prior affected and employees current 2005. of from of number employees quarter impacted second to the extended in coverage million $16.1 of severance charge the a accepted recorded group we labor result, the The a after time. as coverage of and, the medical period 2005 by of a June affected year for in those one benefits package to service, travel 2004, of continued late years and in on date employees based severance other payments package, to cash severance offered included a packages that offered severance subcontracting We the employees. as 475 same approximately the of substantially reduction immediate an in resulted accrual no was there 2005, in 31, included December charges. are of these charges As to These operations. related base. of remaining maintenance statements heavy the Oakland in our charges” at “restructuring lease the terminate to decision Charges Restructuring financial a consolidated in our aircraft to all 2 for Note overhauls See engine tax). details. and after further airframe million for capitalized ($90.4 statements previously pre-tax our million of $144.7 value totaling book charge net the off wrote we uigtefut ure,Aak ece nareetwt h icatMcaisFraternal Mechanics Aircraft the with agreement an reached Alaska quarter, fourth the During • of Association International the to offer contract a presented we 2005, of quarter second the During • Pilots Line Air the with agreement new a reach to unable were we negotiations, ongoing Despite • Horizon the with and mechanics and dispatchers pilots, Alaska the with contracts labor new executed We the of components cost related and severance the of balance and activity the displays table following The medical of costs estimated our in changes to related adjustment million $3.7 a is charges these Offsetting This party. third a to operations ramp Seattle our out contracted we 2005, of quarter second the During our to related million $8.0 of charges rental and impairment asset recorded we 2005, of quarter first the In ehiin.Ti otaticue,aogohries aktbsdwg nraeo approximately of increase wage market-based aircraft a 700 items, approximately other Alaska’s among covering includes, contract contract four-year This new technicians. a in resulting (AMFA) Association an in resulted This 2005. 13, May employees. effective 475 We party approximately group. third of work a reduction this to immediate by operations rejected ramp was Seattle that our workers) subcontracted ramp our representing (IAM, pilot Machinists average an in resulted agreement This effective 2007. became 1, which May 26%. of on of decision amendable reduction the becomes wage 2005, and of 2005 agreement, quarter 1, bargaining first May collective the on the during of arbitration terms binding the to to submitted pursuant therefore, and, (ALPA) Association aac tDcme 1 2005 31, December at Balance payments Cash adjustments charge Restructuring charges Restructuring 2004 31, December at Costs Balance Related and Severance for Accrual ...... 24 3.1 $ 38.7 $ (48.0) 16.1 (3.7) Annual Report 25 10% and a one-time $1,000in bonus the to fourth each quarter of of the 2005. employees covered under the contract, which wasnew paid five-year contract covering Alaska’s 34 dispatchers. covering 21 dispatchers at Horizon. covering Horizon’s 450 mechanics and fleet service agents. • Alaska also reached an agreement with the• Transport Workers Union (TWU) in In 2005 October that 2005, resulted Horizon in reached a an agreement• with the TWU resulting in During a the new fourth three-year quarter contract of 2005, Horizon reached an agreementWe with are AMFA pleased on with a the three-year contracts contract that have been reached recently and we are continuing to negotiate with Beginning in the second quarter of 2004, we lost the ability to defer, as a component of comprehensive The implications of this change are twofold: First, our earnings are more volatile as we mark our entire We have provided information on mark-to-market gains or losses, as well as calculations ofWe our continue economic to believe that our fuel hedge program is an important part of our strategy to reduce our In August 2005, Alaska recorded a net refund totaling $5.7 million ($3.6 million after tax) from the Mexican On June 15, 2005, Alaska Airlines, Inc. entered into an aircraft purchase agreement with The Boeing our other workgroups to reachshareholders. agreement None on of contracts the that contract wouldrequired negotiations benefit under is both the at our Railway an employees Labor impasse andwork Act or our stoppage that has is would reached low. trigger the self 30-day help. cooling Therefore, off we period currently believe the riskMark-to-Market of Fuel a Hedging Gains income, recognition of any unrealizedWe gain lost or this loss ability on because ourCoast the fuel jet price hedge fuel correlation contracts fell between until below crude thestatements. required oil, hedged thresholds. the fuel For commodity is more we consumed. discussion, use see to Note hedge, 11 and to West our consolidated financial hedge portfolio to market eacheven quarter-end though and the report actual the consumption gain2005, will or this take loss will place in have in other the a non-operatingmark-to-market effect future income gains of period. or recorded increasing In expense, in our times 2005 reported ofpreviously for net rising recorded contracts income fuel mark-to-market that or prices gains settle decreasing such for in ourSecond, as settled future reported to in hedges, periods, net a were net loss. large $61.7 of Our extent, million therecorded the ($38.6 reclassification gains impact million from of of after settled our tax). fuel fuelan hedges hedge offset totaling program to $125.0 will fuel million, not expense but be with only reflected the $12.8 in balance million fuel reported of expense. in that In other gain 2005, non-operating is we income reflected (expense). as fuel cost per gallon on pages 21 and 22. exposure to volatile fuel prices. Navigation Fee Refund government related to navigation feesreduction paid to in contracted 2004. services Approximately expenses $4.7an and million $11.0 $1.0 of million million the refund was refund ($6.3 recorded was million as recorded after interest as tax) income. a recorded This during is the compared third to Aircraft quarter Commitments of 2004. Company to purchase 35 B737-800April aircraft 2011. with The deliveries purchase beginning agreement in includes January options 2006 to and purchase continuing an through additional 15 aircraft with deliveries Annual Report ntaie lsawl eanfcsdo mrvn h efrac fterm evcsa h Seattle-Tacoma the at services ramp the of this performance of the part improving Airport. As on International measures. focused operational remain customer-facing will important Alaska other initiative, and handling, baggage rates, completion increase to markets. used new be serve will degree, or Horizon lesser February and a the in Alaska to to delivered both and, and be at markets seats to 2006 existing 74 Q400s in our to used deliveries in 70 two aircraft frequency from (including the fleet 2006 of capacity Q400 in addition expected the delivered The Horizon’s of be of March). year. capacity will introduction the increasing that the in of aircraft and later annualization Q400 schedule coming the four full those to the of largely of most due return with is the 2006, increase to in largely aircraft due B737-800 is new Alaska 12 at increase capacity expected The Outlook Capacity 2005. September in Worth Dallas/Fort borrowings Any agreement. margin. purchase specified Boeing a the plus under on LIBOR rights expire one-month Company’s will on the facility based by This is secured aircraft agreement. rate be 737-800 purchase interest will Boeing aircraft the new current and 38 the 2009 to under 31, up orders) August of firm purchase are Alaska’s which of of requirements (23 funding pre-delivery the of portion Events loss Other related the of recognition immediate Q200 be an 12 not have the would would of Bombardier, we all from and sublease. or support obligation the any any lease on sublease including existing to income, our decide sublease cover Horizon the to by Should that sufficient leased agreement. likely currently the reasonably agreement, aircraft in is the Q200 forth it with 12 set aircraft, connection to as In up fee also aircraft. for a agreement Q400 assistance for This 20 remarketing Horizon years. additional certain several an provide next to to the up agreed firm over purchase Bombardier replaced delivered to part, be option in to an agreement, were for This that provides 2007. aircraft July CRJ-700 through seven continuing for and orders 2006 December in beginning dates two for agreements 2006. in lease late delivered operating in be negotiated delivered to has be B737-800s Alaska to additional agreement, aircraft three purchase B737-800 Alaska for the additional year-end, orders from to firm Separate the Subsequent into 2008. of 2011. rights and 20 and purchase 2007 December, 2010 two In in and under dates. deliveries option 737-800s delivery with one 50 specific options converted additional assigned to an not converted purchase are were to rights rights rights purchase purchase includes that also except order terms, The same 2009. the April and 2007 July between lsawl otnet oktwr prtoa xelnei 06t mrv u ntm performance, on-time our improve to 2006 in excellence operational toward work to continue will Alaska respectively. 6%, and 6% to 5% approximately of increases capacity expect Horizon and Alaska 2006, For to Seattle from and 2005 August in City Mexico to Angeles Los from service non-stop daily began We a provide to facility payment pre-delivery variable-rate, million $172 a finalized Alaska 2005, October In delivery with aircraft Q400 Bombardier 12 purchase to agreement an finalized Horizon 2005, October In 26 Annual Report 27 Our consolidated net loss for 2005 was $5.9 million, or $0.01 per diluted share,Our versus consolidated a income consolidated (loss) net before the accounting change for 2005 was $84.5 million compared ($15.3) Financial and statistical data comparisons for Alaska and Horizon are shown on pages 18 and 19, Operating revenues increased $183.1 million, or 8.2%, during 2005 as compared to 2004 due to an 8.1% Load factor increased 3.0 percentage points to a record 75.9% for 2005, due primarily to an increase in Freight and mail revenues increased by $3.9 million, or 4.5%, compared to 2004 as a result of aOther-net mail revenues increased $19.8 million, or 16.1%, due largely to an increase in Mileage Plan revenues, In 2005, total operating expenses increased $108.5 million, or 4.7%, compared to 2004. Operating expenses RESULTS OF OPERATIONS 2005 Compared with 2004 loss of $15.3 million, or $0.57 per diluted share, in 2004. million in 2004. The 2005are results discussed include in certain the items “Year thatinclude in impact certain Review the items and comparability that Current of impact Events” thetax), comparability, section years. an including beginning These impairment severance on items charge charges page of of 23.fleet, $40.2 $53.4 Our mark-to-market million million 2004 hedging ($26.7 ($31.8 results gains, million million also net aftersettled after of tax) hedges, the related of reclassification primarily $56.9 of to million previously ourmillion ($31.7 recorded Boeing after million mark-to-market 737-200C tax). after gains Excluding tax), for those and$55.0 items, a million consolidated navigation in income fee 2005 before refund compared the ofby to accounting $11.0 higher $5.2 change million revenues, million would ($6.3 offset in have by 2004. been slightly The higher year-over-year non-fuel improvement operating can costs be and characterized significantly higher fuelrespectively. costs. On pages 20 throughmeasures 22, to we the have most included directly a comparable reconciliation GAAP of financial reported measures. non-GAAP financial Alaska Airlines Revenues increase in operating revenue perwas available driven seat by mile a (RASM) 3.5% onhigher increase relatively fuel in flat prices, ticket capacity. higher yields The load that increasea factors, resulted in direct and from RASM result higher an of freight, increase the mail inaddition reduction and ticket of in other prices three our revenues. designed B737-800 summer The to aircraft flight flat offset during schedule capacity the that is year. was primarily announced in June 2005, offsetpassenger by traffic. the The yield environmentfrom is year currently over strong. year In increases 2006,that in yield will fares improvement be (particularly is charged in expected to the to customers first come that half book of travel 2006) through and, our to reservation a call lesser centers. contract extent, we a have new in $10 the fee freight state services of during Alaska the that third began quarter in of the 2005, third offset quarter by of lower 2004 freight and volumes. fuelresulting surcharges from added higher to award our redemptionof on which our a partner portion airlines is andDutch recognized an Harbor, immediately increase which as in is other cash operated revenue receipts by and from a an miles third increase sold, party. in our revenuesAlaska from Airlines service Expenses to per ASM increased 4.6% fromlargely 10.41 to cents the in significant 2004 to increase 10.89services, in cents landing raw or in fees “into-plane” 2005. and The fuel other increase rentals, costsservice, and and in selling other, increases operating expenses, offset expenses depreciation in by and aircraft is declines amortization, maintenance, due related in restructuring contracted to wages charges, our and and Boeing the benefits, 737-200C food impairment fleet.restructuring and charge Operating and beverage in expenses impairment 2004 per charges ASM increased excluding 1.1%excluding fuel, fuel compared the to for navigation 2004. the fee Our first refund, current quarter estimates and of full costs year per of ASM, 2006, are 8.35 cents and 7.65 cents, respectively. Annual Report icatmitnneicesd$94mlin r2.% u agl otepromneo more of performance the to largely due 27.0%, or million, $39.4 increased maintenance Aircraft • per cost fuel GAAP the in increase 36.2% a to due 32.8%, or million, $154.6 increased fuel Aircraft • Company’s the of out contracting to largely due 24.2%, or million, $23.4 increased services Contracted • been have Wages 2004. to compared 2005 during 7.8%, or million, $62.3 decreased benefits follows: and as Wages are expenses operating of components • the in changes year-over-year significant of Explanations xetmitnnecsst eln agnlyi 06det h iigo aneac vnsand events maintenance of timing the initiatives. to improvement We due process improvement. 2006 from reliability in savings with marginally expected assist decline certain to to as decks costs well flight maintenance as and expect and Statements); systems engine Financial interiors, regarding Consolidated aircraft from policy our to costs accounting to enhancements of our 2 shift in Note a change (see in the overhauls resulted maintenance; airframe which aircraft the parties, into period; third benefits the to and during maintenance wages performed heavy actually related was of a work out were on the contracting increase maintenance whether the engine of causing B737-400 regardless factors expense basis, Other we flight-hour 2004. whereby to agreement compared maintenance 2005 power-by-the-hour in our overhauls engine and work fuel airframe and fuel) aircraft in per recorded cost gains activities. economic hedging hedging (the (including all Alaska basis excluding by GAAP gallon realized a per gallon on cost per gallon cost per fuel cost 2005. summarizing the during table gallon), Alaska a April for for through savings 21 consumption in page oil fuel million See crude our $10 between of approximately spread one-third in the approximately resulted whereby for contract contract fixed This fuel is 2006. a prices into fuel entered jet we and 2005, prices $1.53. of to quarter economic $1.26 second Our from the 2004. 2004 In to over our compared 21.5% period, 18.4%, increased the or gallon during million, per recorded $82.3 cost hedges increased fuel taxes settled expense income from fuel before gains net, income all or income Alaska’s including “economic,” non-operating of After other 87.6% change. in represents accounting recorded hedges the $108.8 are settled and realized which from also of gains Alaska majority total 2005, the The During hedges, (expense). consumed. settled gallons from fuel gains in of decline million 2.3% changes. a 2005 by the offset with gallon, associated that costs expect the We annualize 2004. we in as in million 2006 recorded $7.7 in refund to increase fee compared will navigation 2005 services the in contracted of Additionally, million quarter 2005. $5.1 fourth May was the in services in operations contracted functions ramp maintenance Seattle facility the and and equipment 2004, support ground and 2005. service in fleet than see extent to lesser continue a to to expect although services We 2006, contracted operations. throughout in certain wages increases of in by subcontracting declines offset the year-over-year partially to are due workers costs expense for benefits maintenance estimates and and loss wages ultimate in the reduction to the related Overall, 2004 in adjustment million $6.6 favorable operational a sharing, profit including awards pay • variable employee in increase million $14 a expense pension and FTEs in • reduction the to due costs 903 benefits by in down reduction is a which (FTEs), equivalents full-time 9,065 • Seattle of in average operation an services were 2005 ramp there May our 2005, in subcontracted during effect we took 2005, that of contract quarter pilot second • new the the during from resulting wages pilot in • reduction the 2004 late in announced • initiatives restructuring • following: the by reduced h eroe-erdciei ae n eeiswsprilyofe ytefollowing: the by offset partially was benefits and wages in decline year-over-year The compensation 2004 to compared pay based performance and rewards performance 2004 in average the from FTEs 28 Annual Report 29 was delivered in March 2005,2006 offset aircraft by rent lower to rates be negotiatedquarter slightly in of higher 2004 2006. due on to extended the leases. addition We of expect two new B737-800 aircraft inaverage the cost fourth per passenger meal,meals offset served by resulting higher from transportation our costs new and Mexico an City increase and in Dallas the flights. number of Horizon for certain flying. Incentiveintercompany payments payments, to selling Horizon expenses are increased eliminatedand by in commissions $10.2 consolidation. resulting million Excluding from as the the amade increase result through in of traditional revenues. higher travel In codeshare agents, 2005, fees were compared 36.5% made to of through 38.0% Air Alaska’s in Group Internet 2004. ticket web In sales site 2005, were compared 34.8% to of 30.4% the in ticket 2004. sales charge of $36.8 million todepreciation reduce expense the in carrying future value periods. ofaircraft This the delivered is Boeing during offset 737-200C 2005. by fleet, We the resultingdelivery expect increased in of depreciation depreciation lower several and on new amortization two B737-800 to new aircraft, increase owned the in majority 2006 of as which we will take befee owned. rates and increased rentaldepartures. costs, We primarily expect in landing Seattle, fees Portlandand and and increased other Los airport rentals Angeles, costs. to offset be by higher fewer in 2006 as a result ofremuneration, higher crew departures costs, supplies, andpremiums. legal Additionally, settlement in costs, 2004 partly there offset$3.0 were by million $2.0 lower in million insurance the in current lossesinsurance year. on rates We disposal and expect of passenger other assets remuneration expenses compared costs. to to decline slightly in 2006 due to lower • Aircraft rent increased $3.3 million, or 2.9%, due to the additional operating lease on a B737-800 that • Food and beverage service expense decreased $2.1 million, or 4.2%, due primarily• to a reduction in the Selling expenses decreased $5.3 million, or 4.0% primarily due to a decline in the incentive payments to • Depreciation and amortization decreased $2.7 million, or 2.1%. In 2004, we recorded an impairment • Landing fees and other rentals increased $19.9 million, or 14.0%. The increase reflects higher landing • Other expenses increased $10.1 million, or 6.8%, primarily reflecting increases in passenger In 2005, operating revenues increased $53.2 million, or 10.6% compared to 2004. This increase is due Load factor increased 3.5 percentage points to 72.8% for 2005, due primarily to the 14.8% increase in Operating expenses for 2005 increased $56.3 million, or 11.4%, compared to 2004. Operating expenses per Horizon Air Revenues largely to the increased capacitybegan in in both January the 2004, Horizon-brand combined flyingThe with and increase the contract in slight flying RASM increase for was in Frontierticket primarily operating Airlines, yields. due revenues which to per an available increase seat in mile load (RASM). factors, partially offset by a 2.8% decline in passenger traffic outpacing the 9.4%primarily increase due in to capacity. increased The contract increasesone flying in CRJ-700 with passenger in Frontier, traffic 2005 the and and harmonization capacityapproximately four flying are 9.3% additional with of seats Alaska, passenger on the revenues each additionrespectively, and of of in 22.9% our 2004. of Q400s. capacity, Contract during flying 2005 with compared Frontier to represented 9.1% and 21.4%, Horizon Air Expenses ASM increased 1.8% compared todecreased 2004. 1.7% Operating compared expenses to per 2004. ASMyear Our excluding of estimates fuel 2006 of and are costs impairment 14.4 per charges cents ASM and excluding 14.0 fuel cents, for respectively. the first quarter and full Annual Report hnefr20 a 84 oprdt nefcieicm a aeo 57 napetxls n20.Deto Due 2004. in loss pre-tax a on 25.7% of rate tax income effective an to compared 38.4% was 2005 for change (Benefit) Expense Tax Income Consolidated $61.7 of hedges, 2004. settled in for million hedge gains $56.9 unsettled mark-to-market and on recorded 2005 gains previously in mark-to-market of million net reclassification include the gains of fuel-hedging net addition, contracts, In 2004. in million $28.6 for deposits Bombardier in and increase 737-800 significant Boeing the for to agreements due purchase is aircraft increase new aircraft. This our Q400 2005. from our in resulting of million million equipment some $7.2 $8.9 flight to increased to future changes interest 2004 expense the Capitalized in Interest and agreements. million refund. debt fixed-rate $1.7 fee variable-rate higher from navigation our slightly the on to to increases agreements related rate debt 2004 interest variable-rate securities in to marketable payment due average interest million larger larger $11.1 slightly a increased a by and offset returns 2005, improved in to portfolio primarily due million $6.4 increased (Expense) Income Nonoperating Consolidated adn esadohrrnasicesd$. ilo,o 52.Hge adn esaearsl of result a are fees landing Higher 15.2%. or million, $6.3 increased rentals other one and of fees addition Landing the to due primarily 25.4%, and • or card million, credit $3.4 in increased increase amortization an and to Depreciation primarily due 2004 from 9.8%, • or million, of $2.6 return up leases, are extended expenses on Selling rents lower to due primarily • 5.0%, or million, $3.7 decreased rent Aircraft • of number higher a to due primarily 13.1%, or million, $5.0 increased expense maintenance Aircraft • per cost fuel GAAP the in increase 35.5% a to due 40.0%, or million, $27.5 flying increased contract fuel in Aircraft increase the to primarily due • 15.0%, or million, $3.1 increased services Contracted number average the in • increase slight a reflecting 9.1%, or million, $14.9 increased benefits follows: and as Wages are expenses operating of components • the in changes year-over-year significant of Explanations u osldtdefcieicm a aeo r-a noebfr h uuaieefc fteaccounting the of effect cumulative the before income pre-tax on rate tax income effective consolidated Our to compared 2005 in settled contracts hedging fuel from gains in million $112.2 include gains hedging Fuel income Interest 2004. in million $59.2 to compared 2005 in million $144.6 was income nonoperating Net infcn aeicessi eea forkyarot,icesddprue n e akt being markets new and departures increased airports, key 2004. our of of served. quarter several third in the increases in rate Q400 significant a and 2005 of quarter first the of end the at CRJ-700 revenues. higher from resulting commissions other engines. leased fewer and lease short-term a on aircraft one periods. warranty events their maintenance exiting of are timing that We the aircraft warranty. to of by due number covered 2006 increased aircraft in the fewer substantially and and increase fleet to Q400 expense the maintenance for expect work propeller and overhauls fuel engine and fuel) aircraft in per recorded cost gains activities. economic hedging hedging (the (including all Horizon basis excluding by GAAP gallon realized a per gallon on cost per gallon 2005. cost per in fuel cost $1.58 summarizing the to table gallon), 2004 a 2004. in for over $1.31 22 24.8%, from page or 20.6% See million, increased $16.2 gallon increased per recorded expense cost hedges fuel fuel settled net, economic from or Our gains “economic,” hedges all the settled including period, from After the of gains income. during majority total pre-tax the The Horizon’s hedges, (expense). of settled income 61.4% from non-operating represents gains other of in million recorded $16.2 are realized which also Horizon 2005, services. During handling gallon. ground for employees non-Horizon to transition. payments the higher to in related results charge that one-time Alaska a with in resulting program employees, off all time for paid program new incentive a performance-based to new move a the employee, and per wages and employees of 30 Annual Report 31 increase reflects higher pilot wages,May substantially 2004. all Wages of were which favorably wereSeptember. impacted due During by to 2004, the the there restructuring 4% were initiatives wage2003 9,968 announced rate on FTEs, in increase a which August in 7.1% was and increase down in by capacity. approximatelyBenefits 70 costs FTEs were from favorably impactedresulting by from a positive $7.3 workers million compensation reductionultimate claims in loss experience workers estimates at compensation recorded Alaska expense in andover December a year. totaling related $6.6 reduction million. to In total, benefits costs were flat year Our consolidated net loss for 2004 was $15.3 million, or $0.57 per share, versus net income of $13.5 Our consolidated operating loss for 2004 was $79.8 million compared to a loss of $17.5 million for 2003. Operating revenues increased $205.6 million, or 10.1%, during 2004 as compared to the same period in Freight and mail revenues increased $9.1 million, or 11.8%, because of a new mailOther-net contract revenues we increased have $13.3 in million, the or 12.1%, due largely to revenues from service to Dutch For the year ended December 31, 2004, total operating expenses increased $271.6 million, or 13.3%, as • Wages and benefits increased $18.2 million, or 2.3%, during 2004. Approximately two-thirds of the the magnitude of nondeductible expense,loss, such a as relatively employee small per change diemapplied in costs, our pre-tax relative 2005 results to marginal may a rate cause marginal of a pre-tax 37.5% significant profit to change or the in cumulative the effect effective of2004 tax the Compared rate. accounting with We change. 2003 million, or $0.51 per share,to in 2003. 2003. These The items 2004 are resultson discussed include page in four 27. the significant Our “Results items 2003 of thator results Operations: impact a also 2005 the combined include Compared comparability $44.3 $71.4 with million, million 2004”Wartime net ($52.8 section Supplemental of million beginning Appropriations tax) for Act. received Alaska related and to $18.6 assistance million from for the Horizon, government under the Emergency Our consolidated pre-tax loss for 2004 was $20.6 million compared to pre-taxAlaska income Airlines of Revenues $29.0 million for 2003. 2003. The increase in revenuesticket resulted yields. from For an the 11.5% year increaseincreases ended in are December passenger primarily 31, traffic, due 2004, offset to capacity byfrom the increased a Seattle annualization 7.1% 1.4% to and as decline Chicago expansion compared in and of tooutpaced Los our 2003. the Angeles transcontinental The capacity to flying, capacity increase Reagan including of National service in 7.1%, in yield resulting Washington per in D.C. passenger an The mile increase trafficquarter was in increase where a load of yield result factor 11.5% declines of from were continued 70.0% more industry-wide to substantial, pricing 72.9%. dropping pressure, The 5.8% particularly decline compared in to the the fourth fourth quarterState of of 2003. Alaska offset by lower freight revenues. Harbor, which is operated by a third party, that began in JanuaryAlaska of Airlines 2004 Expenses and higher Mileage Plan revenues. compared to the same period in10.41 2003. cents Operating in expenses 2004. per The increase ASMour increased in restructuring 5.8% operating charges, from expenses the 9.84 per impairment cents ASMcontracted charge is in services related 2003 due costs to to largely and our to landing Boeing significant feesnavigation 737-200 increase and fee fleet, other in higher recovery. rental fuel wages Operating and expense costs costs, benefits, per offsetimpairment by ASM charges declines excluding decreased in fuel, 5.0% selling the to expenses navigationof 7.92 and fee cents significant the recovery, per period-over-period restructuring changes ASM and compared in to the 8.34 components cents of per operating ASM expenses in are 2003. as Explanations follows: Annual Report erae 61 o2.1cns elcigteicuino h rnircnrc lig h il o hc is which for yield the flying, contract yield Frontier Passenger the 69.3%. of to inclusion points the percentage reflecting and 5.4 cents, revenues increased 22.61 passenger factor to of load 16.1% 9.1% Passenger decreased approximately 2004. represented during Frontier capacity, with of flying 21.4% Contract 2003. in period same per flying. cost network and native ASM Horizon’s per than cost lower as ASM, significantly such per is operations revenue flying of rents, this costs and for typical labor fuel the station excluding of and ASM many costs for marketing responsible fees, not landing is fuel, Horizon since However, incentives. certain by made payments for incentive flying the consolidation. contract in in new decline eliminated our a are and by payments network offset Incentive native partially Horizon. our 2004, to in 1, Alaska traffic January increased began the which to Airlines, largely Frontier due is increase This 2003. Revenues Air Horizon etutrn hre oae 5. ilo uig20.Ti hreicue ae n te benefits other and wages includes charge This 2004. during million $53.4 totaled charges Restructuring in increase • million $6.3 a reflecting primarily 5.9%, or million, $8.3 increased expense Other reflect primarily rates • higher The 11.1%. or million, $14.2 increased rentals other and fees Landing • on depreciation accelerated reflecting 7.2%, or million, $8.6 increased amortization and Depreciation • to made payments incentive the in decline a to due 10.7%, or leased million, fewer $15.8 and decreased leases expenses extended Selling on rates lower to due • 8.4%, or million, $10.4 decreased during rent overhauls Aircraft engine fewer to largely due • 5.0%, or million, $7.6 decreased maintenance Aircraft • per cost fuel GAAP the in increase 43.9% a to due 51.2%, or million, $159.9 increased fuel Aircraft • an with associated expenses to largely due 18.3%, or million, $14.9 increased services Contracted • o h ereddDcme 1 04 aaiyicesd2.%adtafcwsu 14,cmae othe to compared 31.4%, up was traffic and 20.9% increased capacity 2004, 31, December ended year the For and mark-up base a plus costs expected of reimbursement for provides Frontier with arrangement The to compared as 8.5% or million, $39.4 increased revenues operating 2004, 31, December ended year the For htwl epi sarsl forrsrcuigiiitvsanucdi uutadSpebro 2004. of September and August in announced initiatives restructuring our of result a as paid be will that higher initiatives, costs. restructuring supplies our and with costs, associated remuneration expenses passenger moving higher costs, services professional with combined Oakland, and Angeles Los Portland, Seattle, growth. at volume fees modest rental exclusive and joint-use higher additional and 2003, in acquired aircraft one on from depreciation obsolescence. resulting year inventory depreciation full for in the provisions increase and an 2004, fleet, in 737-200C purchased Boeing aircraft the of retirement planned the made were sales 2003. ticket in the 27.4% of to through 30.4% compared made 2004, site were In web sales 2003. Internet ticket in Alaska’s Group 43.0% through to Air to payments of compared Incentive 38.0% agents, commissions. 2004, travel and In traditional fees, consolidation. card in credit eliminated fees, are booking Horizon in increases by offset Horizon 2003. to compared 2004 in maintenance. aircraft routine versus maintenance heavy of mix the in change a and 2004 $1.26. to Our cents 2003. $0.91 over from 45.7%, 38.6% or increased million, gallon recorded $140.1 per gains increased cost hedge expense fuel hedge all fuel economic of including “economic” million After our of $25.2 income. year, inclusive realized non-operating the is also other during expense Alaska in fuel 2004, recorded aircraft During are in hedges. which increase settled gains, The from consumed. gains gallons of fuel million in $14.6 increase 5.2% 2003. a and and 2002 gallon in paid million fees $8.6 navigation by Mexico costs offset disputed 2004, partially of of costs, 2004 January security in in higher recovery began and the that contract from Harbor charter Dutch temporary to a services with flight associated provide to PenAir with agreement 32 Annual Report 33 ) employees, wages and payroll taxes,compensation partially accruals. offset by favorable reductions of medical and workers gallon, partially offset by ainclusive 7.4% of decrease $2.0 in million gallons of consumed.million gains The of from increase hedge settled in gains, hedges. aircraft which During fuelgains are the expense recorded recorded year, is during in Horizon the other also year, non-operating realized2003. our income. $3.4 Our “economic” After economic fuel including fuel expense all cost increased hedge per $15.1 gallon million, increased or 40.5% 30.1%, from over 93.5 centshours, to a 131.4 higher cents. number offewer routine aircraft maintenance covered activities by and warranty. engine overhauls for the Q200 fleet and and the addition of spare engines during 2004. rates associated with modest volume growth, an increase in airport fees and increased costs for security. Operating expenses increased $36.8 million, or 8.1%, as compared to the same period in 2003. Operating • Wages and benefits increased $3.4 million, or 2.1%, reflecting an increase• in the average number of Aircraft fuel increased $17.5 million, or 34.2%, due to a 45.0% increase in the GAAP fuel cost per • Aircraft maintenance expense increased $7.9 million, or 26.0%, primarily due to• an increase in block Aircraft rent increased $2.9 million, or 4.1%,• reflecting the annualization of aircraft Landing added fees during and 2003 other rentals increased $2.9 million, or 7.5%. Higher landing fees are a result of higher Net nonoperating income was $59.2 million in 2004 compared to $46.5 million in 2003. Interest income Fuel hedging gains include $28.6 million and $6.4 million in gains from settled fuel hedging contracts in The 2003 results include $71.4 million ($52.8 million for Alaska and $18.6 million for Horizon) received in Our consolidated effective income tax benefit rate for 2004 was 25.7% compared to an effective income tax significantly lower than native networkContract flying, revenue and and a higher decline yields inin in incentive an Horizon’s payments increase native from in network Alaska passenger combined for revenue with feed of the traffic. $45.0 increases million, in or traffic, 10.2%. Horizon resulted Air Expenses expenses per ASM including fuelexpenses and per the ASM impairment excluding charge fuel decreased2003. and 10.5% Operating the as expenses impairment compared in charge to 2004 decreased 2003.aircraft include 14.1% Operating and $3.4 as spare million compared engines related to to to theother lower an same significant the impairment period period-over-period carrying charge in changes value on in of our the these held-for-sale components assets F-28 of to operating their expenses estimated are fair as value. follows: Explanations of Consolidated Nonoperating Income (Expense increased $11.7 million due to apremium larger and marketable discount securities amortization portfolio on in ourincludes 2004 marketable $3.3 combined securities million with from portfolio a in the correction 2003.expense recovery of 2004 in (net interest 2004 of income of capitalized also disputed interest) Mexico increased navigation $4.7 fees million paid due in to 2002 increases and in 2003. debt Interest balances2004 as and compared 2003, to respectively. 2003. Incontracts, addition, net fuel-hedging of gains the include reclassification mark-to-marketmillion of gains in previously on 2004. recorded unsettled mark-to-market hedge gains for settled hedges, of $56.9 connection with the government reimbursementEmergency of Wartime security Supplemental fees Appropriations remitted Act. and carrier fees paid under the Consolidated Income Tax Benefit expense rate of 53.4% incosts, 2003. relative Due to to pre-tax the profit magnitudein or of the loss, nondeductible effective a expenses, tax relatively such rate. small as change employee in per pre-tax diem results can cause a significant change Annual Report otsgiiatasmtosi conigfrteMlaePa r ecie below. described The are expenses. Plan Plan Mileage Mileage the or for recognition accounting an revenue in therefore, of assumptions estimates; timing significant in and/or most significant inherent amount require uncertainties the that are impacts assumptions There assumption several formulate. incorrect on and based estimate computed to is judgment liability management The million. $466.8 of liability Horizon, airlines. or other Alaska on on flown flown and and issued issued awards The are for provided. awards revenue sales is when other-net the transportation revenue as of award passenger and majority the as a when recognized the parties, recognized are and third and proceeds liability to revenue awards deferred a sold deferred for recognize miles as therefore, we For recorded travel; partners, obligation. are future travel future proceeds this our this As provide or for partners. to Horizon expense alliance obligation Alaska, selling our an on either corresponding of have fly In any we who cash. or existence, passengers for Horizon, in by partner, Alaska, is earned card on Plan credit travel Mileage our for the as redeemed as such be long parties, may third miles to outstanding miles the sell case, we Additionally, partners. travel our Plan Mileage committee. audit our with have policies We these estimates. of accounting disclosure critical and under following selection results the development, different identified the materially have are discussed in We that result conditions. a those potentially and for as and assumptions Statements defined uncertainties, different Financial are and Consolidated estimates judgment to accounting significant judgments 1 Critical of and Note policies. reflective estimates See accounting make operations. significant to of our us results of requires and description statements position financial financial generally these our principles of affect accounting preparation that with The accordance U.S. in the prepared in been accepted have which statements, financial consolidated Estimates Accounting Critical 2004. “power-by-the-hour” late a in of party execution third the a not including with do program, agreement We maintenance maintenance tax). our engine after in million changes engine ($90.4 of and pre-tax the because airframe million adopting information capitalized $144.7 of previously of effect our charge the of a disclosing value in believe book resulting net aircraft the all also off for We wrote overhauls visits. we maintenance 2005, frequent, 1, more January but effective shorter, on for more the program focuses that maintenance now believe approved airframes our our Additionally, of activities. majority maintenance the in allocations the repair or versus overhaul overhaul the of life the of the shorter the the Under over term. expense lease maintenance remaining to amortized and capitalized were the from Policy Accounting in Change 1 ietexpense direct h ubro ie htwl o erdee o travel: for redeemed be not will that miles of number The . n te atr.W eiv u raaeasmtosaeraoal.Ahpteia .%cag nour in change 1.0% hypothetical A balances, reasonable. liability account are a accounts, assumptions record members’ breakage not our our do in believe and activity We miles (“breakage”), consider factors. the used breakage other and be of and accounts never estimates Plan will Our Mileage miles miles. of many those number how for the estimate on we based accounts, Therefore, the travel. in for redeemed be always not aggregate an in resulting outstanding, miles billion 95 approximately had we 2005, 31, December At and Horizon or Alaska on fly who passengers member to miles awards program loyalty Plan Mileage Our our upon based is operations of results and position financial our of analysis and discussion The overhauls engine and airframe major for accounting of method our changed we 2005, 1, January Effective aiaieadamortize and capitalize ebr a o ec h ieg hehl eesr o retce n usadn ie may miles outstanding and ticket free a for necessary threshold mileage the reach not may Members ietexpense direct ehdi rfrbebcuei lmntstejdmn n siainnee odetermine to needed estimation and judgment the eliminates it because preferable is method ehdi h rdmnn ehdue ntearieidsr.Accordingly, industry. airline the in used method predominant the is method ietexpense direct ehdt the to method ietexpense direct ietexpense direct ehd vralcssaeepne sicre.W eiv that believe We incurred. as expensed are costs overhaul method, 34 ehdo e noefr20 rvdsmeaningful provides 2005 for income net on method ehd ne h omrmto,teecosts these method, former the Under method. Annual Report 35 We estimate how many miles will be used per award. If actual miles used are more or less than estimated, When the frequent flyer travels on his or her award ticket, incremental costs such as food, fuel and The cost for Alaska or Horizon to carry an award passenger is typically lower than the cost we will pay We defer an amount that represents our estimate of the fair value of a free travel award by looking to estimate of breakage (currently 12%liability. in However, the actual aggregate) breakage has could approximatelythe differ a program significantly $5.2 and from million our our affect inability estimates on to given the predict the our dynamic members’ nature future of behavior. we may need to adjust therequirements liability in and our corresponding Mileage expense. Plan Our program estimates and are historical based redemptions on on the Alaska, current Horizon or other airlines. insurance are incurred to carrycontribution that to passenger. overhead We and estimate profit) whataward and these ticket, accrue costs we a will often liability. be must If (excludingon pay the any negotiated the passenger agreements other travels and airline on are for anotherpassenger. often carrying airline We substantially the on estimate higher passenger. an how than The much the otherredemptions we costs airline and will we costs settlements pay would are with to incur based other other toincurred carriers airlines carry by and for that us accrue future or a travel paid liability awardsaccrued, to accordingly. based and other The on therefore airlines costs historical we may actually may be need higher to or adjust lower our than liability the and costs recognizeThe that a number were corresponding of estimated expense. awards and redeemed for travel on Alaska or Horizon versusto other other airlines: airlines. We estimateother the airlines number and of accrue awards the whichnumber costs will of on be awards this redeemed redeemed based on on on Alaskaliability other our or and airlines estimate Horizon corresponding is of versus expense. higher historical or redemption lower patterns. than If estimated, the we may needThe to rate adjust at our which we defer sales proceeds from sold miles: the sales prices of comparablein paid more travel. or As less fare recognition levels of change, cash our proceeds deferral in rate anyWe changes, given review which quarter. Mileage may Plan result estimates each quarter, and change our assumptions if facts and circumstances We account for the defined benefit pension plans using SFAS No. 87, “Employer’s Accounting for The calculation of pension expense and the corresponding liability requires the use of a number of important . The number of miles used per award (i.e., free ticket): . The costs that will be incurred to provide travel: 2 3 4. 5. indicate that a change isfinancial necessary. position Any and such results change of in operations. assumptions could have a significant effectPension on Plans our Pensions.” Under SFAS No. 87,service pension periods. expense Pension is expense recognized calculated onrequirements. under an We SFAS accrual recognized No. basis expense 87 over for is employees’million, our generally approximate and qualified independent $73.5 defined-benefit of million pension funding in plans decisions 2005, of or 2004, $71.7 and million, 2003, $78.3 respectively. assumptions, including the expected long-term ratein these of assumptions return can on result plan assets infrom different and these the expense assumptions. assumed and At discount liability December amounts, rate. 31,totaled and Changes 2005, $680.9 future the million. actual fair We experience anticipate value can making of differ a our cash qualified contribution defined-benefit of pension approximately plan $50 assets million during 2006. Annual Report obndntbo au fapoiaey$0 ilo n ebleetecretmre au si h range the in is a value have market MD-80s current owned the 15 believe million. our we $80 other 2005, and to by 31, million million changes December $205 $50 fleet of approximately on of and As of dependent market carriers. value highly the other book is in by net and available aircraft combined fluctuates aircraft those aircraft of for charge MD-80 number demand impairment of the carrying and an value including the airlines as market control, as recognized The our aircraft be made. of MD-80 would is out owned loss decision factors 15 This such our value. fleet any MD-80 of market this when leased disposal current exit and 11 upon the to if our loss exceeds decision for a aircraft a lessors incur those make to would of we payments we option value If termination that this Directors. lease believe at of substantial we closely Board make and look our to aircraft to with have expect it likely we discuss would made, and we been 2006 type, has of decision quarter no first Although the future. during the in fleet MD-80 our losses flow cash operating and condition, assets asset. long-lived long-lived regarding the the decisions in of management change use are assets, significant the but long-lived a with include, the assets, associated impairment of the the potential value of on indicating market use based Factors the future impairment generate. in the for they decreases potential flows significant the cash to, assets, and the limited the assets, and not of the assets lives of the useful values of expected residual value the expected fair about the estimates plans, make fleet we in assets, changes long-lived these for accounting In Assets Long-lived expected is draft on exposure based The status Obligation. unfunded Benefit to the Accumulated 2006. charge recognize the March significant to than in a required rather 2006. in be Obligation 31, result will Benefit December likely we Projected at will as the effective benefits income be postretirement comprehensive would and other postretirement this pension accumulated other us, for our and For accounting pension 2006. the of 15, in status December change unfunded after This full ending the years of for recognition plans sheet benefit balance require would that draft what predict cannot We liabilities. and future. expense the pension in future be our will impact factors will these plans pension our in participants pension future impact could change such Any groups. liabilities. labor pension other and for expense plans benefit defined the restructure by million. 2005 $8.0 31, approximately December by at expense obligation pension discount benefit 2006 the accumulated estimated Decreasing our increase bonds. increase and discount long-term would million The quality 5.00%) $56.7 respectively. high to approximately 2004, on 5.50% and earned (from 2005 rates 0.5% 31, current by December the rate at on 5.75% based and determined 5.50% is of rate rate a using obligations pension million. $3.6 approximately by 0.5% expense and by pension U.S. return 2006 of of estimated allocation rate our an long-term increase on expected would based the 7.25%) is Decreasing to 2005 securities. 7.75% 31, income (from December fixed at U.S. This assets and appropriate. plan equities considered on non-U.S. as return regularly investments of by We rebalance rate developed assumptions. periodically long-term was inflation and is expected and long-term allocation rate expense, as asset This pension well actual 7.75%. 2005 as the of the economists review return for and of used consultants rate 8.0% from long-term of input a rate evaluating generate assumed will the assets than plan lower pension slightly the that estimate we 2006, eso xes nrae steepce aeo euno eso lnast erae.A fJnay1, January of As decreases. assets plan pension on return of rate expected the as increases expense Pension spr forsmlfcto n ntcs euto ntaie,w a ekt ceeaetertrmn of retirement the accelerate to seek may we initiatives, reduction cost unit and simplification our of part As assets. related and equipment and property of billion $2.0 approximately had we 2005, 31, December of As exposure an on work to began Board Standards Accounting Financial the 2005, 31, December to Subsequent the to related factors other various and rates discount assumed returns, asset plan in changes Future to working are We 2003. in entrants new to closed was personnel management for plan benefit defined The future discounted We reduced. is rate discount the as increase expense pension future and liability Pension 36 Annual Report Change 285.0989.6664.8 89.7 (20.5) 162.8 2004 60%:40% NA 78%:22% NA $ 873.9 $108.7 $ 24.51 $ 0.23 December 31, debt-to-capital amounts) 374.7 969.1 827.6 (In millions, except per share and 2005 54%:46% 73%:27% $ 982.6 $ 24.74 December 31, ...... 37 we have evaluated whether it is more likely than not that the ...... “Accounting for Income Taxes,” During the year ended December 31, 2005, our cash and marketable securities increased $108.7 million to The table below presents the major indicators of financial condition and liquidity. In 2003 and 2004, due to volatile economic conditions and indications of declining aircraft market values, There is inherent risk in estimating the future cash flows used in the impairment test. If cash flows do not The Company uses a combination of insurance and self-insurance mechanisms to provide for workers The Company has a net deferred tax liability of $64.6 million at December 31, 2005, which includes gross capitalized at seven times annualized rent Cash and marketable securities Working capital Long-term debt and capital leaseShareholders’ obligations, equity net of current portion Book value per common share Long-term debt-to-capital Long-term debt-to-capital assuming aircraft operating leases are $982.6 million. This increase reflectsby cash financing provided activities by of operating $254.8 activities5.7 million of million resulting $271.9 shares primarily million of from and our $200.0 cashand common million provided equipment stock in additions, and net net a proceeds of large fromand aircraft volume the net deposit of sale purchases returns option of of and exercises, marketable proceeds offset securities from by of asset cash $63.1 dispositions, used million. of for $410.4 property million deferred tax assets will bethan realized. not Based that on those the assets availableDecember would evidence, 31, be we 2005. realizable have Our and concluded conclusion thus thatdifferences is no it and based valuation is does on allowance more not the has likely rely expected beento on future recorded realize future reversals as the taxable of of net income. existing operating Should taxablethe loss we temporary need carryforwards incur for may additional a be losses valuation subject in allowance to the during greater future, each uncertainty. our future We ability reporting will period. Liquidity continue and to Capital reassess Resources we evaluated whether the book“Accounting value for of the our Impairment aircraft or wasresults Disposal impaired of of in the Long-Lived accordance evaluations Assets.” with except No SFASspare as impairment No. engines related was 144, in to necessary 2004. the based See B737-200C on Note fleet the 14 and in Horizon’s the idle Consolidated Fokker Financial F-28 Statements aircraft for and furthermaterialize discussion. as estimated, there isimpairment a charges risk may the be impairment necessary charges in recognized the to future. date may beWorkers inaccurate, Compensation or and further Employee Health Care Accruals compensation claims and employee healththe care Company benefits. are Liabilities not associated discounted withoutside and the expertise, are risks severity estimated, that factors in are and part, retainedcould other by be by actuarial considering significantly assumptions. historical affected The claims if estimated experiencetrends. future accruals and Our occurrences for workers and these compensation claims liabilities and differ2005, employee from compared health these to care assumptions $29.7 accruals and million totaled historical at $34.4 December million 31, at 2004. December 31, Realizability of Deferred Tax Assets deferred tax assets of $423.7SFAS million No. offset 109, by a gross deferred tax liability of $488.3 million. In accordance with Annual Report r-eieypyet hogot20 n eoduigti aiiy so eebr3,20,$38million $73.8 2005, 31, additional December fund of of to As delivery expect facility. takes We this Alaska aircraft. using outstanding. that those beyond was time on and the financing 2006 at debt throughout repaid long-term payments be from pre-delivery amounts will proceeds Any principal and using margin. The aircraft likely specified agreement. specified aircraft, a purchase to the plus Boeing relate LIBOR the facility one-month under the facility on rights on The based Alaska’s outstanding agreement. is by new purchase rate secured 38 aircraft interest be to current The will up the 2009. borrowings of under 31, purchase orders) August Alaska’s firm on of are expire requirements which will funding of pre-delivery (23 the aircraft of 737-800 portion Boeing a provide to lenders of discussion. further Facility borrow for Payment to Statements Pre-delivery plans Financial immediate Consolidated no the has in Company 5 the Note and See facility facility. credit credit this this on using borrowings outstanding no are there 2003. Facility in Credit issued of 2023 Line through due Bank due notes payments convertible interest senior Q400s. collateralize rate the to floating on intended million financing is $150 the which our negotiating million, on currently $4.1 2006 financing are of March debt and cash have deliveries restricted We B737-800 have financing. 2006 also debt firm We additional our funding and of pre-delivery aircraft, all proceeds our B737-800 for with with new arranged along assistance of million, provide purchase $982.6 to the totaling used on 2005 facility requirements 31, payment December pre-delivery at new hand our on from securities marketable and cash and $54.2 of payments debt long-term normal 15 by of offset term issuances were a Debt period has below. the and discussed during million. equipment facility stock flight payment common by pre-delivery from secured its proceeds Horizon is against and fees. which million of professional million, $73.8 shares and $20.0 borrowed million discounts of Alaska 5.7 underwriting 2005 years. issued of during we net issuance 2005, million, debt of $200.0 one quarter of had fourth proceeds the for In stock 2004. common during our million $106.9 of activities financing Activities aircraft. Financing new in) several (Used of by delivery Provided $400 take Cash which we (of as million 2006 $510 in approximately related) be new-aircraft accounting to be maintenance expenditures to our capital expected under expect is incurred We million expenditures as date. capital expensed that as have are on well longer activities adopted as no maintenance policy aircraft, we those 737-800 2005, as Boeing 1, overhauls 35 January to purchase acquire of related aircraft to As the 2005 payments. to of pre-delivery related quarter scheduled million second additional million $101.2 the $255.3 of during increased payment into dispositions, net entered related asset the commitment aircraft from reflecting our proceeds primarily 2005, and 2004, During returns to equipment dispositions. deposit compared and asset aircraft property from of for proceeds net million and expenditures, $410.4 returns capital and deposit securities aircraft marketable of of net million additions, $63.1 of purchases net had Activities in Investing refund year. in tax current Used million the Cash $42.7 in a revenues severance, improved for by made offset payments costs, cash fuel the higher to significantly largely and due 2004, is decrease The 2004. during Activities Operating by Provided Cash nOtbr1,20,Aak iaie 12mlinvral-aervligla aiiywt syndicate a with facility loan revolving variable-rate million $172 a finalized Alaska 2005, 19, October On 2005, 31, December of As 2008. March in expires that facility credit variable-rate million $160 a has Alaska operations from funds generated internally through commitments operating and capital our meet to plan We in used cash net to compared 2005 during million $254.8 was activities financing by provided cash Net We 2004. in million $392.0 to compared 2005, during million $481.1 was activities investing in used Cash million $334.0 to compared million, $271.9 was activities operating by provided cash net 2005, During 38 Annual Report Total 2010 Beyond 2010 2009 2008 Delivery Period—Firm Orders 85363 35 ————— 1 2007 39 2006 $380.6 $328.1 $160.2 $126.6 $133.6 $44.4 $1,173.5 ...... 1 ...... 2 10 — — — — 12 ...... 10 ...... 13 18 5 3 6 3 48 The CRJ700 was delivered in January 2006 and was paid for with cash on hand. The two Q-400 aircraft will In 2003, Alaska Air Group completed the private placement of $150.0 million of floating rateAs senior noted in Note 5 of the Consolidated Financial Statements, where these Notes are discussed further, we We received a $9.7 million credit toward our purchase deposits related to the aircraft purchase agreement At December 31, 2005, we had firm orders for 48 firm aircraft purchase orders requiring aggregate The following table summarizes aircraft purchase commitments and payments by year, as of December 31, Payments (Millions) be delivered in December 2006delivered and throughout financing 2006 has beginning not in yetbeen February. been arranged. Financing determined. In for The addition all 10 to of B737-800B737-800 the the aircraft aircraft 10 2006 are that firm B737-800 to will orders aircraft be be noted deliveriesscheduled delivered above, has for in Alaska delivery November has in and lease 2006 December agreements was of in delivered 2006. place in Our for February first two and B737-800 was aircraft financed with $31.5 million of fixed-rate debt. Aircraft Boeing 737-800 Total Bombardier Q-400 Bombardier CRJ700 Convertible Notes convertible notes due in 2023 (the Notes). have the option of callingpossible the that Notes we in would March call 2006.Notes, the Based we Notes on have at the not that recent yet time. marketWe determined However, price anticipate how no of that each decision our these payment has common payments of beenpayments stock, will principal made. from it be or If our is funded interest we subsidiaries either due do or by willpayments not through dividends, be by call new distributions, funded our the borrowings loans, in subsidiaries or advances the to financings or future. Air by other Group Alaska could Air be Group. subject Any to such statutorySupplemental or Disclosure contractual of restrictions. Noncash Investing and Financing Activities entered into during the secondincluded quarter in of other 2005. liabilities This on credit our was consolidated recorded balance as sheet additional and purchase will deposits be andContractual applied is Obligations, to Commitments future and aircraft Off-Balance upon Sheet delivery. Arrangements Aircraft Purchase Commitments payments of approximately $1,173.5 million,lease as agreement set with forth a below. third Inacquire party addition, 35 to Alaska additional take has B737s delivery entered and of into17 purchase two an CRJ700s. rights B737-800 operating Subsequent for aircraft to 30 in year-end, more, latethree Alaska and 2006. additional converted Horizon Alaska B737-800s one had had to option options options be and toagreements to delivered two acquire for in purchase 20 two 2007 rights Q400s used and into and Q400 2008. firmthese aircraft Additionally, orders two to Horizon for aircraft be executed was delivered purchase approximately inthe $21.0 February extent million. or exercised, Alaska March the and of option Horizon 2006. aircraft expect Total with to purchase leases, finance price long-term the for debt firm or orders internally and generated to cash. 2005: Annual Report Total (3) obligations purchase Other (2) obligations Interest commitments purchase Aircraft (1) commitments lease Operating the of portions long-term and Current lease capital and debt long-term and Current 2009. we millions) through which (in year plans, per pension million various $70 our to to million contributions $50 excludes approximately table be other This to and 2005. expect commitments 31, purchase December aircraft of commitments, as lease obligations operating obligations, lease capital obligations, Obligations Contractual 05adhshdn infcn mato u iaca oiin eut foeain rcs flows. cash or operations of of quarter results fourth position, the financial in our adopted on was to 47 impact information FIN significant sufficient obligation. no have retirement liability’s had would asset the has entity an and if an 2005 of incurred when when value clarifies obligation fair also retirement the 47 asset estimate FIN reasonably conditional estimated. required a reasonably is of be entity can value an value fair that fair the clarifies for 47 liability FIN a 143.” recognize No. to Statement FASB of interpretation Obligations—an Retirement been historically not has pre-tax that a compensation on stock-based year for operations. per be of million will statements $9 million our to $5 in million to recorded $7 million compensation approximately $3 stock-based be which the our will of in expect 123R, basis, recognized we SFAS are adopted, under amounts Once measured prospective disclosed. as and being expense, unvested 123R simply but SFAS of awarded with instead previously accordance statement 1, whereby in income January adoption for effective upon accounted was method” are amortize 123R prospective awards to SFAS “modified equity intend method. the we straight-line use and the will provisions, using our We at vesting period to 2006. stock ratable service and purchase with the employees to granted over to employees typically cost grant allows are compensation we and options that provision Our as options look-back discount. employees stock a 15% to to features a issued both which compensation apply Plan, based will Purchase to equity standard Stock companies other new Employee requires and This standard options date. new stock grant The of the 95.” value of and fair 123 the Nos. expense SFAS as of recognize Amendment An Payment: Based “Share Standards Accounting New agreement. 31, maintenance December power-by-the-hour of long-term as our effect under in obligations rates Includes interest using above (3) shown are and obligations November future in debt, delivered variable-rate be For will that aircraft (2) B737-800 for agreements lease aircraft two Includes (1) nlds$5 ilo eae oteCmayssno ovril oe u n22.Hleso hs Notes these of Holders 2023. in due notes convertible senior Company’s the to related million $150 Includes * r-eieypyetfacility payment pre-delivery facility) payment pre-delivery the (excluding obligations a eur h opn oprhs l raprino hi oe,fraprhs rc qa oprincipal to equal price purchase a for Notes, their of 5 portion the a on or interest, all accrued purchase plus to Company the require may debt long-term and current under payments principal our of summary a provides table following The nMrh20,teFS sudItrrtto o 7(I 7,“conigfrCniinlAsset Conditional for “Accounting 47), (FIN 47 No. Interpretation issued FASB the 2005, March In 123R, SFAS issued (FASB) Board Standards Accounting Financial the 2004, of quarter fourth the During 2005. Consolidated the in 2006. 5 of Note December See agreement. the in defined as event, tax or Statements. control Financial in change a of occurrence ...... $ ...... th ,10 th n 15 and , th niesre fteisac fteNts ruo the upon or Notes, the of issuance the of anniversaries 808$3. 520$7. 452$,8. $4,877.7 $1,783.5 $485.2 $478.1 $532.0 $738.1 $860.8 8. 2. 6. 2. 3. 441,173.5 44.4 1,969.8 826.5 133.6 209.2 126.6 208.8 160.2 224.2 328.1 233.8 380.6 267.3 2006 912. 973. 03142272.7 73.8 379.1 124.2 105.8 — 30.3 39.7 30.0 44.4 — 29.7 53.0 29.4 — 65.9 29.1 $1,008.8 682.6 — 70.3 $ 72.4 $ 19.0 68.3 $ 64.9 54.8 $ 61.9 $ 58.7 40 2007 2008 2009 2010 Beyond 2010* Total Annual Report 41 In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections—a replacement In June 2005, the Emerging Issues Task Force (“EITF”) reached a consensus on EITF Issue No. 05-6, In March 2004, the EITF reached a consensus on EITF Issue No. 03-1, “The Meaning of Other-Than- Inflation and price changes other than for aircraft fuel do not have a significant effect on our operating of APB Opinion No. 20application and as FASB the Statement required No. method 3”pronouncement for (“SFAS includes reporting No. specific a 154”). transition change SFAS provisions. in No.amortization SFAS 154 accounting or No. requires principle, depletion 154 retrospective unless method also impracticable for requires orestimate long-lived, that a effected nonfinancial a by assets change a be in change accounted depreciation, Opinion in for No. accounting as 20, principle. a “Accounting This change Changes,” statement inestimate. for carries accounting SFAS the forward No. reporting the 154 of guidance is the insignificant effective correction APB impact beginning of on January an our 1, error financial 2006. and position, SFAS a results No. change of 154 in operations is accounting or not cash expected flows. to have a “Determining the Amortization Period forin Leasehold a Improvements Business Purchased Combination” after (“EITF Leaseservice 05-6”). Inception significantly EITF or after 05-6 Acquired and requires not thatshorter contemplated leasehold of at improvements the or that useful near are life the placedto of beginning in be the of reasonably assets the assured or lease at a termfourth the term be quarter date that amortized of the includes over 2005. leasehold required the EITF improvements leaseoperations 05-6 are periods or did purchased. and cash not EITF renewals flows. have 05-6 that a was are significant adopted deemed impact in on the our financial position, results of Temporary Impairment and Its Applicationthree-step to model Certain for Investments,” determining (EITF whether 03-1).disclosures an The about investment guidance unrealized is prescribes losses other-than-temporarily a on impairedperiods investments. and beginning The requires after accounting June guidance 15, becameperiods 2004, effective ending while for after the reporting June disclosure 15, requirements“Effective 2004. became Date In effective of September for Paragraphs 2004, annual 10-20 the reporting Impairment of FASB and EITF issued Its Issue FASB Application No. Staff to 03-1, Positioneffective Certain “The EITF date Investments, Meaning 03-1-1, for “(FSP of the EITF Other-Than-Temporary measurement 03-01-1).November and FSP 2005, recognition EITF the guidance 03-01-1 FASB contained delayed issued in the Impairment FSP paragraphs and FAS 10-20 Its 115-1 of Application and EITF to FAS 03-01.investment Certain 124-1, In is Investments.” “The considered This Meaning impaired, FSP of whether addresses Other-Than-Temporary impairment the the loss. impairment determination This is as statement other to specifically than whenreferences nullifies temporary an existing the and other-than-temporary requirements the impairment of measurement guidance. paragraphsreporting of The 10-18 an periods guidance of beginning under EITF after this 03-1 December FSPthe and 15, is Company’s 2005. effective marketable At for securities December portfolio 31,Other had 2005, Accumulated unrealized available-for-sale Comprehensive losses investments Income. totaling in Management $3.9losses does million as not which of believe are December that recorded 31, the in guidance. 2005 securities meet with the unrealized criteria for recognizing the loss under existing other-than-temporary Effect of Inflation and Price Changes revenues, operating expenses and operating income. Annual Report hrae ihrfe rcso h utimn fshdldsriecudrsl.W a eual ooffset to supply unable fuel be a may fares. the of We higher fuel, event result. through of the could fuel availability In service of and certainty. scheduled price price of of the the degree curtailment in on any the in increases events with or result these predicted prices could of be fuel and any cannot higher fuel of fuel shortage, jet effect of or the availability oil of future or crude Because and areas of fuel. cost producing availability of oil or cost in production the conflicts the in natural other in increases including or reductions is events hostilities in and various and result shortage addition, Rita, could and In and elsewhere, surplus gasoline. Katrina market and hurricanes of oil as periods heating such to home disasters, subject both also for is demand availability by Fuel affected demand. and supply and annually. issues million $4.0 approximately in by increase expenses one-cent fuel a our that increases our estimate fuel harm we of would trends, gallon increases historical per Further on price operations. Based economic fuel of operations. our in results of increases our results Significant impacted and respectively. negatively condition 2004, have financial and 2005 2005 and 31, 2004 December during ended costs years business. the our for harm expenses would operating costs fuel high jet current in the increases to Further exposed fuel. substantially jet are of operations variability of and results prices and condition, financial and business, competition Our increase will which serve, currently will we operations. airlines pairs of Other city results Mexico. the our in of affect serve some negatively we on potentially cities service to add levels to service seek authorized likely expand amendments The service. air travelers business as industry the to competition travel. the of air reduce dimension for may new substitutes communication a lower-cost for electronic add seek desire of and the methods communication limit other in-person may and for advancements teleconferencing need technology video addition, example, In For automobiles. travel. or air trains buses, as such effectively alternatives, compete serve. to we unable that be markets may the We in markets. fares our discounted in or both, service from or introduce chosen fares, that have their airlines competitors reduce other these service, against costs of add operating Some to lower agreements. time have financing to customer could and time enhance bankruptcy supply and of labor, flows out renegotiated cash reorganize from court maintain successfully derived bankruptcy to who under order competitors operating in addition, resources are discounts In financial Others fare loyalty. greater company. substantial significantly our institute have than may on and costs and airlines larger operating protection other are lower adversely more airlines or may or these recognition which one of name decline, with Many and to compete routes. fares currently our cause We of fares. could operations. all increased this of substantially towards future, results trend the and a in business and capacity our capacity their affect the industry increase and reduced to routes in decide reduced resulted to airlines have has If costs airlines which nominal Recently, available, only seats. planes incur unsold of airlines otherwise number because occupying discounting passengers price to to service susceptible provide particularly is industry The service. changes. rapidly markets adjust our to in or competition compete costs, of to operating nature unable lower the be or event may resources the We financial in change. greater enough rapid with to airlines subject other and against competitive effectively highly is industry airline The decline. also could stock common our of price trading the case, such FACTORS RISK itrcly ulcsshv enupeitbeadsbett iepiefutain ae ngeopolitical on based fluctuations price wide to subject and unpredictable been have costs fuel Historically, total of 19% and 24% comprising expenses, operating total our of portion significant a constitute costs Fuel commercial to relating agreement bilateral their amended recently Mexico and States United the addition, In transportation ground from competition faces also airlines, regional particularly industry, airline The and routes benefits, flyer frequent frequency, flight fares, to as competitive highly is industry airline The In suffer. could operations of results and condition financial business, our occurs, following the of any If 42 Annual Report 43 We utilize fuel hedges as a form of insurance against the volatility of fuel prices. To manage the risk of fuel We, along with other airlines, have announced aggressive cost reduction goals that are an important part of In each year since 2000, we have incurred operating losses. For the year ended December 31, 2005, we In addition, our quarterly operating results can fluctuate substantially due to a variety of factors including We have and will continue to have for the foreseeable future a significant amount of indebtedness. Due to price increases, we have entereddesignated into per-barrel swap oil agreements prices. and Even purchasedjet with call fuel hedges, options costs we that since are cap the substantially ourThis amount and fuel means of increasingly costs that hedged exposed at even consumption to if declines increasesharming fuel and in our prices the business stay price and at at results current whichhigher of levels, we fares. operations, our are unless economic hedged we fuel increases. are cost able will to increase offset in these future higher years, fuel pricesIf through we are unable to meet our cost reduction goals, our financialour condition business may strategy suffer. of offeringachieving the acceptable best profit value margins to and passengerspositions return through us on competitive to capital. fares be We while able believe atoperating to having the costs grow a same were our lower time slightly business cost higher and structureare year take better unable over advantage to year, of further and market reduce we opportunities.our our expect For financial non-fuel those 2005, results unit costs our may costs, to non-fuel suffer. we decline would somewhat likely in not 2006. be If able we to achieveWe our have growth incurred plan operating and lossesaddition, in our each quarterly year results since can 2000 fluctuate and substantially. may incur operating losses in theincurred future. an In operating loss of$17.5 $7.4 million million, for and the prior years toconsidering ended that the December we benefit 31, incurred from 2004 operating fuel and losses(expense), hedges 2003, of we that respectively. $79.8 would settled However, million have during in and had the 2005,hinder an period when our operating that ability profit are to of included honor $104.8 inor our million. nonoperating to existing The income do obligations inability so as to on they sustain commercial become profitability terms, due, may and to to obtain sustain future and equity expand or our debt business. financing seasonal variations in traffic, theflight timing do of not various vary expenditures, significantly andpassengers with weather. or the Because in number expenses pricing of of has passengers ana a carried, aircraft minor disproportionate a shortfall effect relatively in on small expected an changeoperations. revenue airline’s in Due levels operating the to could and number these cause financial of factors, a results.comparisons as disproportionately Accordingly, of well negative our as impact results other on may risk ourany not factors results future be described of quarter good in our indicators this operating of prospectus,analyses results our quarter-to-quarter regarding could future our be performance. company. below In In expectations addition,substantially. that of it event, investors is the and possible price any that of published in Air reports Group’s or common stock could decline, perhaps Our indebtedness and other fixedour obligations activities. could increase the volatility of earnings and otherwise restrict our high fixed costs, includingdisproportionately aircraft greater lease decrease commitments in and earnings. debt$1 As service, billion of a of both decrease indebtedness December in outstanding, 31, revenuesflight approximately 2005 results equipment $859 and in and million 2004, a real and we property. $892 hadunder In million approximately operating addition of leases to which related long-term was to debt, securedDecember our we by 31, aircraft, have 2005, airport significant future terminal other minimum space, fixedremaining lease other obligations terms payments airport in under facilities excess noncancelable and of operatingof office one leases $1 space. year with billion As were initial for of approximately or the $934 years million thereafter. for 2006 through 2009 and an aggregate Annual Report akt,etbihnwmreso nraeorfih oncinopruiis n u alr od ocould so do to existing failure our our expand and successfully opportunities, to connection able flight business. be our to our will increase ability harm we or our that markets affect you new negatively assure also establish or may cannot will personnel markets, cost-effectively We Expansion skilled and strategy. grow. retain efficiently growth to and facilities our ability hire and our achieve our to equipment delay constrain inability required or will Our the limit future facilities. secure deny, the and to would in equipment that serve personnel, geographic condition to skilled targeted Any seek additional our strategy. or require in cost serve the located our we Increasing airports with airports airports. suitable consistent to these access is access to to that flights ability manner our our a operational of on to in other frequency depends and markets and the serve scale gates increase we of additional to markets economies obtain order of attain to in number to need airports business may key our We our for operations. at order of facilities opportunities. in results connection strategy our flight growth improve increasing our or and achieve sustain markets we new that into critical expanding is serve, It currently we markets to flights business. our harm could strategy growth Alaska’s plans. implement growth successfully our to result impair failure or would Our balances which cash aircraft, our of on delivery when effect take do available adverse to to be material inability able will a our be financing have or not additional could in may that financing delays we guarantee the in which no secure to financing, be to intend secure can inability we must There Our which we all. required. aircraft, fleet, at remaining our or the grow terms, of to acceptable purchase and on the aircraft complete retiring To replace aircraft. to those do, of portion a aircraft. for new financing our for financing secure or obtain to able be not may our We refinance could we that We or strategy. timely all. growth or at our successful if pursue be terms, may to would acceptable we ability efforts on debt, our renegotiation obligations additional restrict our or with may unable that obligations activities that are you those our covenants we assure renegotiate finance other If cannot to we and harmed. forced extent financial be be the to could could To and subject business we financing. debt become our obligations, debt our so fixed or pay do other equity to to and additional operations fail debt obtain our we our from if on flow and payments cash due, make We sufficient become to control. generate they our to as beyond able obligations are be fixed conditions which will other political of we and many that economic factors, you prevailing other assure on and cannot depend business will regulatory, turn competitive, in financial, which and flow, cash and performance operating could: are they we if and equipment other incur and will aircraft We new 2006. of markets. in delivery new delivered take into be we expand to as to aircraft obligations able two fixed for other commitments and lease debt operating additional had also We 2011. through so eebr3,20,w a omtet oaig$. ilo oprhs 8adtoa aircraft additional 48 purchase to billion $1.2 totaling commitments had we 2005, 31, December of As lsasgot taeyivle digadtoa oig7780arrf,icesn h rqec of frequency the increasing aircraft, 737-800 Boeing additional adding involves strategy growth Alaska’s secured have We 2011. through aircraft new 48 purchase to commitments had we 2005, 31, December of As future our on depend will obligations fixed other and debt our on payments changing scheduled to make responding to in ability flexibility Our our reduce and pressures interest competitive and withstand payments to lease ability fund our to limit flow cash operating our of • portion material a dedicate to expenditures, us capital require strategy, growth our funding for • financing additional obtain to ability our limit example, • For consequences. important have could obligations fixed other and indebtedness outstanding Our uiesadeooi odtos nldn ecigt n cnmcsodw ntearieindustry. airline the in slowdown economic any to reacting including conditions, economic and business and purposes, other for available funds reducing thereby indebtedness, on payments purposes, other or capital working acquisitions, 44 Annual Report 45 Growth of our fleet and expansion of our markets and services may also strain our existing management Alaska currently operates a fleet of 84 Boeing 737 aircraft and 26 MD-80 aircraft. The MD-80 aircraft have Although no decision has been made, as part of our simplification and unit cost reduction initiatives, we Alaska is required to comply with specific financial covenants in certain agreements. For example, on In the past, Air Group’s credit ratings were downgraded by both S&P and Moody’s. We cannot be assured resources and systems to themake point significant that expenditures they in may these noour areas. longer systems We be and cannot adequate infrastructure assure to on you support a that our timely we operations, basis, will requiring and be us the able to failure to to sufficientlyA do develop significant so change could to harm our our fleet business. could negatively affect our financial performance. an average age of nearlyaircraft, 14 which years, are the scheduled longest to ofcosts, be any consume retired of more by our fuel the fleet and end typeshaving have of with a lower 2007. the mixed reliability Generally, exception fleet and older of of customer aircraftcosts, the MD-80 acceptance have and B737-200C and than higher drives B737 newer maintenance the aircraft aircraft. need adds In for operational addition, more complexity, inventory results parts. in higher crew and training may seek to accelerate theduring retirement the of first our quarter MD-80 of fleettype, 2006 in we and the would discuss future. likely it We have with expectaircraft, to our to which make Board look could substantial of closely negatively lease Directors. at impact termination Ifloss this our payments we upon option financial to make disposal performance. lessors a of In of decision owned addition, thevalue. to MD-80 we 11 This exit aircraft believe leased loss this as that MD-80 would fleet the we be carrying wouldthus recognized value incur have as of a an an those adverse impairment aircraft impact charge exceedshighly on if the dependent our and current on shareholders’ when market factors equity. any out The suchchanges of market decision by our value is other control, of made airlines including MD-80 and and the aircraftowned would demand number fluctuates MD-80s for of and have those aircraft is a aircraft available combined by in net other the book carriers. market value As and of of fleet approximately December $205 31, million. 2005,If our Alaska 15 fails to comply with financial covenants, some of its financingMarch agreements 25, may 2005, be Alaska terminated. enteredfinancial into covenants a such $160 as million a revolvingworth minimum credit covenant, level facility, and of which a net contains minimum worth certainable level covenant, restrictive to of a comply fixed maximum with charge level these coverage ofour covenants covenant. debt future or We and operations provisions cannot leases or or ensure to capital that thatprovisions net needs. these Alaska could Alaska’s requirements will result inability will be in to not default comply limitAlaska’s under with our other these the ability financing financing required to agreements. agreements financial finance In and covenantsdefault, the could or all event result amounts of in outstanding any a under such crossAlaska the default default did agreements and under not could our have be inability sufficient declared toAlaska available to obtain would cash be a have to immediately waiver to pay due of seek all andor the additional amounts payable. at debt that If all. or became If equity due such financing, andrequired financing which payable, to were may Air make not not Group accelerated available, be or payments Alaska availableour or would on business. risk have acceptable its to terms, aircraft sell becoming assets subject in to order repossession, to which obtain could the harm funds A downgrade in our corporateinterest credit or rating principal may payments indicate on a our decline outstanding in debt. our business and in ourthat ability our to corporate make credit ratingsdecline will in not our decline business in and themay may future. make affect If additional the any borrowing trading of more prices, our expensive if ratings and any, decline, difficult of this to our may obtain. common indicate stock a or convertible notes and Annual Report operations. could: and us, including industry, airline the involving on hostilities impact a other negative to or significant harmed attacks further were such a results of have were operating fear could we and the U.S. short-term, savings, attacks, the the cost terrorist in through Additional fixed demand degree. are customer greater costs in proportionately our reduction of the portion offset substantial to a unable Because company. our including industry, our harm significantly may future. U.S., the further the in and involving business business hostilities our our other and and or industry industry attacks, our terrorist impacted actual negatively or attacks threatened terrorist 2001 11, September and The condition financial business, our in harm reduction would general factors Any these industry. of airline any operations. the of of Syndrome on result results Respiratory impact a Acute adverse as business. Severe material traffic airline as a passenger the such have the airline on behavior, could in impact travel flu, events adverse affects avian or an that or conflicts in disease (SARS) other result a or and of Iraq economy outbreak industry in the an airline war impact Similarly, the the may of addition, elsewhere much In or to 2004. East contributed through Middle prices 2001 fuel from escalating losses and significant yields suffering ticket Low expectations. and on growth effect adverse an have could operations. particular, of in results industry and airline condition the financial in business, and our economy, general the in financial Weakness business, our harm key that our measures in competitive competition other in take operations. increase or of An fares results passengers. reduce and on to condition increases imposed us price fees cause significant and also adverse or costs could as product access markets such our airport by markets, about in harmed key perception increases be our public to would in negative linked business transportation conditions, Our air economic in markets. for local efforts key demand in marketing our in changes and on reduction sales dependent a from highly causing advantage remain circumstances greater we any gain result, to a as As well regions. as those facilities, ground and aircraft, from personnel, and to traffic 2005, In hub. Seattle traffic. our total from our and of to 62% occurs for flights accounted our Seattle of portion significant A Anchorage. successful be to markets key few a on depend We h curneo n fteeeet ol amorbsns,fnnilcniinadrslsof results and condition financial business, our harm would events FAA. these the of by any traffic of air occurrence commercial The of grounding a in breaches result security from resulting delays and • cancellations flight shutdowns, airport from costs prices; increase fuel of volatility insurance; the other and or • costs risk fuel war increase obtain to us for difficult • more it make costs; air insurance for • and demand security in increase drop dramatic potentially a to • due yields and traffic passenger reduce significantly • airline the impacted negatively have aftermath their and 2001 11, September of attacks terrorist The economic in changes to sensitive particularly is traffic, business including traffic, airline that believe We in investment our maximize to us allows way this in offerings service our concentrating that believe We and Angeles Los Portland, Seattle, including markets, key few a serving on focus to is strategy Our n ecie aeytras and threats; safety perceived and travel; 46 Annual Report 47 Immediately following the September 11, 2001 terrorist attacks, aviation insurers dramatically increased Although our insurance costs have decreased since the dramatic increase following September 11, 2001, As of December 31, 2005, labor unions represented approximately 84% of Alaska’s and 46% of Horizon’s Our continuing obligation to fund our traditional pension plans could negatively affect our ability to Our insurance costs dramatically increasedand immediately further following increases the in September insurance 11,operations. costs 2001 would terrorist harm attacks our business, financial condition and results of airline insurance premiums and significantlythird-party reduced claims the resulting maximum from amount acts ofaggregate. of insurance In terrorism, available light war to of or airlines this similarHomeland for development, events Security under to Act the $50 of Air million 2002, Transportation pergovernment as Safety event continues most and and to recently System in offer amended Stabilization the domestic by Actmillion, airlines the and or either Consolidated the (ii) (i) Appropriations in third-party Act lieu liability ofcoverage. of war 2006, This commercial risk the coverage war coverage provides risk above for insurance,comprehensive $50 the full insurance same hull, and limits comprehensive twice of and the war third-partySeptember limits and liability 11, of allied 2001. war third-party perils risk liability coverage insurance for carried hull by and the airline on aviation insurers could increase theirairline premiums accidents again or in other the events eventcomprehensive adversely of and affecting additional third-party the terrorist war airline attacks, risk industry.2006. hijackings, insurance Furthermore, While provided the the by full government the hull, may governmentbe extend is certain the mandated that deadline through any for August extension when 31, the will it government occur, will stop or stop providing if providing such it suchfor coverage does, coverage, this to how we coverage the long cannot will airline the be industry, extensioncoverage substantially the will will higher premiums last. be than charged It much the by is more premiums aviationor, expected limited, currently insurers in that, including charged the should smaller by case aggregate the of limits governmentinsurance certain and and premiums events, short the would a cancellation adversely lesser periods impact period, (i.e. our including 7 business, immediate days financial termination). condition Significant and increases results in ofMany operations. of our employees areagreements, covered or by to collective do bargaining so agreements.disrupt on A our terms failure business competitive to and with negotiate increase the new our labor costs. costs and practices of our competitors,employees. could Labor costs generally are31% a and significant 35% component of of our ouremployee total total groups operating expenses, has expenses comprising separate in approximately collective 2005operating bargaining and expenses agreements, 2004, and and respectively. adversely may Each affect make ofmediated our demands our negotiations profitability. that different through Three would represented the of increase National these our the Labor agreements terms Relations are of Act currently any process. subject collective Ifwidespread to bargaining we employee agreement are dissatisfaction, with unable we any to could group reachbecome be of agreement subject subject our on to to employees protests work or or slowdowns wereevents picketing or to would by stoppages. experience be organized We disruptive labor could to groups also with our representing an operations our organized and employees. labor could Any group harm ofcurrently requires our these pay us business. or to In we pay the are wages eventincrease unable or any and to to agreement our fully incur we operating offset costs reach margin such thatoutsourcing would increased are or be costs materially subcontracting harmed. through higher of In fare than certain addition, increases,costs those services to our associated we for the expenses with our extent would hiring business, we new we are employees, would unable in incur to order substantial maintain to costs, the perform including these services in-house. compete in the marketplace becausebankruptcy some or of never our had competitors traditional havehigh pension either labor plans eliminated costs in such or place. obligations any We through increases operate to in these a costs highly could competitive affect industry our and ability our to compete. Annual Report rahsi euiycudhr u iaca odto n eut foperations. and of problems results control and traffic condition conditions, financial conditions weather our weather to harm adverse due could to delays security susceptible or in of more Cancellations other breaches area is competitors. or geographic operation our storms our our of rain, to of many freezing Due portion than rain, delayed. significant snow, significantly a fog, or believe of canceled we periods be operations, During may increase profitability. flights and our conditions, utilization affect weather aircraft turn adverse reduce in passengers, which measures frustrate of including Delays all measures, breaches. costs, security security increased to and response conditions in weather imposed adverse airports, at congestion traffic and condition financial our harm airports, could at which congestion of operations. traffic any of including measures, results control, security our increased beyond and factors conditions by weather structure. affected cost often its are in operations increases Our or less operations on Alaska’s agreements in existing disruptions in renegotiate to result Alaska could force events Vendor or These publicity. marketplace terms. services negative competitive favorable vendor and the affect incidents in adversely further changes could of significant suppliers risk among or supervision the issues increase reduce compliance to to regulatory negative steps order unionization, of taken in bankruptcies, has number personnel Company a vendor The experienced Seattle. of Alaska in training 2006, incidents and or early our aircraft and issues of several 2005 safety one following issues, late if reports In maintenance control, airline. press delays, quality costs, our for increased of vendors perception experience our may public be monitor we negative not we adequately may Although perform services all. to replacement at fails promised, or vendors as rates, perform competitive to at fails available or readily operation ceases bankruptcy, into goes vendors locations. other many a at to carriers Airport other Seattle-Tacoma and at Alaska services to facilities handling services and ground similar aircraft service its provides heavy fleet out that its for subcontracted vendor of suppliers Alaska remainder outside 2005, the retained May increased subcontracting Alaska In recently began addition, maintenance. has Alaska In vendors 2004, vendors. outside September outside on In to reliance so. maintenance our do efforts, to and control continue hosting cost may system our and reservation of computer part fueling, As handling, maintenance. ground software maintenance, engine and airframe including activities. critical certain for or vendors safe third-party less on is rely fly We they equipment business. involve the our not or harm does airlines would it our which if that alternatives, even perception transportation and public other and insured a than business fully cause reliable our if could harm even airlines, Substantial would incident, our accident. coverage or of an insurance accident one from related aircraft losses our any substantial of Moreover, such bear excess results. of to in financial amount forced accident the be an practice, may from industry we resulting maintain with and claims currently consistent adequate we generally be aircraft that type not damaged believe the may a we of coverage of Although and from replacement service. amounts claims or from in potential repair loss insurance significant the permanent liability experience for or could costs temporary we as consequential addition, well its In as and public. relatives, flying surviving the and by passengers airlines injured incident. our or in accident faith airline of an loss of event the in harmed be could results financial and reputation and, business. Our leave our who harm personnel could key prospects key individuals of business other these services and or of the results management any lose operating replacing of we our difficulty loss if and have the or business also therefore, cost, our may reasonable sustain We a or harmed. at grow be employees to could qualified unable retain be and may train we costs. hire, personnel reasonable to at unable personnel are qualified we retain If and attract to unable are we if harmed be could business Our ieohrarie,oroeain r ujc odly asdb atr eodorcnrl nldn air including control, our beyond factors by caused delays to subject are operations our airlines, other Like more or one that event the In risks. several to exposure our increases vendors outside of use increased Our business, our to critical functions and services of variety a for vendors outside on relied historically have We a in result and life of loss significant a involve could aircraft our of one involving incident or accident An positions. skilled highly many in labor for businesses other and airlines U.S. major the against compete We 48 Annual Report 49 Airlines pay or are responsible for collecting a number of different taxes and fees including, but not limited Moreover, we believe that the impact of higher fixed-rate fees is proportionally greater for low fare carriers, Airlines are subject to extensive regulatory and legal requirements, both domestically and internationally, We depend on automated systems to operate our business, including our computerized airline reservation Alaska and Horizon are parties to marketing agreements with a number of domestic and international air Increases in government taxes and fees could reduce demand for air travelto, and airport harm facility our business. charges, immigrationthe fees, demand security for fees, air excise travel taxesview is on them highly ticket as sensitive sales, “pass-through to and costs,” fare fuelinfluence we levels. taxes. their believe Although We purchase that law believe and a makers travel higher maywould decisions total impose harm and ticket additional our may price fees business. result in and in the an eyes overall of decline the in consumer passenger will traffic, which carriers with a high percentagecarries of many leisure leisure travelers, travelers and and carriersother Horizon that fee flies fly increases many relatively generally short short could haul segments. negatively segments, Because impact we Alaska Air believe Group higher more security than fees some and ofChanges our in competitors. government regulation imposingincrease additional our requirements operating and costs restrictions and on result our in operations service could delays and disruptions. that involve significant compliance costs.Department In of the Transportation, last the several Transportation years,Administration Security Congress (the Administration has “FAA”) and passed have the laws, issued Federal andhave regulations, Aviation the required relating U.S. significant to expenditures. the For maintenancethings, example, and security the operation measures, FAA of collision has airlines avoidance issued that procedures systems, regulations and noise covering, maintenance abatement, among regulations. environmental other Similarly, restrictions,increasingly many safety stringent aspects federal, of state an and airline’ssignificantly local operations higher laws are security protecting subject and the to other environment.increased costs Additionally, their incurred because rates by of and airports charges sincehave to September been air 11, proposed carriers. 2001, from Additional many time laws, airportsdemand to regulations, have for time taxes air that and travel. could airport If significantly ratesand/or adopted, increase and increasing these the charges costs. measures cost could of have airline the operations effect or of reduce raising the ticket prices, reducingWe revenue rely heavily on automatedbusiness. systems to operate our business and any failure of these systems couldsystem, harm our our telecommunication systems andpassengers our as website. electronic We tickets. also We issueaccept depend a these on substantial electronic our number tickets. computerized of In reservation ourmust order system tickets be for to to able our be to operations able accommodate to torepeated a work issue, website, high efficiently, track reservations volume our and system of website or traffic andour telecommunication and reservation services systems deliver system and failures important cause could flight our reduce information.automated customers the Substantial systems to attractiveness or for purchase of crew tickets scheduling, fromsystems flight another could dispatch, airline. result and In in other addition, the operational wecease loss needs. rely our of Any on operations. important disruption other data, in increase these our expenses and possibly cause us toWe temporarily rely on partner airlines for code share and frequent flyer marketingcarriers, arrangements or “partners”, including butNorthwest not Airlines. limited These to agreements American provide Airlines,“codeshare” that Continental flights certain Airlines, and flight Delta that segments Airlines certain operatedthe and partner by agreements flights us generally are are provide held held that out out members for as of sale partner Alaska’s as Mileage Alaska Plan codeshare program flights. can In earn addition, miles on or redeem Annual Report aeepsr ocagsi neetrts hsepsr ssmwa iiae hog u variable-rate our through mitigated somewhat is exposure This which rates. instruments, interest variable-rate in include changes obligations to debt exposure Our have portfolio. investment short-term and obligations Risk Market Financial program. hedging fuel our of results the on data hedging specific our of value fair the decrease respectively. and million, or increase $32.7 the increase would and in 10% 2005 million 11 a 31, $33.6 Note that December approximately See estimate of by increases. We as portfolio price positions. prices fuel hedge oil of our crude possibility of in the summary decrease against a hedging for not Statements in Financial risk Consolidated is there believe We prices. Prices Fuel We purposes. increases. trading price for fuel instruments jet financial to derivative fixed-rate exposure any of our hold a form hedge or of the to purchase execution in used not through instruments instruments do risk sensitive derivative market market financial the manage have and purchase to We instruments We seek means. debt fleet. and other aircraft prices, and our market strategy operate prevailing hedging to at documented required fuel fuel jet jet our in of risk majority price commodity and portfolio, investment 7A. in ITEM deployed be could increase. capacity likely excess would we this costs that that operating capacity assurance unit financial excess no our have significant be and to have can markets were would There profitable Frontier we elsewhere. If agreement, deploy markup. the to base terminate have a to would plus necessary Airlines service it Frontier the find arrangement, providing and the of difficulties Horizon’s Under costs of revenue. expected 23% passenger the approximately Horizon’s Horizon represents of pays service 9% this approximately Currently, and 2004. capacity January total in began that Airlines. Airlines Frontier Frontier on dependent is which JetExpress, Frontier on dependent partly are results better Horizon’s are fleet diversified more the a events. by operate such actions that manage in Carriers to or aircraft. are avoidance our we customer operate than in to positioned result inability would an of the that in supply by public resulting the performance the FAA with contractual by associated problems, perception problems mechanical adverse any defects, or to design manufacturers, vulnerable including more parts, are and we aircrafts result, those a As Bombardier. on parts. dependent and aircrafts for suppliers of number limited a on dependent are these We of all or some terminate Either or Code. modify Bankruptcy to In the seek advantage. of would competitive 11 that of Chapter reorganization agreements. source under of on a protection plans impact is for propose negative believe filed could a we Delta carrier have which and could Plan, Northwest flights Mileage both our partner our 2005, of certain of September part or attractiveness code important partner the under an significant or sold are a revenues flights arrangements of our from flyer loss revenue frequent The of the program. amount that Plan significant believe Mileage a we receive addition, We In versa. arrangements. vice share and flights partner for miles ehv xouet aktrs soitdwt hne nitrs ae eae rmrl oordebt our to primarily related rates interest in changes with associated risk market to exposure have We company for statements, financial consolidated the in 11 Note to as well as 22, and 21 pages to refer Please fuel jet of volatility the to exposure our decrease to hedges as instruments financial derivative utilize We marketable sale for available our and obligations debt rate floating our in risk rate interest have We with agreement 12-year a under JetExpress Frontier as branded service jet regional operates Horizon similarly is Horizon parts. aircraft many and aircraft for supplier sole its as Boeing on dependent is Alaska UNIAIEADQAIAIEDSLSR BU AKTRISK MARKET ABOUT DISCLOSURE QUALITATIVE AND QUANTITATIVE 50 Annual Report (57.5) (44.9) (44.9) (1.66) (1.66) (1.66) (1.66) 2004 $656.3 4th Quarter (25.8) (33.0) (33.0) (1.15) (1.15) (1.15) (1.15) 2005 $730.6 56.8 74.0 74.0 2.75 2.75 2.29 2.29 2004 $768.2 3rd Quarter 90.2 90.2 90.2 3.28 3.28 2.71 2.71 2005 $845.7 (1.7) (1.7) (20.6) (0.06) (0.06) (0.06) (0.06) 2004 $701.3 (in millions, except per share) 9.1 2nd Quarter 17.4 17.4 0.64 0.64 0.56 0.56 2005 $756.5 51 (58.5) (42.7) (42.7) (1.59) (1.59) (1.59) (1.59) 2004 $598.0 9.9 1st Quarter 0.36 0.34 (80.9) (2.97) (2.39) (80.5) 2005 $642.5 ...... CONTROLS AND PROCEDURES CHANGES IN AND DISAGREEMENTS WITHFINANCIAL ACCOUNTANTS DISCLOSURE ON ACCOUNTING AND CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ...... change * change * None We intend to regularly review and evaluate the design and effectiveness of our disclosure controls and As of December 31, 2005, an evaluation was performed under the supervision and with the participation of Income (loss) before accounting Net income (loss) * Income (loss) before accounting Net income (loss) * We also have investments in marketable securities, which are exposed to market risk associated with See Item 15. change * For earnings per share, the sum of the quarters willITEM not 9. equal the total for the full year. ITEM 9A. procedures and internal controls overprocedures financial over reporting time on and an to ongoingpresent correct basis design any and of deficiencies to our that improve disclosure we theseeffective, controls may controls future and discover and events procedures in affecting and the our internal future. business controls While may over we cause financial believe us reporting the to are modify theseDisclosure controls Controls and and procedures Procedures in the future. our management, including our chiefofficers”), executive of officer the and effectiveness chief of financialdisclosure the officer controls design (collectively, and and our procedures operation “certifying are of designed our to disclosure ensure controls that and the procedures. information These required to be disclosed by us in Operating revenues Operating income (loss) Income (loss) before accounting Net income (loss) Basic earnings (loss) per share: Diluted earnings (loss) per share: investment portfolio. A hypothetical 10%during change 2005 in would the correspondingly average change interestapproximately our rates $2.7 net incurred million. earnings on In and variable-rate order cash debt rates to flows on help associated several mitigate with of the these our risk itemsapproximately existing of by 44% variable-rate interest of debt rate our agreements fluctuations, total in we long-term 2005. fixed debt As the at a interest December result, 31, our 2005 variable-rate compared debt to is 65% atchanges December in 31, interest 2004. rates. Ifincome short-term would interest increase rates by were approximately to 20 average basis 1% points. more than they did inITEM 2005, 8. interest Annual Report TM9B. ITEM stated as firm, accounting public registered herein. independent included an is LLP, which KPMG report by their audited in been has 2005 31, 2005. December 31, December of as effective our was Framework, reporting COSO financial the over under control evaluation internal our our of on that Organizations Based concluded the Sponsoring Framework). management on of COSO based Committee (the reporting the Commission financial by Treadway over issued the control Framework we internal Control—Integrated officer, our Internal the financial of in with principal effectiveness framework and and the supervision officer of the executive evaluation Under principal an 13a-15(f). our conducted Rules including Act management, Exchange our in of defined participation is term such as reporting, Reporting Financial over Controls Internal on Report Management’s financial over controls internal our effect, materially to likely reasonably reporting. are or affected, materially concluded Reporting Financial over Controls Internal effective. the that basis. and timely forms, a and on rules officers SEC’s certifying processed, the our recorded, by to is specified communicated SEC) periods is (the time information Commission the Exchange within and reported Securities and the summarized with filed reports periodic our None of as reporting financial over control internal our of effectiveness the of assessment management’s Our financial over control internal adequate maintaining and establishing for responsible is management Our officers certifying our that 2005 during reporting financial over controls internal our in changes no made We were procedures and controls disclosure that evaluation, their on based concluded, officers certifying Our TE INFORMATION OTHER 52 Annual Report 53 PART III DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT EXECUTIVE COMPENSATION SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS PRINCIPAL ACCOUNTANT FEES AND SERVICES See “Election of Directors,” incorporated herein by reference from the definitive Proxy Statement for Air We have adopted a Code of Ethics that applies to our principal executive officer, principal financial officer, personal and professional relationships; with, or submits to, the Commission and in other public communications made by the registrant; code; and The Code of Ethics is located on our Internet website at www.alaskaair.com under “Company See “Executive Compensation,” incorporated herein by reference from the definitive Proxy Statement for See “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan See “Certain Relationships and Related Transactions,” incorporated herein by reference from the definitive See “Principal Accountant Fees and Services,” incorporated herein by reference from the definitive Proxy ITEM 10. Group’s Annual Meeting of Shareholdersin to Part be I held following on Item May 4 16, for 2006. information See relating “Executive to Officers executive of officers. theCode Registrant” of Ethics principal accounting officer and personsstandards performing that similar are functions. reasonably A designed Code to of deter Ethics wrongdoing1. is and a to set promote: of written Honest and ethical conduct, including the ethical2. handling of actual or apparent Full, conflicts fair, of accurate, interest timely, between and understandable disclosure3. in reports and documents that Compliance a with registrant applicable4. files governmental laws, rules and regulations; The prompt internal reporting of violations of5. the code to an appropriate Accountability person for or adherence persons to identified the in code. the Info—Investor Information—Corporate Governance.” We intendItem to 10 satisfy of the Form disclosure 8-K requirementto regarding under our an principal amendment executive to, officer, orsimilar principal a functions financial waiver that officer, from, relates principal a to accounting provisioninformation any officer of on element or our the of persons Code Corporate the performing of Governance Code Ethics portion of that of Ethics applies our definition internet enumerated website. above by postingITEM such 11. Air Group’s Annual Meeting of Shareholders to be held on May 16,ITEM 2006. 12. Information,” incorporated herein by referenceMeeting from of the Shareholders definitive to Proxy be Statement held for on Air May Group’s 16, Annual 2006. ITEM 13. Proxy Statement for Air Group’s Annual Meeting of Shareholders to be heldITEM on 14. May 16, 2006. Statement for Air Group’s Annual Meeting of Shareholders to be held on May 16, 2006. Annual Report e xii ne npg 95. page on Index Exhibit See ended years the for Accounts, Qualifying and Valuation II, Schedule Statement Financial Firms Consolidated Accounting Public Registered 2003 Independent and of 2004 Reports 2005, 31, Statements December Financial ended Consolidated years to the Notes for Flows Cash and of 2004 Statements 2005, Consolidated 31, December ended 2003 years and the 2004 for 2005, Equity 31, Shareholders’ December of ended Statements years Consolidated the for 2004 Operations and of 2005 Statements 31, Consolidated December of as Sheets Balance Consolidated (Unaudited) Information Financial Consolidated Quarterly Selected 15. ITEM eebr3,20,20 n 2003 and 2004 2005, 31, December 2003 a osldtdFnnilStatements: Financial Consolidated (a) ...... 59-60 ...... XIIS OSLDTDFNNILSAEETSCHEDULES STATEMENT FINANCIAL CONSOLIDATED EXHIBITS, ...... 94 ...... 62–90 ...... ATIV PART 54 ...... 91–93 ...... 56–57 ...... 51 ...... 61 ...... 58 ...... Page(s) Annual Report Director Director Staff Vice President/Finance and Controller (Principal Accounting Officer) Director Director Director Director Director Director Director Director Director Date: February 17, 2006 Chairman, President, Chief Executive OfficerDirector and Executive Vice President/Finance and Chief Financial Officer (Principal Financial Officer) 55 SIGNATURES . R ,J IEN YER YER ILDEN EDIENT ADSEN EDERSEN ALLOTT HOMPSON ENNEDY AMPBELL S. A AMILTON INDLAUB S. A ANGLAND T A. W NIGHT D. T L S. P M. B F. M J. C I. M R. K R. H J. K V. R ARC ILLIAM William S. Ayer, William S. Ayer Byron I. Mallott ILLIAM Richard A. Wien John V. Rindlaub Bradley D. Tilden Dennis F. Madsen ICHARD Bruce R. Kennedy R. Marc Langland Mark R. Hamilton ENNETH ENNIS Phyllis J. Campbell Patricia M. Bedient Jessie J. Knight, Jr. ARK YRON RUCE RADLEY Brandon S. Pedersen OHN J. Kenneth Thompson ESSIE HYLLIS ATRICIA RANDON /s/ W /s/ W /s/ R /s/ J /s/ D /s/ B /s/ B /s/ B /s/ M Chairman and Chief Executive Officer /s/ R. M /s/ J /s/ P /s/ P /s/ B /s/ J. K Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant the following persons on February 17, 2006 on behalf of the registrant and in the capacities indicated. has duly caused this report to be signed on itsALASKA behalf AIR GROUP, by INC. the undersigned, thereunto duly authorized. By: Annual Report oa Assets Total Assets Other Contracts Hedge Liability Fuel Pension Minimum Additional to Related Assets Intangible Equipment—Net and Property Total equipment flight future for Deposits equipment and property Other equipment flight other and Aircraft Equipment and Property Assets Current Total assets current other and expenses Prepaid contracts hedge Fuel taxes income Deferred supplies—net 2004—$3.0) and (2005—$2.7; Inventories accounts doubtful for allowance Receivables—less collateral lending Securities securities Marketable equivalents cash and Cash Assets Current ASSETS Millions) (In 31 December of As esacmltddpeito n amortization and depreciation accumulated Less ...... e copnigntst osldtdfnnilstatements. financial consolidated to notes accompanying See ...... OSLDTDBLNESHEETS BALANCE CONSOLIDATED ...... lsaArGop Inc. Group, Air Alaska ...... 56 ...... $3,792.0 73.6 $ 2,032.2 2,265.5 1,540.3 1,019.6 3,051.8 2005 134.0 305.3 481.0 101.4 124.2 112.0 909.0 51.9 33.6 84.3 91.8 44.0 $3,335.0 28.0 $ 1,908.3 2,294.3 1,242.3 2,833.2 2004 115.5 471.8 845.9 924.9 30.3 38.6 67.1 86.6 65.7 74.7 42.0 99.4 — Annual Report — — (3.4) 75.3 53.4 29.8 (60.5) (81.6) 723.3 664.8 133.0 301.6 250.2 957.3 989.6 173.6 264.8 284.9 496.5 284.0 2004 $3,335.0 $ 143.8 — (8.1) 71.8 35.9 (56.6) 829.7 827.6 105.9 336.0 291.8 112.0 113.5 969.1 156.4 291.1 382.2 710.3 278.1 2005 (132.0) 1,165.6 $3,792.0 $ 134.6 ...... 57 ...... Alaska Air Group, Inc...... CONSOLIDATED BALANCE SHEETS ...... See accompanying notes to consolidated financial statements...... shares 2004—29,777,388 shares Total Liabilities and Shareholders’ Equity Other Liabilities and Credits Deferred income taxes Commitments and Contingencies Shareholders’ Equity Preferred stock, $1 par value Authorized: 5,000,000 shares, none issued or outstanding . . . Total Current Liabilities Long-Term Debt and Capital Lease Obligations, Net of Current Portion LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilities Accounts payable Accrued aircraft rent Accrued wages, vacation and payrollOther taxes accrued liabilities Air traffic liability Securities lending obligation Current portion of long-term debt and capital lease obligations Deferred revenue Other liabilities Common stock, $1 par value Authorized: 100,000,000 shares Issued: 2005—35,932,925 Capital in excess of parTreasury value stock (common), at cost:Deferred 2005—2,478,779 stock-based shares compensation 2004—2,651,368 shares Accumulated other comprehensive loss Retained earnings As of December 31 (In Millions Except Share Amounts) Annual Report hrsue o computation: for used Shares Results Forma Pro Unaudited Share: Per (Loss) Earnings Diluted Share: Per (Loss) Earnings Basic (Loss) tax Income of Net net change, accounting of effect Cumulative change accounting before (loss) Income (benefit) change expense accounting tax and Income tax income before (loss) Income 2,975.3 Other-netFuelhedginggains ...... compensation government U.S. capitalized Interest expense Interest ...... income Interest (Expense) Income Nonoperating Loss Operating Expenses Operating parts Total spare related and aircraft of Impairment charges Restructuring Other...... rentals other and fees Landing amortization and Depreciation expenses Selling service beverage and Food rent Aircraft maintenance Aircraft fuel Aircraft services Contracted benefits and Wages Expenses Operating Revenues Operating Total Passenger Revenues Operating Amounts) Share Per Except Millions (In 31 December Ended Year Other-netFreightandmail ...... ple retrospectively): applied DilutedBasic ...... Share ProFormaDilutedEarnings(Loss)PerShare...... Per (Loss) Earnings Basic Forma Pro Proformanetincome(loss)NetEarnings(Loss)PerShare ...... Income(loss)beforeaccountingchange ...... NetEarnings(Loss)PerShareIncome(loss)beforeaccountingchange ...... uuaieefc facutn change accounting of effect Cumulative change accounting of effect Cumulative ...... e copnigntst osldtdfnnilstatements. financial consolidated to notes accompanying See ...... OSLDTDSAEET FOPERATIONS OF STATEMENTS CONSOLIDATED ...... asmn hnei ehdo conigwas accounting of method in change (assuming ...... lsaArGop Inc. Group, Air Alaska ...... 58 (0.01) $ $2.65 (0.21) $ $3.06 (5.9) $ $2,728.7 2,982.7 33.917 27.609 2005 144.6 137.2 173.9 208.3 208.4 143.4 157.7 187.0 228.5 722.8 132.4 923.6 152.5 (63.0) (90.4) (2.66) (3.27) 84.5 52.7 30.9 20.4 50.2 94.1 (6.1) (7.4) — — NA NA NA 8.9 04)$0.42 $ (0.42) $ 04)$0.42 $ (0.42) 11.1 $ $ (11.2) $ 05)$0.51 $ (0.57) 0.51 $ $ (0.57) 0.51 $ $ (0.57) 0.51 $ $ (0.57) $ 1.)$13.5 $ (15.3) $ $2,243.0 $2,494.6 ,2. 2,444.8 2,723.8 ,0. 2,462.3 2,803.6 68926.730 26.648 26.859 26.859 2004 9. 186.5 164.9 133.0 197.4 133.2 185.1 142.6 194.9 144.9 183.8 363.3 187.4 100.1 184.1 941.6 540.7 108.4 967.5 3. 119.5 138.9 5.)(47.8) (51.9) (17.5) (79.8) 1.)13.5 29.0 (15.3) (20.6) 9246.5 59.2 556.4 85.5 12.8 24.5 — 53.4 61.0 51.9 02— 40.2 0382.3 90.3 06 1.4 (0.6) 53 15.5 (5.3) —— 71.4 — —— —— . 2.3 1.7 2003 Annual Report 14.7 (17.9) Total 13.5 13.5 (15.3) (15.3) Retained Earnings 0.9 0.9 (2.7) (2.7) (0.8)(1.2) (0.8) (1.2) (2.0)(1.2) (0.1) (2.0) (5.2) (0.5) (2.3) (2.3) 27.4 17.9 (29.4) (16.5) Loss Other Accumulated Comprehensive (3.5) 0.0 Deferred Stock-Based Compensation Stock, at Cost Treasury 59 Excess of Capital in Par Value 0.2 4.3 — 4.5 0.1 0.7 0.8 0.1 2.4 — 2.5 0.1 2.3 2.4 — — 1.4 1.4 — 0.6 0.6 $29.3 $483.3 $(62.5) $ 0.0 $(80.2) $285.8 $655.7 $29.5 $486.3 $(61.9) $ 0.0 $(79.0) $299.3 $674.2 Stock Common Alaska Air Group, Inc. 0.165 0.030 0.137 0.135 0.062 0.024 26.762 26.573 Shares Common Outstanding ...... 0.9 ..... 3.5 ...... 1.5 1.5 ...... 0.8 ...... 0.5 1.6 ...... CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY ...... — 0.1 0.1 ...... 5.2 5.2 ...... Change in fair value Change in fair value Change in fair value Change in fair value Reclassification to earnings Income tax effect Reclassification to earnings Income tax effect Reclassification to earnings Income tax effect Reclassification to earnings Income tax effect adjustment net of $1.2 tax benefit net of $1.0 tax benefit adjustment net of $3.3 tax expense net of $1.0 tax expense ...... Minimum pension liability Officers supplemental retirement plan Related to fuel hedges: Related to marketable securities: Minimum pension liability Related to marketable securities: Related to fuel hedges: Officers supplemental retirement plan $0.6 tax benefit $0.1 tax benefit plan plan compensation Stock issued under stock plans, including Stock issued under stock plans, including Stock issued for employee stock purchase Stock issued for employee stock purchase Amortization of deferred stock-based Treasury stock sales Total comprehensive loss Other comprehensive income (loss): Treasury stock sales Deferred stock-based compensation Balances at December 31, 2003 2004 net loss Total comprehensive income (In Millions) Balances at December 31, 2002 2003 net income Other comprehensive income (loss): Annual Report aacsa eebr3,2005 31, December at Balances compensation stock-based Deferred loss comprehensive Total (loss): income comprehensive Other loss net 2005 2004 31, December at Balances Millions) (In rauysoksales stock Treasury stock-based deferred of Amortization tc sudfrepoe tc purchase stock employee for issued Stock tc sududrsokpas including plans, stock under issued Stock tc sudi qiyofrn,nto $0.4 of net offering, equity in issued Stock compensation plan 18txbenefit tax $1.8 fees iiu eso liability pension Minimum hedges: fuel to Related securities: marketable to Related plan retirement supplemental Officers ...... benefit tax $24.4 of net adjustment, benefit tax $0.7 of net noetxeffect tax Income earnings to Reclassification noetxeffect tax Income earnings to Reclassification value fair in Change OSLDTDSAEET FSAEODR'EQUITY—(Continued) SHAREHOLDERS' OF STATEMENTS CONSOLIDATED ...... 2.1 2.1 — ...... 0.0 ...... 4.7 ...... e copnigntst osldtdfnnilstatements. financial consolidated to notes accompanying See .. 6.8 ...... 3.5 ...... Outstanding Common Shares 33.454 27.126 0.172 0.114 0.342 5.700 lsaArGop Inc. Group, Air Alaska Common Stock 3. 703$5.)$81 (3.)$7. $827.6 $278.1 $(132.0) $(8.1) $(56.6) $710.3 $35.9 $664.8 $284.0 (81.6) $ $(3.4) $(60.5) $496.5 $29.8 . 3.9 3.9 — — . . 2.4 — 2.3 0.1 . 04—10.7 — 10.4 0.3 . 9. 200.0 194.3 5.7 a Value Par aia in Capital xesof Excess 60 Treasury tCost at Stock, Compensation Stock-Based Deferred 68 0.0 (6.8) Comprehensive Accumulated Other Loss (12.8) 4.)(41.2) (41.2) 11 (1.1) (3.5) (1.1) 81 (8.1) (8.1) . 0.0 0.0 Earnings Retained 59 (5.9) (5.9) Total (56.3) Annual Report 2003 1.0 2.2 0.1 — 8.4 3.7 —— —— (2.5) 4.4 (6.1) (33.5) 13.5 44.6 12.581.0 26.1 55.2 21.3 4.8 19.2 15.1 62.6 69.2 40.2 — 53.4 — 12.4 3.4 94.6 274.4 (21.0) 0.1 (55.4) 2.1 (60.8)(63.8) (235.2) (26.9) (75.2) (35.2) (25.6) (33.2) (39.8) (0.4) 142.6 133.0 745.3 689.0 334.0 355.2 192.9 269.0 2004 (976.1) (942.9) (209.9) (71.3) (392.0) (638.1) (106.9) 206.8 (164.9) (76.1) $ 49.7 $ 40.4 $ 44.7 — $ 28.0 $ 192.9 $ (15.3) $ 13.5 1.6 2.1 7.6 1.5 6.5 — — — — (7.6) 46.5 51.6 41.6 20.4 93.8 45.6 28.0 90.4 (11.5) (24.8) (13.4) (70.1) (46.6) (32.9) (54.2) 143.4 215.2 271.9 254.8 (345.0) (481.1) 2005 1,121.4 (1,184.5) $ 51.7 $ 9.7 $ 73.6 $ (5.9) ...... 61 ...... Alaska Air Group, Inc...... CONSOLIDATED STATEMENTS OF CASH FLOWS ...... See accompanying notes to consolidated financial statements...... Increase (decrease) in other currentIncrease liabilities in deferred revenue and other-net (Increase) decrease in receivables -(Increase) net decrease in prepaid expensesIncrease and in other air current traffic assets liability Changes in deferred income taxes Loss on sale of assets Changes in derivative fair values Amortization of deferred stock-based compensation Capitalized overhauls Other flight equipment Other property and equipment Amortization of airframe and engine overhauls Aircraft and aircraft purchase deposits Depreciation and amortization Impairment of aircraft and related spare parts Income taxes Assets acquired under long-term debtCredit and received capital for leases flight deposits deferred in other liabilities Interest (net of amount capitalized) Restructuring charges Cumulative effect of accounting change, net of tax activities: Restricted deposits and other Aircraft deposits returned Property and equipment additions: Sales and maturities of marketable securities Purchases of marketable securities Long-term debt and capital leaseProceeds payments from issuance of common stock, net of related fees Noncash investing and financing activities: Cash and cash equivalents at end ofSupplemental year disclosure of cash paid (refunded) during the year for: Net cash provided by (used in) financingNet activities change in cash and cash equivalents Net cash used in investing activities Cash flows from financing activities: Proceeds from issuance of long-term debt, net Cash and cash equivalents at beginning of year Cash flows from investing activities: Proceeds from disposition of assets Net cash provided by operating activities Cash flows from operating activities: Net income (loss) Adjustments to reconcile net income (loss) to net cash provided by operating Year Ended December 31 (In Millions) Annual Report r are tcs,wihapoiae akt h opn eue ahblne hncek r disbursed. are checks when balances cash reduces Company The market. approximates which cost, at carried are ahadCs Equivalents Cash and Cash Reclassifications concentrations. geographic and information segment structures. cost working lower continues have and that been carriers has with Company compete The better results. to operating costs on unit impact reduce significant to a have can 2006. prices) 31, ticket December to prior amendable become or are negotiations respectively, in employees, currently Horizon are and that Alaska agreements of under 18% covered and 61% Approximately agreements. bargaining capital large finance to need incidents. conditions, the aircraft economic force, potential general work and carriers, unionized regulation, major largely government the a expenditures, of prices, some fuel by volatile filings competition, bankruptcy intense to lead has which instability, 2004. in in revenues revenues passenger passenger of of JetExpress 9.3% 9.1% Frontier and and the capacity capacity under Horizon’s of aircraft of 21.4% jet 22.9% and regional represented 2005 nine agreement the operating this during currently under operational is Flying fully Horizon brand. became and agreement 2004 this of under quarter Service second Airlines. Frontier miles. with 382 agreement was 12-year 2005 in trip miles. passenger 1,009 Canada. average was Western its 2005 and and in California, aircraft, trip Northern turboprop passenger Northwest, and average Pacific jet its the both to and primarily operates service fleet serving It East/West jet airline provides all regional North/ also an a and Alaska operates is Alaska Mexico. It Horizon of and Seattle. state Canada from the U.S., primarily in Western cities, destinations the 8 serves in principally cities and between airline service major South a is Alaska substantially. differ Operations estimates. of these Nature from preparation differ their may and results America Actual of estimates. States management’s in United of prepared the use been in the have accepted requires significant statements generally All financial principles operations. These accounting its eliminated. with of been conformity Air all have Horizon substantially transactions and conducts and (Alaska) Company balances Inc. the intercompany Airlines, which Alaska through being (Horizon), subsidiaries Inc. principal Industries, the subsidiaries, its and Company) Policies Accounting Significant Presentation of of Summary Basis and and General Organization 1. Note aheuvlnscnito ihylqi netet ihoiia auiiso he otso es They less. or months three of maturities original with investments liquid highly of consist equivalents Cash format. current the to data years’ prior the conform to made been have reclassifications Certain operating for 13 Note See States. United the in occur sales Horizon’s and Alaska’s of all Substantially of measure (a yield and factors load in fluctuations Small costs. fixed high by characterized are Airlines collective by covered are respectively, employees, Horizon and Alaska of 46% and 84% Approximately industry as such uncertainties, various to subject are results financial and operations Company’s The a under JetExpress Frontier as branded service jet regional operating began Horizon 2004, 1, January On risks economic and competition, plans, business their However, airlines. as operate Horizon and Alaska the or Group (Air Inc. Group, Air Alaska of accounts the include statements financial consolidated The OE OCNOIAE IACA STATEMENTS FINANCIAL CONSOLIDATED TO NOTES lsaArGop Inc. Group, Air Alaska eebr3,2005 31, December 62 Annual Report years years years years years years 3-10 years 10-30 years Term of lease through 2007* ...... 10 ...... 10 63 ...... 20 ...... 15 ...... 15 ...... 20 ...... Boeing 737-200C Boeing 737-400/700/800/900 Boeing MD-80 Bombardier Q400 Bombardier CRJ 700 Bombardier Dash 8 (Rotable sparesBombardier only) CRJ 700 (Rotable spares only) Aircraft and related flight equipment: Buildings Capitalized leases and leasehold improvements Other equipment Beginning in 2005, from time to time, the Company lends certain marketable securities to third parties for a Receivables consist primarily of airline traffic (including credit card) receivables, amounts from customers, Expendable aircraft parts, materials and supplies are stated at average cost and are included in inventories Property and equipment are recorded at cost and depreciated using the straight-line method over their being depreciated through 2006 and 2007, depending on the scheduled retirement dates. * As a result of our announced intent to retire the B737-200C fleet, all aircraft and related flight equipment are Securities Lending period of time of lessparties, than the one Company year. requires During cash thecash collateral time collateral for period is 102% in restricted of which and the thesethe is daily securities Company’s deposited market are guidelines with value loaned to a of to generate lending theDecember the additional agent loaned 31, third income, and securities. 2005, which invested This the is by Company shared thatsecurities had with agent are $110.0 the in classified million lending accordance as of agent. with marketable securities Asownership securities on of rights and loan to included under the in the securities current program.collateral loaned assets. The is and The affected classified continues Company in to maintains current earnrelated full assets interest liability as and is securities appreciation classified lending on in collateral them. current in The liabilities our cash as consolidated securities balance lending sheets obligation. Receivables and the mileage plan partners, government taxnet authorities, of and an other allowance miscellaneous for amountsDecember doubtful due 31, accounts to 2004. of the Management $2.7 Company, determines million andaccounts the at are and allowance December historical for 31, experience doubtful 2005 applied accounts and to based $3.0 an on million aging known at of troubled accounts. Inventories and Supplies—net and supplies-net. An obsolescence allowancelives for of flight the equipment corresponding expendable fleet partsvalue. type is The and accrued allowance salvage based for values. on all Surplus estimated December non-surplus inventories 31, expendable are 2005 inventories carried and was at 2004, $20.7 theirmillion respectively. million net and Inventory and realizable $4.1 and $18.9 million supplies-net million at also at inventory December includes are 31, fuel included 2005 inventory in and of flight 2004, $4.4 equipment. respectively. Repairable and Rotable aircraft parts Property, Equipment and Depreciation estimated useful lives, which are as follows: Due to the time delaydisbursement in accounts, checks which clearing is the reported banks,million as the and a Company $29.1 current normally million liability. maintains at The a December amount negative 31, of balance 2005 the in and negative its 2004, cash cash respectively, balance and was is $34.4 included in accounts payable. Annual Report esruo eunwl o ekonwt etit ni h n ftelease. the any of to end due the amount until actual certainty lease, the with the although known on agreement, be remaining lease not time the will the in return on included upon based provisions lessor date the return and aircraft usage scheduled aircraft the planned to prior visit maintenance heavy Costs Return Aircraft the Leased of of terms date the the over than basis operations. other straight-line of date a statements a on consolidated at expenses the commencing rental in scheduled payments minimum leases For rental records holidays. for Company rent or the or terms occupancy, clauses lease initial escalation the rent during contain clauses agreements escalation lease rent these of Some leases. operating agreements. applicable the of Leases term Operating the over or provided is transportation award when recognized is revenue This Revenue Deferred historical and assumptions these from differ liabilities claims these and for occurrences and accruals future trends. experience estimated if claims The affected historical assumptions. significantly considering actuarial by be by other could retained part, and are in factors that estimated, severity risks are expertise, the and outside with discounted associated not Liabilities are benefits. Company care the health employee and claims compensation Accruals Care Health Employee and Compensation Workers respectively. million 2003, $3.2 and and 2004, use million, 2005, internal $6.8 31, of million, December development $2.3 ended the of costs years to costs the Capitalized dedicated development during years. individuals software five the capitalized to of Company three costs The generally payroll software. the software, and and the labor use of contract intended life include its useful primarily for estimated ready the is is software period the amortization when commences Amortization stage. development recorded. be will considered value not Costs fair is Software the group Internally-Used over asset amount or carrying asset asset the or the of asset If excess the amount. the of carrying to loss use its equal impairment the than write-down An from less a liabilities. result are recoverable, and to disposition the assets expected eventual of of flows its flows groups cash and cash other undiscounted group identifiable of future which flows estimated The for cash when recoverable. level the recognized be lowest of is not the independent may at largely group reviews are asset such group or of asset asset purposes an for of assets amount groups carrying Company total the that indicate circumstances value present the to equal amount related an and at payments. Assets recorded lease use. initially minimum of are future period leases the estimated capital of their under over financed depreciated items and for capitalized obligations are aircraft of usefulness the respectively. million, $18.4 and million $19.6 totaled allowance this 2004, and 2005 lgteupeticue earbeivnoyprs e fa boecnealwne so eebr31, December of As allowance. obsolescence an of net parts, inventory repairable includes equipment Flight ahpyet soitdwt eunn esdarrf r cre einn meitl fe h last the after immediately beginning accrued are aircraft leased returning with associated payments Cash under equipment other and space, office facilities, terminal and airport aircraft, leases Company The aircraft. of leaseback and sale the and credits mileage of sale the from primarily results revenue Deferred workers for provide to mechanisms insurance and self-insurance of combination a uses Company The application the in incurred are that software internal-use develop to costs capitalizes Company The in changes or events whenever impairment for used and held be to assets long-lived evaluates Company The improve or life the extend that modifications Major incurred. when expensed are repairs and Maintenance 64 Annual Report 19.8 2003 2004 252.9 $136.6 $409.3 77.8 76.0 20.9 2004 2005 280.9 $ 65.3 $ 63.0 $143.1 $139.0 $165.0 $466.8 98.9 2005 $ 81.3 $180.2 65 ...... Total Mileage Plan revenues Other accrued liabilities Deferred revenue Other liabilities Other-net revenues Passenger revenues Total The amounts recorded in other accrued liabilities relate primarily to deferred revenue expected to be Alaska’s Mileage Plan revenue is included under the following statements of operations captions for the Balance Sheet Captions Current Liabilities: Other Liabilities and Credits: As leased aircraft are returned, any payments are charged against the established accrual. The accrual is part Passenger revenue is recognized when the passenger travels. Tickets sold but not yet used are reported as air Freight and mail revenues are recognized when service is provided. Other-net revenues are primarily related Alaska operates a frequent flyer program (“Mileage Plan”) that provides travel awards to members based on realized within one year, includingassociated $25.1 with million Mileage and Plan $25.0 awards million issued at but December not 31, yet 2005 flown. and 2004, respectively, years ended December 31 (in millions): of other current and long-termDecember liabilities, 31, and 2004, was respectively. $9.9 million and $6.9 million as of DecemberRevenue 31, Recognition 2005 and traffic liability. Passenger traffic commissionsrecognized. and Passenger related traffic fees commissions are and expensedDue related when to fees the complex not related pricing yet revenue structures, recognizedcertain is refund are amounts and included are exchange as recognized policies, a as and prepaidand revenue interline expense. the using agreements amount estimates with of regarding other revenue both airlines, Company’s to the historical be timing data. recognized. of Any These the adjustments estimates revenueliability resulting are recognition are from generally included periodic based in evaluations on results of theHistorically, of the statistical such operations estimated analysis adjustments during air of have the traffic the not period been in significant. which the evaluations are completed. to the Mileage Plan and they are recognized as described in theMileage “Mileage Plan Plan” paragraph below. accumulated mileage. For miles earnedincremental by cost flying of on providing Alaska free andmiles travel through are awards airline accumulated. is partners, Alaska recognized the also as estimated agencies, sells a a mileage selling grocery credits expense store to and chain, non-airline accrueddefers and partners as the a such a portion major as liability of bank hotels, as the that carrecognizes sales offers rental that proceeds Alaska amount that Airlines as represents affinity revenue the creditrecognized when estimated cards. as the fair The passenger award value Company revenue transportation of for is theredeemed awards provided. award on redeemed The transportation other on deferred and airlines. Alaska proceeds Alaska’s or are following Mileage Horizon, balance Plan and sheet deferred as captions revenue other-net at and revenue December liabilities for 31 are awards (in included millions): under the Annual Report Acutn o tc-ae opnain”I codnewt FSN.13 h arvleo ahstock each of value fair the 123, 123, No. No. SFAS stock (SFAS) with Company’s Standards accordance the Accounting In for Financial Compensation.” cost of Stock-Based compensation Statement for had with “Accounting (EPS) accordance share in per determined (loss) been earnings options forma pro and (loss) income in information. Interpretations more related for and 7 Employees”, Note to See Issued options. Stock stock for for “Accounting accounting 25, No. Opinion (APB) Board realized. Options be Stock to amount expected the the not in for are recognized necessary, evidence, is if available rates established, on tax be based in would that, be change allowance benefits to a valuation tax expected of A any are liabilities date. of differences and enactment temporary assets the those tax includes which deferred that tax in on period enacted years effect using the The measured in settled. are income or for liabilities taxable and recovered and to bases, assets apply tax tax to respective Deferred expected their carryforwards. the rates and credit between liabilities tax differences and and to assets loss attributable existing operating consequences of tax amounts future carrying the statement for financial recognized are liabilities and assets Taxes Income swap fixed-price price and fuel structures, jet collar to options, exposure call its purchased of of agreements. portion consist amended. a primarily as hedge instruments Activities”, to These Hedging instruments, increases. and derivative Instruments crude-oil-based Derivative uses for Company “Accounting The 133), (SFAS 133 No. Standards the on based Instruments is Financial cost Derivative interest The asset. the of life useful estimated rate. the borrowing over average depreciated weighted is Company’s and asset, related the of Interest Capitalized $16.7 and 2005, in million $14.0 was 2003. expense and Advertising 2004 place. both are takes in costs advertising million production the Advertising time incentives. first and the commissions expensed costs, promotional advertising, awards, travel Expenses Selling services. similar other and fees, processing data Services Contracted hedges. fuel settled our of Fuel Aircraft h olwn al ersnstepofranticm ls)bfr conigcag,pofranet forma pro change, accounting before (loss) income net forma pro the represents table following The Principles Accounting of provisions the with accordance in method value intrinsic the applies Company The tax Deferred taxes. income reporting and accounting for approach liability and asset the uses Company The Accounting Financial of Statement utilizing instruments derivative financial for accounts Company The cost a as payments progress facility ground and deposits purchase equipment flight on capitalized is Interest free Plan Mileage charges, systems distribution global commissions, card credit include expenses Selling employees, temporary fees, navigation security, handling, ground for expenses includes services Contracted portion effective the and oil, taxes, fuel costs, “into-plane” associated and fuel jet raw includes fuel Aircraft 66 Annual Report 2003 —— —— (4.5) (6.0) (4.5) (6.0) (0.74) 0.28 (0.74) 0.28 (0.74) 0.28 (0.74) 0.28 2004 $(0.57) $0.51 $(0.57) $0.51 $(0.57) $0.51 $(15.3) $13.5 $(19.8) $ 7.5 $(15.3) $13.5 $(19.8) $ 7.5 $(0.57) $0.51 1.3 1.3 (4.8) (4.8) 2.55 2.93 (0.11) (0.34) 2005 $(0.01) $ 2.65 $(0.21) $ 84.5 $ 81.0 $ (5.9) $ (9.4) $ 3.06 ...... 67 ...... Pro forma As reported Pro forma As reported Pro forma As reported Pro forma During the fourth quarter of 2004, the Financial Accounting Standards Board issued SFAS 123R, “Share Pro forma net income (loss) As reported Pro forma net income (loss) before accounting change methods for all awards, net of related tax methods for all awards, net of related tax value-based method, net of related tax value-based method, net of related tax notes. See Note 12 for further discussion. Diluted EPS*: Diluted EPS before accounting change*: Deduct: Total stock-based compensation expense determined under fair value-based Deduct: Total stock-based compensation expense determined under fair value-based Basic EPS: Add: Total stock-based compensation expense recognized under the intrinsic Add: Total stock-based compensation expense recognized under the intrinsic * Diluted EPS calculations include the add back of interest expense, net of tax, on the Company’s convertible Based Payment: An Amendment ofas SFAS expense Nos. the 123 fair and value 95.”grant of The date. stock new This options standard new and requires standard other companiesEmployee will equity-based to Stock apply compensation recognize Purchase both issued Plan, to to which stock employeesa features options as 15% a that of discount. look-back the the Implementation provision Company of and grantsratable SFAS allows to vesting 123R employees employees provisions, was to and and effective purchase to the January stockthe the Company 1, at straight-line intends 2006. method. to Options The amortize are Company compensation typicallypreviously will cost granted awarded use over with but the the unvested “modified service equity prospective periodprospective awards method” using amounts are upon are accounted adoption recognized for whereby in inCompany the accordance expects income with that statement SFAS stock-based instead 123R compensation of and $7 expense, simply million as being to measured disclosed. $9 under Once million SFAS adopted,compensation per 123R, the that year will has on be not a approximately historically pre-tax been basis, recorded of in which our $3 statements million of to operations. $5 million will be for stock-based Basic EPS before accounting change: Net income (loss) as reported Income (loss) before accounting changeAs (in reported millions): option grant is estimated onratably the over date the of vesting grant period. usingrespectively: The the dividend following Black-Scholes yield assumptions option of were pricing 0% used model4.39%, for for and 3.43%, all grants then and years; in amortized 2.97%: volatility 2005, and of 2004,average expected 43%, and fair lives 37%, 2003, value of and of 5 43%; options years risk-free granted for interest was all rates $14.38, years. of $11.73, Using and these $8.96 assumptions, in the 2005, weighted 2004, and 2003, respectively. Annual Report maretadIsApiaint eti netet,“FPET 30-) S IF0-11dlydthe delayed 03-01-1 EITF FSP 03-01-1). Other-Than-Temporary EITF of “(FSP 03-1-1, Meaning Investments, EITF “The Certain Position 03-1, to Staff No. Application FASB Issue Its issued EITF and FASB of Impairment reporting the 10-20 annual 2004, Paragraphs for September of effective In Date became 2004. “Effective requirements 15, disclosure June reporting the after for while ending effective 2004, periods became 15, guidance June accounting after requires The beginning and investments. periods impaired on a other-than-temporarily losses prescribes is unrealized guidance investment about The an disclosures 03-1). whether (EITF determining Investments,” for Certain model to three-step Application Its and Impairment Temporary results position, financial Company’s the the on for impact deemed effective significant are was a flows. that 05-6 have cash renewals EITF not or and purchased. did operations periods are 05-6 of lease improvements EITF the required leasehold 2005. over includes the of amortized that date quarter be term the fourth term a at lease or assured the assets reasonably of the be in beginning of to placed the life are near useful that or the improvements at of leasehold contemplated shorter that not requires and Acquired 05-6 after or EITF significantly Inception 05-6”). service Lease (“EITF after Combination” Purchased Business Improvements a Leasehold in for Period Amortization the “Determining a have flows. to cash expected or not operations accounting is of in 154 results change No. position, a SFAS financial and 2006. Company’s error 1, the an January on of beginning impact APB correction effective significant in the is guidance of 154 the reporting No. forward the SFAS accounting carries for estimate. in statement Changes,” change This “Accounting a principle. 20, as accounting No. for in Opinion depreciation, accounted change in be a change assets by a nonfinancial effected a that long-lived, estimate or requires for impracticable also method unless retrospective 154 depletion principle, requires No. or accounting 154 SFAS amortization No. in provisions. SFAS change transition 154”). a specific No. reporting includes (“SFAS for pronouncement 3” method No. required Statement the FASB as and application 20 No. Opinion APB of of results position, financial Company’s the the on in impact effective significant was a 47 have flows. FIN not cash sufficient obligation. did or have retirement 47 operations would asset FIN the entity an 2005. if an of of incurred when value quarter when clarifies fair fourth obligation also the retirement FIN estimate asset The reasonably conditional estimated. to a reasonably information is of be entity value can an fair value that the fair clarifies for liability’s 47 liability FIN a 143.” recognize No. to Statement required FASB of interpretation Obligations—an Retirement Standards the Accounting with New compliance into equipment the bringing of any, reflected if are cost, return). which the for payments, (plus required Company’s lease 6 condition The remaining Note physical entities. the in interest is commitments variable arrangements lease the lease future of of in losses types include that expected these not features of under do similar majority exposure and or the maximum lease obligations absorb the purchase to of fixed-price Company arrangements inception Company, the leasing the the obligate the at by that terms made fact market guarantees the the with value of on consistent residual beneficiary based are primary are which the conclusions terms not Company’s contain is The involved Company losses. the or 46), because gains consolidation (FIN 46) expected the 46 (FIN entity’s meet No. Entities” not Interpretation Interest Company. do issued Variable the they (FASB) of to However, Board “Consolidation aircraft entities. Standards lease interest Accounting and variable Financial finance for of purchase, criteria requirements to the specifically meet party entities third leasing a These by established trusts are lessors Entities Interest Variable nMrh20,teET ece osnu nET su o 31 TeMaigo Other-Than- of Meaning “The 03-1, No. Issue EITF on consensus a reached EITF the 2004, March In 05-6, No. Issue EITF on consensus a reached (“EITF”) Force Task Issues Emerging the 2005, June In replacement Corrections—a Error and Changes “Accounting 154, No. SFAS issued FASB the 2005, May In Asset Conditional for “Accounting 47), (FIN 47 No. Interpretation issued FASB the 2005, March In the instances, many In aircraft. leased our covering leases operating of series a in lessee the is Company The 68 Annual Report direct method. Under the former method, these method is the predominant method used in direct expense 69 direct expense method, overhaul costs are expensed as incurred. The Company method to the direct expense method is preferable because it eliminates the judgment and estimation needed to capitalize and amortize direct expense reclassification of previously recorded mark-to-marketFor gains the on full hedges year, that total settled mark-to-market in gains, the net fourth of quarter. the reclassification, totaledcosts $61.7 for million. affected employees based on actual costs incurred. for 2004 was $53.4 million. reclassification of previously recorded mark-to-marketFor gains the on year hedges ended that December settledreclassification, 31, in was 2004, the $56.9 total fourth million. mark-to-market quarter. gain related to future hedges, net of the method on net income for 2005 provides meaningful information because of changes in the Company’s Fourth quarter 2005 adjustments include the following items: • A $54.1 million mark-to-market loss on fuel hedges that settle in future• periods, net of the A $0.3 million adjustment to restructuring charges to adjust theFourth estimate quarter for 2004 post-employment adjustments medical include the following items: • A charge of $25.9 million related to• restructuring initiatives announced earlier in A 2004. $23.1 The million total mark-to-market charge loss on fuel hedges that settle in future periods, net of the • An impairment charge of $0.6 million related to Horizon’s retired F-28 fleet. Effective January 1, 2005, the Company changed its method of accounting for major airframe and engine costs were capitalized and amortizedremaining to lease maintenance term. expense Under over the thebelieves shorter that of the the life of the overhaul or the the airline industry. Accordingly, effectivepreviously January capitalized 1, airframe 2005, and the engine Companypre-tax overhauls wrote ($90.4 for off million all the after aircraft net tax). resulting bookexpense The in value Company a of does charge its not of believe $144.7maintenance disclosing million program, the including effect the of execution adoptingthird of the party a in “power late by 2004. the hour” engine maintenance agreement with a determine overhaul versus repair allocationsmaintenance in program maintenance for activities. the Additionally, majority themaintenance of Company’s visits. its approved Management airframes also now believes focuses that more the on shorter, but more frequent, effective date for the measurementNovember and 2005, recognition the guidance FASB contained issued inImpairment FSP paragraphs and FAS 10-20 Its 115-1 of Application and EITF to FAS 03-01.investment Certain 124-1, In is Investments.” “The considered This Meaning impaired, FSP of whether addresses Other-Than-Temporary impairment the the loss. impairment determination This is as statement other to specifically than whenreferences nullifies temporary an existing the and other-than-temporary requirements the impairment of measurement guidance. paragraphsreporting of The 10-18 an periods guidance of beginning under EITF after this 03-1 December FSPthe and 15, is Company’s 2005. effective marketable At for securities December portfolio 31,recorded had 2005, in unrealized available-for-sale Other pre-tax investments Accumulated losses in Comprehensive totalingunrealized Income. $3.9 losses Management million as does which of not are December believetemporary 31, that guidance. 2005 the meet securities the with criteria for recognizing the loss under existing other-than- Fourth Quarter Adjustments Note 2. Change in Accounting Principle overhauls from the Annual Report oe4 ealo te iaca ttmn Captions Statement Financial Other of Receivables Detail 4. Note respectively. 2004, and 2005 31, December thereafter. statements. financial of statements consolidated the in method. income identification interest specific in the included on are based securities operations. the is marketable in sold on (expense) securities dividends income of and nonoperating cost Interest Other other The “Accumulated in operations. caption included of the are value, statements under losses fair consolidated equity and at shareholders’ gains carried in Realized are reported Loss.” securities losses Comprehensive The and available-for-sale. gains as unrealized classified the were with program, lending securities the under Securities Marketable 3. Note loac o obflaccounts doubtful for Allowance receivables Other receivables hedging Fuel receivables Plan Mileage receivables traffic Airline millions): (in 31 December at following the of consisted Receivables of as million $873.9 and million $982.6 was portfolio securities marketable and cash total Company’s The losses realized Gross gains realized Gross maturities and sales from Proceeds 3% and 2007, in 17% 2006, in mature 80% 2005, 31, December at hand on securities consolidated marketable the the to Of material not were losses and gains unrealized gross 2004, and 2005 31, December At obligations corporate Other obligations Asset-backed securities government U.S. value: Fair obligations corporate Other obligations Asset-backed securities government U.S. Cost: millions): (in 31 December at following the of consisted securities Marketable pledged securities including securities, marketable Company’s the of all 2004 and 2005 31, December At ...... 70 $1,121.4 2005 4.0 0.4 60.0 $ $689.0 $745.3 $206.1 $207.3 $912.9 $124.2 $909.0 552.9 150.0 554.3 151.3 2005 2005 2004 30.6 26.7 (2.7) 9.6 1.0 0.9 1.6 0.2 $329.1 $331.1 $849.6 $845.9 $46.5 $99.4 239.4 277.4 239.6 278.9 2004 2004 2003 25.3 25.6 (3.0) 5.0 Annual Report 1.5 2.9 9.0 31.8 47.2 57.8 27.7 31.5 2004 2004 2004 2004 102.8 140.6 $86.6 $43.2 $284.9 $115.5 $301.6 $103.1 $101.7 $ 84.2 1.8 8.6 4.1 34.3 54.4 41.6 32.1 23.9 2005 2005 2005 2005 110.9 169.7 $84.3 $47.7 $382.2 $134.0 $336.0 $182.6 $122.9 $101.9 ...... 71 ...... — 3.6 ...... Additional minimum pension liability (nonqualified) Postretirement medical benefits liability Other Additional minimum pension liability (qualified) Other liabilities consisted of the following at December 31 (in millions): Mileage Plan deferred revenue Additional minimum pension liability (qualified) Additional minimum pension liability (nonqualified) Other At December 31, 2005, the Company’s restricted deposits were primarily restricted investments used to Other accrued liabilities consisted of the following at December 31 (in millions): Other assets consisted of the following at December 31 (in millions): Restricted deposits (primarily restricted investments) Prepaid aircraft rent Prepaid fuel costs Restricted cash for senior convertibleOther notes Deferred costs and other Restricted cash for senior convertible notes Prepaid expenses and other current assets consisted of the following at December 31 (in millions): Other Liabilities guarantee various letters of creditconsist and of workers highly compensation liquid self securities insuranceapproximates with programs. market. original The Deferred maturities restricted costs of investments and threedeposits other months and includes or other deferred less. items. financing They costs, are long-term carried prepaid at rent, cost, lease which Other Accrued Liabilities Other Assets Prepaid Expenses and Other Current Assets Annual Report olw i millions): (in follows is and million $73.8 is above. balance table outstanding the the in and 2005, payable 2006 31, notes debt throughout December variable-rate long-term payments of in from pre-delivery As included proceeds additional facility. using fund PDP likely to the be aircraft, expects using will the Company beyond and of The aircraft delivery aircraft. specified takes those to Company on Boeing relate the financing the facility that under PDP time the rights the the on Company’s on at based the outstanding repaid is by amounts aircraft rate secured principal current interest are The the The Borrowings agreement. under 2009. margin. purchase orders) 31, specified firm August a are on plus Company’s which expire LIBOR the of will one-month for (23 facility requirements aircraft PDP funding 737-800 The pre-delivery Boeing agreement. the new purchase of 38 portion to a up provide of to purchase lenders of syndicate a with average weighted The 2004. during 7.3% and 2005 during 7.0% was rate interest fixed average weighted The * Obligations Lease Capital and Debt Long-term 5. Note Loss Comprehensive Other Accumulated aibeitrs aews45 uig20 n .%drn 2004. during 3.2% and 2005 during 4.5% was rate interest variable Thereafter 2010 2009 plans pension to related adjustment liability available-for-sale minimum considered Additional securities marketable on loss hedges Unrealized fuel unsettled on gains Unrealized oa rnia payments principal Total 2008 2007 2006 as were years five next the for payments lease capital and principal debt long-term 2005, 31, December At facility (PDP) payment pre-delivery revolving variable-rate million $172 property. a real into and entered equipment Alaska flight 2005, by During secured were million $858.5 of borrowings 2005, 31, December At portion current Less obligations lease Capital debt Long-term 2023 through due notes convertible 2018* Senior through due payable notes 2015* Variable-rate through due payable millions): notes (in Fixed-rate follows as were obligations lease capital and debt long-term 2004, and 2005 31, December At tax): of net millions, (in 31 December at following the of consisted loss comprehensive other Accumulated ...... — ...... — ...... — ...... — ...... 72 ...... D Facility PDP 7. 1088$1,082.6 $1,008.8 $73.8 113.5 $ 58.7 $ $54.8 ...... 906. 80.9 61.9 19.0 607.0 $ 969.1 $ (0.3) $ $132.0 1,082.3 Other 129.8 (113.5) 2005 2005 8. 682.6 682.6 150.0 325.3 2472.4 72.4 8368.3 68.3 4964.9 64.9 2.5 0.3 361.3 $ 989.6 $ 1,042.5 (8.4) $ $81.6 Total 2004 2004 87.5 150.0 531.2 (53.4) 2.5 0.5 Annual Report 73 During 2004, Alaska repaid its $150 million credit facility and, on December 23, 2004, that facility expired. Although the Company has not yet determined how each payment of principal or interest due will be funded The Notes are convertible into shares of the Company’s common stock at the option of the holder at a price For each $1,000 of original principal amount per Note, the conversion price through March 21, 2008 is The Notes are senior unsecured obligations and rank equally with the Company’s existing and future senior On March 21, 2003, the Company completed the private placement of $150.0 million of floating rate senior During 2005, Horizon financed one Bombardier CRJ-700 under a 15-year term, long-term debt arrangement During 2005, the Company exercised its option under several of its existing variable-rate long-term debt Bank Line of Credit On March 25, 2005, Alaskawith finalized a a syndicate $160 of million financial variable-ratefinancial institutions. credit ratios The facility, specified interest that in rate will the on expirebe agreement the in secured with credit March by a facility 2008, either minimum varies aircraft interest dependingmaintenance or rate on of cash of certain specific collateral. LIBOR levels This plus of credit 2%.fixed net facility Any charge worth, contains borrowings coverage maintenance contractual will ratios, of restrictions and certainSuch and limits debt provisions requires on and restrict liens, leases Alaska asset to Airlines dispositions, netdividends from dividends, worth, and distributing and leverage limit any certain and the funds other amount to expenditures. 2005, of Alaska $300.0 funds Air million Alaska Group was Airlines in available can thefacility. to loan form As loan to of of to Alaska December Alaska Air 31, Air Group. 2005, Group As there without of are violating December no the 31, outstanding covenants borrowings in on the this credit credit facility. equal to the original orequal variable to principal, $26.00 divided per by share, 38.4615.may which At redeem would date all result of or in issuance, a an theany portion additional conversion time of 5,769,000 price on the shares was or Notes of after in commonCompany the cash stock. to third or The purchase, anniversary common Company in of stock cash, the orand all issuance a 15th or of combination anniversaries a the of of portion Notes. cash the of In and issuance their addition, common of Notes holders stock the at may at Notes principal require or plus the upon accrued the interest, occurrence on of theequal a 5th, to change 10th the of original control principal orprice amount tax was of event. equal the to Notes, $26.00 dividedor per by $28.60 share 38.4615. per and At share. the the After conversion datethe March trigger of variable 21, price issuance, yield 2008, was the of the equal conversion the conversion toconvertible notes. price 110% at The and of any conversion conversion the time trigger trigger conversion at price priceconversion price, the was increase into option reached based shares of in on of the 2004. the holder, As Company’s through such, common maturity. the stock Holders Notes (or may are cash, elect at to the surrender election the of notesunsecured the for indebtedness. Company). The Notes doadditional not agreements restrict limiting the or ability prohibiting of the the distribution Company’s of subsidiaries earnings, to loans enter or into other payments to Air Group. of $20.0 million, secured by the flight equipment. arrangements to fix the interestfrom rates 5.2% through to maturity. 6.5%. The These fixed changes rates did on not these result affected in debt any arrangements gainConvertible range or Notes loss in the consolidated statements of operations. in the future, the Companyadvances anticipates or that other these payments payments from willAny our be such subsidiaries funded payments or either by through by the new dividends, Company’s borrowings distributions, subsidiaries or loans, could financings be by subject Alaska to Air statutory Group. or contractual restrictions. convertible notes due in 2023variable (the interest Notes). rate The of Notes 3-month bearin LIBOR interest arrears. plus for Thereafter, 2.5% the the (7.00% first Notes at fiveincrease will December years daily cease 31, from by bearing 2005). date the cash This of unpaid interest interest issuance interest, and is at which instead, paid a will the quarterly be principal calculated value at of LIBOR the plus Notes 2.5%, will up to a maximum of 5.25%. Annual Report cur 7CJ70.Aak ilas aedlvr ftoB3-0 icati 06udroeaiglease operating under 2006 in to aircraft options B737-800 arranged. had two been Horizon of already above, delivery have noted take that options also agreements the will to Alaska addition CRJ-700s. In 17 billion. acquire $1.2 approximately of payments aggregate the and aircraft. Horizon model Aircraft, CRJ700 the Q400 seven of 12 for recognition the orders immediate of firm an purchase terminate have the to would with the agreed we association of have Bombardier, and In all manufacturer from obligation sublease. or support lease the any any existing on sublease including our loss to income, cover related decide sublease to Horizon the sufficient Should that be agreement. likely not previously the reasonably would aircraft in is 200 forth it Series set aircraft, DHC-8 as Q200 agreement, 12 fee twelve purchase to a this up for of for Horizon execution assistance by the remarketing leased includes with certain also Concurrent provide agreement aircraft. to purchase Q400 agreed The 20 Bombardier 2007. additional July an through purchase continuing to and options 2006 December in beginning deliveries into rights purchase the the to of applied 20 be converted will Alaska and December, $9.7 sheet In The balance delivery. manufacturer. Company’s upon options. the the aircraft from in future received liabilities of million other price aircraft $9.7 as purchase in of deferred million credit been under $110.9 a has aircraft paid and credit additional Alaska cash million 50 agreement, using to purchase deposits up this option purchase of and to execution purchase includes rights the also includes with agreement and Concurrent purchase aircraft terms. The 15 similar 2011. additional April an through purchase continuing to and options 2006 January in beginning deliveries Commitments Aircraft millions): (in below shown expense are rent respectively. Total 2003, leased. and also 2004, are 2005, facilities in terminal million, and $288.1 airport and of million, majority $309.6 The million, years. $328.6 15 was to one of terms lease Commitments Lease Commitments provisions. 6. loan Note all with compliance in was Company the 2005, 31, December At covenants. eti lsala gemnscnanpoiin htrqiemitnneo pcfe financial specified of maintenance require that provisions contain agreements loan Alaska Certain tDcme 1 05 h opn a imprhs omtet o 8ttlarrf requiring aircraft total 48 for commitments purchase firm had Company the 2005, 31, December At with aircraft Q400 12 acquire to 2005 October in agreement purchase aircraft an into entered Horizon with aircraft B737-800 35 acquire to agreement purchase aircraft an into entered Alaska 2005, June In payments lease capital of value Present interest representing amount Less payments lease Total Thereafter 2010 2009 2008 2007 2006 2005 31, December of as year one of excess in terms noncancelable with payments lease minimum Future noncancelable remaining have that aircraft 61 for contracts lease had Company the 2005, 31, December At ...... $ ...... $0.3 ...... 74 1640$3. 0.4 $ $335.8 $1,634.0 Aircraft prtn Leases Operating 1. 1. — — — 115.6 — 28.2 0.2 38.2 710.9 39.9 181.0 0.2 $ 45.8 170.6 184.3 68.1 $ 188.0 199.2 Facilities Capital Leases (0.1) Annual Report Price Price Per Share Per Share (48,000) 21.79 (75,975) 25.63 (92,875) 31.73 Shares Shares 560,600 19.60 307,250 26.23 301,190 32.89 (221,723) 22.70 (506,164) 25.21 (100,600) 29.19 2,274,5872,560,648 $33.02 2,526,404 32.45 32.46 3,252,312 $31.64 3,688,937 $30.01 3,673,864 $30.12 3,376,015 $31.05 75 ...... December 31, 2004 December 31, 2005 Exercisable at year-end December 31, 2003 Outstanding, Dec. 31, 2005 Granted Exercised Outstanding, Dec. 31, 2003 Granted Exercised Outstanding, Dec. 31, 2004 Granted Exercised Outstanding, Dec. 31, 2002 Canceled Canceled Canceled Subsequent to year-end, Alaska converted one option and two purchase rights into firm orders for three Alaska and Horizon expect to finance the firm orders and, to the extent exercised, the option aircraft with The Company has awards outstanding under a number of long-term incentive equity plans, one of which The Company follows the intrinsic value method prescribed by APB Opinion No. 25 and related Changes in the number of shares subject to options, with their weighted-average exercise prices, are additional B737-800s to be deliveredfor in two 2007 used and Q400 2008. aircraft Additionally,aircraft to Horizon was be has approximately delivered executed $21.0 in purchase million. February agreements or March of 2006. Total purchase price for theseleases, two long-term debt, or internally generated cash. Note 7. Stock Plans continues to provide for thedate grant of of the stock grant options to tooptions directors, purchase for officers Air 4,864,140 and Group shares employees common have of stockgrant. been Air at Under granted Group market all and, and prices plans, at its on the December subsidiaries.vested the stock 31, Under after options 2005, the one granted 1,229,955 various year, have shares plans, 50% terms were after of available two up for years, to 75% ten after years. three Substantially years, all and grantees 100% are afterinterpretations 25% four in years. accounting for stockoption options. plans, Accordingly, as no the compensation exercise cost price has of been options recognized equals for the these fair market value on datesummarized of below: grant. Annual Report h hrsaeise.I 05ad20,1411sae n 3,5 hrs epciey eeprhsdby purchased were respectively, offering which shares, quarterly in 137,456 each period and Plan. of the shares ESPP day in 114,151 the last equity 2004, under the stockholders’ and employees or to 2005 Company first credited In the are issued. Company on shares are purchase value of shares can market issuance the employees fair the Plan, the from ESPP of received the lower Proceeds of the period. terms of the 85% Under at Code. stock Revenue common Internal the of 423 Section Plan consolidated Purchase the Stock in Employee benefits and wages in included is compensation and stock-based 2004 deferred in of million operations. the Amortization $0.1 of at stock. and statements award common 2005 RSU our in 2005 total of million in the price $2.1 million of closing was $3.5 value the and the on million reflecting based for $6.8 compensation, date eligible recognized stock-based grant not Company deferred are The as and years. respectively, non-voting, 3 2004, are after and RSUs vest” The “cliff Horizon. RSUs and The Alaska dividends. at employees certain to respectively, Awards Stock Restricted lives: contractual remaining and prices exercise weighted-average 5 t $ 7...... 2.2 1.8 $52to$57 2.8 ...... $41to$51 5.7 ...... $35to$40 5.9 ...... $29to$34 6.0 ...... $23to$28 7.3 ...... $18to$22 ...... $11to$17 ...... Outstanding: prices Exercise of Range their with 2005 31, December at exercisable and outstanding options stock summarizes table following The h opn pnosa mlyeSokPrhs ln(h SPPa)ta sitne oqaiyunder qualify to intended is that Plan) ESPP (the Plan Purchase Stock Employee an sponsors Company The (RSUs), units stock restricted 125,000 and 211,000 approximately awarded Company the 2004, and 2005 In $11to$57 ...... $52to$57 ...... $41to$51 ...... $35to$40 ...... $29to$34 ...... $23to$28 ...... $18to$22 ...... $11to$17 ...... Exercisable: prices Exercise of Range 5.0 $11to$57 ...... 76 ie(years) Life Remaining ,1,2 31.52 1,318,625 ,2,0 $32.46 2,526,404 $31.05 3,376,015 3,0 47.14 38.26 237,900 539,712 26.26 19.03 924,035 340,643 3,0 47.14 38.27 237,900 31.18 537,312 26.16 985,442 19.26 634,307 118,893 Shares Shares 00057.31 10,000 00057.31 10,000 ,0 $15.99 5,100 ,5 $15.99 2,550 e Share Per rc Per Price Share Price Annual Report 4.6 (0.7) 38.2 30.9 48.0 53.8 49.8 49.3 (57.8) (21.6) (10.1) 134.8 (21.6) 276.7 2004 2004 2004 (103.1) $909.9 $529.5 $607.0 $805.0 $(302.9) $ 12.0 $ 38.2 $ 12.0 0.2 — 33.2 23.3 50.9 50.4 39.1 69.3 (41.6) (34.5) (11.1) 200.4 (34.5) 284.4 2005 2005 2005 (182.6) $989.1 $607.0 $680.9 $909.9 $(308.2) $ 9.4 $ 33.2 $ 9.4 77 ...... Benefits paid Change in assumptions Actuarial loss Curtailment (gain) loss Accumulated other comprehensive loss Amendments Unrecognized prior service cost Accrued benefit liability-long term Interest cost Actual return on plan assets Employer contributions Benefits paid Unrecognized loss Accrued benefit liability-current Net amount recognized Amounts recognized in the consolidatedIntangible balance asset sheet: Funded status (PBO less fair value of plan assets) Net amount recognized Service cost End of year The accumulated benefit obligation for the defined-benefit pension plans was $904.8 million and $767.9 End of year Plan assets at fair value Beginning of year Projected benefit obligation (PBO) Beginning of year Four defined-benefit and five defined-contribution retirement plans cover various employee groups of The Company’s pension plans are funded as required by the Employee Retirement Income Security Act of million at December 31, 2005 and 2004, respectively. Note 8. Employee Benefit Plans Alaska and Horizon. The defined-benefitaverage plans compensation provide for benefits a based specified onnoncontributory period an defined-benefit of employee’s plan time term for before of certain retirement. service elected Alaska and officers. also A maintains summary an of unfunded, each planPension follows: Plans-Qualified Defined Benefit 1974 (ERISA). The defined-benefit plansecurities. assets The consist Company primarily uses of a marketablethe December equity status 31 and of measurement fixed-income the date plans for for these 2005 plans. and The 2004 following (in table millions): sets forth Annual Report 03(nmillions): stock. (in 10 common 2003 exceed Company’s not the may in portfolio assets bond plan the invest of to minimum life intend a average currently carry the not securities and does income Poor’s Company Fixed and The portfolio. Standard years. equity and/or entire Moody’s the by of rating 10% “A” exceed not will investment equity asset various approximately: in are invests classes and asset managers primary fund the of for number allocations a Target uses risk. Company diversify The to cycle. classes market full a over assets 2004: on return of rate long-term asset expected each the for develop return to expected allocation portfolio. The asset the the class. target for which asset the assumption in each on assets classes of based asset returns weighted other future then the for on is with expectations return class (primarily associated the expected investments premium and the risk-free risk invested determining on the is In returns of portfolio points. expected level basis of historical 25 level the nearest current bonds), the the government to assesses round Company and the year assets, the plan of end the near bonds from varied used increase compensation of rate the plan. and the 8.0% on was depending used 6.80%, assets to plan 3.47% on return expected the years, ended years the for cost benefit periodic net 31: determine December to plan. used the assumptions on average depending Weighted 6.80%, to 3.47% from varied used increase compensation of rate the years, 31: December of as obligations benefit determine to used assumptions average Weighted e eso expense pension Net cost service prior of Amortization assets on return Expected cost Interest cost Service and 2004, 2005, for components following the included plans defined-benefit the for expense pension Net individual An allocations. asset target above the maintain to periodically rebalanced are assets Pension pension for risk reasonable a at returns maximum achieving on focuses policy investment Company’s The assets Plan securities income Fixed securities equity Non-U.S. securities equity Domestic category: and Asset 2005 of end the of as follows as is category, asset by plans, defined-benefit the of allocation asset The long-term high-quality on rates the use to is policy Company’s the used, rate discount the determining In both For respectively. 2004, and 2005 31, December of as used were 6.00% and 5.75% of rates Discount both For respectively. 2004, and 2005 31, December of as used were 5.75% and 5.50% of rates Discount eonzdatailloss actuarial Recognized ...... ie income: Fixed equities: Non-U.S. equities: Domestic ...... 30% ...... 5% 65%...... 78 71.7 $ 50.4 $ 2005 (49.9) 50.9 15.4 4.9 83$73.5 $ 78.3 $ 44.6 $ 53.8 $ 2004 2005 4.)(33.9) (43.9) 100% 8043.1 48.0 5314.5 15.3 66% 29 . 5.2 5.1 5 2003 2004 100% 66% 29 5 Annual Report 1.1 1.9 1.8 — (1.2) (1.3) (1.8) (1.8) 2004 2004 $— $35.8 $34.5 $— 41.6 52.7 53.8 53.9 53.2 343.9 $599.1 1.3 1.9 2.8 2.5 — (0.3) (2.5) (2.5) 2005 2005 $— $34.5 $37.7 $— 79 ...... $ ...... Total payments 2007 2008 2009 2010 2011 - 2015 2006 End of year The accumulated benefit obligation for the noncontributory defined-benefit plan was $36.1 million and End of year Plan assets at fair value Beginning of year Service cost Interest cost Change in assumptions Actuarial gain Benefits paid Actual return on plan assets Employer contributions Benefits paid Projected benefit obligation Beginning of year Alaska also maintains an unfunded, noncontributory defined-benefit plan for certain elected officers. This In 2005 and 2004, the Company recorded $41.2 million (net of taxes of $24.4 million) and $2.3 million (net The Company expects to contribute approximately $50 million to these defined-benefit pension plans during Future benefits expected to be paid over the next ten years under the defined-benefit pension plans from the $33.3 million at December 31, 2005 and 2004, respectively. Pension Plans-Nonqualified Defined Benefit plan uses a December 312004 measurement (in date. millions): The following table sets forth the status of the plans for 2005 and of taxes of $1.2 million),that respectively, the in Company non-cash sponsors charges for toof eligible equity the employees. in discount The connection rate charge with and in therecorded a 2005 defined-benefit a change can plans reduction from be of the partially this GAM83 attributedthan equity mortality to expected charge tables the return of to reduction on $5.2 the assets. million RP2000 (net tables. of In taxes 2003, of the $3.3 Company million) primarily reflecting higher 2006. assets of those plans as of December 31, 2005 are as follows (in millions): Annual Report ln a 2. ilo,$32mlin n 2. ilo,rsetvl,i 05 04 n 2003. and 2004, 2005, in respectively, defined-contribution million, the $21.7 for and expense million, Total $23.2 contributions. million, Company $22.9 require was plans plans these of All Code. Revenue Plans Defined-Contribution millions): (in follows as are 2005 31, December of as plans pension millions): (in 2003 and 2004 2005, 5.00%. was used increase compensation of rate the years, ended years the for cost benefit periodic net 31: determine December to used assumptions average Weighted 5.00%. was used increase compensation of rate the years, 31: December of as obligations benefit determine to used assumptions average Weighted h eie-otiuinpasaedfre opnainpasudrscin41k fteInternal the of 401(k) section under plans compensation deferred are plans defined-contribution The defined-benefit noncontributory the under years ten next the over paid be to expected benefits Future expense pension Net cost service prior of Amortization cost Interest cost Service for components following the included plans defined-benefit noncontributory the for expense pension Net recognized amount Net loss comprehensive other Accumulated term liability-long benefit Accrued liability-current benefit Accrued sheet: assets balance Intangible consolidated the in recognized Amounts recognized amount Net cost service prior Unrecognized loss Unrecognized status Funded both For respectively. 2004, and 2005 31, December of as used were 6.00% and 5.75% of rates Discount both For respectively. 2004, and 2005 31, December of as used were 5.75% and 5.50% of rates Discount cura loss Actuarial oa payments Total 2015 - 2011 2010 2009 2008 2007 2006 ...... 2.1 2.0 ...... 1.9 ...... 1.9 ...... 1.8 $ ...... 80 $3.6 $1.3 2005 1.9 0.1 0.3 $(28.7) 0.4 $ $(28.7) $(37.7) 34$3.3 $3.4 11$0.8 $1.1 2005 2005 2004 (34.3) . 2.1 1.9 . 0.1 0.1 . 0.3 0.3 (1.8) 7.0 0.4 8.6 $21.0 11.3 $(27.6) 0.5 $ $(27.5) $(34.5) 2004 2004 2003 (31.8) (1.5) 5.2 0.5 6.5 Annual Report 2003 2003 4.1 4.3 1.8 2.0 —— (1.1) (1.1) (8.6) (9.0) (0.2) (0.2) 2004 2004 $ 3.6 $ 3.5 $ 9.3 $ 9.6 $ 1.3 $ 1.3 $10.1 $10.5 4.1 1.6 — (1.0) (9.7) (0.6) 2005 2005 $ 3.4 $ 8.5 $ 1.2 $11.4 was a new program in 2005 that entitles all employees 81 ...... is a program that rewards non-union employees and Alaska dispatchers, is based on Air Group profitability. All of the Company’s union work groups pays Alaska’s mechanics, represented by AMFA, as certain pre-tax margin ...... Profit Sharing Plan Variable Pay Plan Operational Performance Rewards Program 1% lower trend rate 1% higher trend rate 1% lower trend rate 1% higher trend rate participate in this plan exceptAssociation for (AMFA) Alaska and employees the represented Transport by Workers the Union Aircraft (TWU). Mechanics Fraternal levels are achieved. This programquarter. was new in 2005 in conjunction with the contract ratified in theto fourth quarterly payouts of up to $300Performance-Based per Pay person if operational and customer service objectives are met. represented by TWU, based on(3) four achievement separate of metrics unit related cost to: goals, (1) and Air (4) Group employee profitability, engagement. (2) safety, Change in year-end postretirement benefit obligation Change in service and interest cost Net periodic benefit cost A 1% higher or lower trend rate has the following effect on the Company’s postretirement medical plans Service cost Interest cost Expected return on assets Amortization of prior service cost Recognized actuarial loss Alaska and Horizon have four separate plans that pay employees based on certain profitability and • The • The • The • The Company allows retirees to continue their medical, dental, and vision benefits by paying all or a portion The Company uses a December 31 measurement date to assess obligations associated with the subsidy. Net during 2005, 2004, and 2003 (in millions): Employee Incentive Pay Plans operational metrics. The aggregate expensemillion, under and these $6.3 plans million, in respectively. 2005, The 2004 plan and descriptions 2003 are was as $20.0 follows: million, $5.3 Postretirement Medical Benefits of the active employee planretirees, premium because until the eligible premiums for received Medicare,accumulated by currently postretirement the age benefit Company 65. obligation are This (APBO) less resultsand for than in 2004 this the a was subsidy actual subsidy $82.1 is cost to million unfunded, ofdiscount and and the rate $76.2 at retirees’ of million, December claims. 5.50% respectively. 31, The and This 2005 included 5.75% liability within in was other 2005 determined liabilities and using on 2004, anat the respectively. assumed December Consolidated The 31, Balance accrued 2005 Sheet, liability and and relatedhistorical 2004, totaled to payments. respectively. $54.4 the The million subsidy Company and is expects $47.2 future million annual subsidies to be similar to the periodic benefit cost for the2003 postretirement (in medical millions): plans included the following components for 2005, 2004, and Annual Report arfrad a esbett rae netit.TeCmaywl otnet esestene o a for need the loss reassess operating to period. net continue reporting the will future realize Company each to The during ability uncertainty. allowance income. Company’s greater valuation taxable the to the future future, subject on on the be based rely in may is not losses carryforwards conclusion does additional This and incur 2005. differences Company 31, temporary the December taxable Should of existing as of recorded reversals been future has expected allowance valuation no thus and in ending and 2006 in beginning expire effected) tax million ($2.4 million $59.6 of carryforwards loss State * purposes. tax for amounts such and purposes reporting financial for liabilities and Taxes Income 9. Note 2024. xeso a vrbo depreciation book over tax of Excess h opn a ocue hti smr ieyta o htisdfre a seswudb realizable be would assets tax deferred its that not than likely more is it that concluded has Company The liability tax deferred Net liability tax deferred Noncurrent asset tax deferred Current liabilities tax deferred Net assets tax deferred Gross Other-net carryforwards* Loss benefits Employee impairment Asset revenue Deferred obsolescence Inventory provision return aircraft Leased tax minimum Alternative Plan Mileage liabilities tax deferred Gross Other-net hedges Fuel millions): (in 31 December at following the comprise liabilities and (assets) tax Deferred assets of amounts carrying the between differences temporary of impact the reflect taxes income Deferred ...... 82 437.0 $ 64.6 $ (91.8) $ 64.6 $ (423.7) (124.7) (172.5) 2005 156.4 488.3 (19.3) (21.6) (17.9) (49.6) 45.1 (8.2) (2.4) (7.5) 6.2 463.3 $ 98.9 $ (74.7) $ 98.9 $ (396.1) (156.0) 2004 173.6 495.0 (19.0) (25.1) (85.7) (18.9) (16.8) (17.3) (54.7) 26.5 (2.6) 5.2 Annual Report 2003 2003 Fair Value 2.1 2.5 0.2 1.9 0.7 1.1 (7.2) 10.2 (0.4) 0.9 25.7% 53.4% —— (0.4)(4.3) 0.7 11.1 (1.7) 3.3 (1.0) 4.4 2004 2004 $(3.9) $10.4 $(5.3) $15.5 $— $ — $— $ — $ (5.3) $15.5 $(20.6) $29.0 73.6 $ 73.6 909.0101.9153.3 909.0 101.9 153.3 December 31, 2005 1,082.6 1,089.5 Amount Carrying 2.4 3.5 4.6 0.8 2.9 (1.2) (5.4) 48.0 38.4% 45.2 49.8 2005 2005 $ 2.1 $ 52.7 $(48.9) $(54.3) $ 52.7 $137.2 ...... 83 ...... $ ...... State Federal State Federal State Federal change Nondeductible expenses State income taxes Other-net Assets: Cash and cash equivalents Expected tax expense (benefit) Actual tax expense (benefit) Effective tax rate The estimated fair values of the Company’s financial instruments were as follows (in millions): Marketable securities Restricted deposits Fuel hedge contracts Liabilities: Long-term debt and capital lease obligations Income (loss) before income tax and accounting change Total tax benefit, Cumulative Effect of Accounting Change Income tax expense (benefit) reconciles to the amount computed by applying the U.S. federal rate of 35% to Total deferred Total tax expense (benefit) related to income (loss) before accounting Deferred tax benefit, Cumulative Effect of Accounting Change: Total current Deferred tax expense (benefit): The components of income tax expense (benefit) were as follows (in millions): Current tax expense (benefit): Note 10. Financial Instruments income (loss) before income tax and accounting change as follows (in millions): Annual Report farrf ul sdfndi FSN.13 h mat nteCmaysrpre eut r sfollows: as are results reported Company’s prices the in on changes impacts to The correlated” 133. “highly No. not SFAS are in contracts defined hedge as Company’s fuel, the aircraft 2004, of of quarter second the since agreements. swap fixed-price the and prices, structures, fuel collar aircraft options, impairment in call and fluctuations purchased restructuring with into (excluding associated enters expenses risks Company operating economic 2004 manage and To 2005 respectively. of charges), 20% and 24% for period accounted each recorded are contracts hedge fuel these of value fair the in Changes earnings. value. in fair their at sheet balance Contracts Hedge Fuel 11. government Note and industry many across dispersion the and place takes settlement that segments. frequency the to due 2005 of amount the limits institution. Company one the any financial addition, with well-known In exposure large, ratings. credit with credit investment only strong transactions have into that enters counterparties Company institution the However, positions. hedge fuel the by nonperformance anticipate not does and instruments financial counterparties. derivative its to counterparties are Credit the of using Concentrations analysis flow cash discounted a the on approximates based deposits is rate. fuel restricted debt borrowing of of long-term current value value of Company’s fair fair value The The fair prices. prices. The market exchange amount. quoted commodity carrying on on based based is is securities contracts marketable hedge of value fair The instruments. h arvleo aheuvlnsapoiae arigvledet h hr auiyo these of maturity short the to due value carrying approximates equivalents cash of value fair The obligations lease capital and debt Long-term Liabilities: contracts hedge Fuel deposits Restricted securities Marketable equivalents cash and Cash Assets: eotdfe xes ilicueteefcieprino an soitdwt eg oiin that positions hedge with associated gains of portion effective other the in include reported will are expense 2004 fuel 31, Reported March since contracts hedge fuel • of value fair the in changes All fuel • jet and oil crude Intermediate Texas West of prices the between spread the in variations of Because which fuel, aircraft of availability and price the upon dependent inherently are operations Company’s The the on contracts, hedge fuel are which of all currently instruments, derivative all records Company The 31, December at risk credit of concentration significant a represent not do receivables trade Company’s The its to counterparty single any by nonperformance of event the in loss material a realize could Company The that institutions financial the of, quality credit the and with, positions its monitors continually Company The akt-aktgiswr led nlddi cuuae te opeesv osa ac 31, that March extent at the Loss to Comprehensive 2004 Other 31, Accumulated March in 2004. at included existed already that were contracts gains on mark-to-market period current the during settled (expense). income non-operating ...... $ ...... 84 Carrying Amount ,4. 1,060.3 1,042.5 eebr3,2004 31, December 4. 845.9 845.9 6096.0 84.2 96.0 28.0 84.2 $ 28.0 Value Fair Annual Report (2.0) (3.4) 2004 $65.3 $70.7 $68.7 $ 6.8 (1.5) $49.26 $48.97 $48.68 Horizon Air (14.7) 2005 $ 81.5 $ 97.7 $ 96.2 $ 8.6 Oil Price per Barrel Approximate Crude (14.6) (25.2) 2004 $446.8 $486.6 $472.0 $ 50.1 50.853.549.736.420.9 $35.70 21.3 $39.76 26.0 $43.41 17.8 $46.10 12.3 $43.09 $45.11 $45.27 $47.89 $50.44 (11.3) (97.5) Alaska Airlines 2005 (in millions) $529.1 $637.9 $626.6 $ 53.1 Gallons Hedged ...... Requirements Expected Fuel Approximate % of 85 ...... gains on settled hedges ...... 53% ...... 19% ...... 6% 7.1 ...... 6% 5% 6.8 5.5 ...... 46% 35% ...... 22% 17% ...... 52% ...... 20% ...... 11% As of December 31, 2005 and 2004, the fair values of the Company’s fuel hedge positions were $153.3 SFAS No. 128, “Earnings per Share” requires that companies use income from continuing operations before Outstanding fuel hedge positions as of December 31, 2005 are as follows: The following table summarizes realized fuel hedging gains and changes in fair value of hedging contracts related to hedges that settlepreviously in recorded future mark-to-market periods, gains net to of the reclassification of included in non-operating income (expense) Third Quarter 2008 Fourth Quarter 2008 million and $96.0 million, respectively,consolidated and balance are sheets. presented as both current and non-current assets in the in the Note 12. Earnings (Loss) per Share (EPS) extraordinary items and the cumulativewhether effect potential of common an shares accounting are changeaccounting dilutive as change or the in antidilutive. “control 2005, As number” the the inconvertible potential Company determining notes common reported are shares income included from before in the the calculated the Company’s by calculation common dividing for stock net diluted options income earnings andshares (loss) (loss) senior that by per would the share have average (EPS). been common Dilutedexercise outstanding shares EPS of assuming outstanding is in-the-money the plus stock conversion additional options, of common securities using contingently are the convertible dilutive, treasury securities the stock and associated method. the For interest For the expense, the years net years ended of in December tax, whichthe 31, must the calculations. 2005 be convertible For and added the 2003, back year the to ended dilutive the December impact net 31, of income 2005, common or the stock loss. dilutive options impact was of included 5.8 in million common shares that First Quarter 2006 Economic fuel expense Mark-to-market hedging gains included in nonoperating income (expense) Fuel expense before hedge activitiesLess: (“raw” gains or on “into-plane” settled fuel hedges cost) included inGAAP fuel fuel expense expense Less: gains on settled hedges included in nonoperating income (expense) Second Quarter 2006 Third Quarter 2006 Fourth Quarter 2006 First Quarter 2007 Second Quarter 2007 Third Quarter 2007 Fourth Quarter 2007 First Quarter 2008 Second Quarter 2008 outstanding as of December 31, 2005 and 2004 (in millions): Annual Report eotn emns ossigo lsaadHrzn hs emnsaemr ul ecie nNt under 1 Note in described fully and more operating are primary segments two These Operations. has Horizon. in of Company and maker Nature The Alaska decision performance. of operating assessing consisting chief in segments, the and reporting by resources which regularly allocate about evaluated to enterprise is how its an that deciding about of available information components is descriptive are information and defined, financial financial as separate interim segments, and Operating annual segments. report operating company reportable public a that requires 131), Information Segment Operating 13. Note outstanding shares average Weighted (loss) income Diluted tax of net notes, convertible on Interest (loss) income Net outstanding tax shares of average net Weighted change, accounting of effect Cumulative outstanding shares average change Weighted accounting before (loss) income Diluted tax of net notes, convertible on Interest change accounting before (loss) Income Share Per Earnings Diluted outstanding shares average Weighted (loss) income Net outstanding tax shares of average net Weighted change, accounting of effect Cumulative outstanding shares average Weighted change accounting before (loss) Income Share Per Earnings Basic million, respectively. 3.4 2003, represented and antidilutive, 2004 are 2005, calculations. they in the because million in EPS 3.0 included diluted and were of million notes calculation 3.7 convertible the senior from the excluded of options conversion Stock upon outstanding been have would FSN.11 DslsrsaotSget fa nepieadRltdIfrain”a mne (SFAS amended as Information,” Related and Enterprise an of Segments about “Disclosures 131, No. SFAS EPS Diluted change accounting of effect cumulative share Per change accounting before EPS Diluted EPS...... change accounting of effect cumulative share Per change accounting before EPS amounts): share per except millions (in follows as were calculations EPS ...... 86 (0.01) $ (0.4) $ (5.9) $ (2.66) $ (90.4) $ 2.65 $ 90.0 $ 84.5 $ (0.21) $ (5.9) $ (3.27) $ (90.4) $ 3.06 $ 84.5 $ 33.917 33.917 33.917 27.609 27.609 27.609 2005 5.5 5.5 05)$0.51 $ (0.57) $ 13.5 $ (15.3) $ 13.5 $ (15.3) $ 0.51 $ (0.57) $ 13.5 $ (15.3) $ 13.5 $ (15.3) $ 0.51 $ (0.57) $ 13.5 $ (15.3) $ $— $— 0.51 $— $— $ (0.57) $ 13.5 $ (15.3) $ 68926.730 26.859 26.730 26.859 26.730 26.859 26.648 26.859 26.648 26.859 26.648 26.859 2004 ANA NA NA NA NA NA NA NA 2003 Annual Report 2003 3.97.0 2.4 5.2 7.9 45.9 1.4 1.4 1.1 1.2 1.10.3 0.7 1.9 (3.1) (5.0) (3.1) (5.0) 17.1 25.3 24.5 12.8 44.1 45.2 51.9 47.8 13.4 12.3 26.2 15.2 (10.7)(20.6) (8.1) 29.0 (27.0) 11.8 (13.8) (47.8) 159.6 308.2 167.5 354.1 287.0840.6 246.7 888.9 503.2 463.8 128.1 119.5 142.6 133.0 2004 (874.5) (942.8) 3,081.9 3,066.4 2,723.8 2,444.8 $3,335.0 $3,259.2 $2,233.0 $2,027.4 5.5 9.7 1.1 1.7 1.2 1.6 0.2 (3.4) (3.4) 26.4 43.1 30.9 51.2 63.0 16.8 32.5 (13.4) 137.2 373.8 416.9 311.8 124.2 556.4 125.4 143.4 2005 3,511.9 1,012.1 2,975.3 (1,043.8) $ 3,792.0 $ 2,416.1 87 ...... Consolidated Other** Elimination of inter-company accounts Other** Horizon Horizon Other** Elimination of inter-company accounts Consolidated which are eliminated in consolidation. Alaska Horizon Horizon Consolidated Alaska Consolidated Alaska Consolidated Alaska Consolidated Alaska Horizon Other** Elimination of inter-company revenues Consolidated Alaska Horizon Other** Horizon Other** Elimination of inter-company accounts Financial information for Alaska and Horizon follows (in millions): Alaska *** Capital expenditures include Includes aircraft the deposits, parent net company, of Alaska deposits Air returned. Group, Inc., including its investments in Alaska and Horizon, Total assets at end of period: Capital expenditures*: Income (loss) before income tax and accounting change: Interest expense: Interest income: Depreciation and amortization expense: Operating revenues: Annual Report rgnlyetmtda 5. ilo,o hc 2. ilo n 2. ilo a eodddrn h hr and third the during recorded was million $25.9 and respectively. were million 2004, restructuring $27.5 a of this which in quarters with of resulted fourth associated million, activities costs $53.4 restructuring related at these and estimated total, Severance originally equipment In employees. support initiatives. 900 ground other approximately and as of service well reduction fleet as Company’s functions, the maintenance of facility out and contracting base, maintenance heavy Oakland the in recorded was which related million, and $16.1 Severance at Seattle. estimated in originally quarter. employees were second 475 restructuring approximately this of with reduction associated a costs in resulted event This Airport. Charges Restructuring letters 15. and/or Note offers recent on based value realizable to net engines estimated buyers. spare their prospective and to from aircraft assets intent F-28 these of held-for-sale of its value with carrying associated the respectively, lower million, $0.6 and million $0.4 Engines Spare Related and Aircraft F-28 of Impairment values carrying remaining retired. the be depreciating will and began aircraft lives and last useful equipment the the spare when reassessed related 2007 has and through Company fleet deemed the the management determination, of that value values factors fair residual other the for with adjusted conjunction and In authority, appropriate. pricing independent an by compiled to (pre-tax) value. million market $36.8 fair totaling estimated charge its Accordingly, impairment to flows. an fleet cash recorded the 737-200C future Alaska down the remaining 2004, write of estimated of value the quarter carrying to second the compared the that when during concluded recoverable and longer Assets” no Long-Lived was of fleet Disposal or Impairment aircraft. the all-cargo for an to converted airplanes be modified will five one the and and of aircraft aircraft Four passenger/cargo 737-400 capacity. combination July existing passenger into In five remaining converted planned. modifying the be initially by for will than aircraft aircraft earlier these 737-400 2007) replace existing of to other end plan using the its (by announced service Company from the aircraft 2004, those remove and fleet 737-200C Aircraft 737-200C of Impairment Charges Impairment 14. Seattle-Vancouver. Note and Spokane-Seattle, Portland-Seattle, Based are Spokane. routes and nonstop 2005. Boise, leading in Portland, its miles Seattle, 2005, passenger are in revenue airports revenues of leading on 5% Horizon’s for enplanements, accounted passenger markets on Canada Based The Idaho. and Oregon Washington, Diego. Seattle-San and 2005 Angeles, on Seattle-Los Based Seattle-Anchorage, passenger Anchorage. are on and routes Based Portland nonstop 18%. Angeles, leading for for Los its accounted accounted Seattle, revenues, markets markets are Mexico other airports the and leading 20%, 5%, Alaska’s for for enplanements, accounted accounted mainland markets U.S. Canada the the and 10%, Alaska between and Alaska within etCatpsegrtafcacutdfr4%o lsas20 eeu asne ie,psegrtraffic passenger miles, passenger revenue 2005 Alaska’s of 47% for accounted traffic passenger Coast West uigtetidqatro 04 lsaanucdamngmn eraiainadtecoueo its of closure the and reorganization management a announced Alaska 2004, of quarter third the During International Seattle-Tacoma the at services ramp out contracted Alaska 2005, of quarter second the During million, $2.4 of charges impairment recorded Horizon 2004, of quarters fourth and second first, the During data market and appraisals third-party using derived was aircraft Company’s the of value fair estimated The “Accounting 144, No. SFAS by required as impairment evaluated Company the decision, this of result a As Boeing Alaska’s of retirement the accelerate to plan a approved Board Company’s the 2004, June In of states the in primarily domestically, flown are miles passenger revenue Horizon’s of 95% Approximately 88 Annual Report — 53.4 (14.7) 2004 $ 38.7 $— (3.7) 16.1 (48.0) 2005 $ 3.1 $ 38.7 ...... 89 ...... Restructuring charge adjustments Cash payments Restructuring charges Balance at December 31, 2005 and 2004, respectively The Company will make the majority of the remaining cash payments in the first quarter of 2006. The During March 2005, the Company notified the Port of Oakland of its decision to terminate the lease for the On December 16, 2005, the Company sold 5.7 million shares of its common stock at $35.15 per share for The Company is a party to routine litigation incidental to its business and with respect to which no material In May 2005, the Air Line Pilots Association filed a lawsuit in federal district court in Seattle to overturn the In March 2005, Alaska filed a lawsuit in federal district court in Seattle against the International Association Accrual for Severance and RelatedBalance Costs at December 31, 2004 and 2003, respectively The severance package offered to impacted employees included cash payments based on years of service The following table displays the activity and balance of the severance and related cost components of the accrual for severance and relatedand costs payroll at taxes December in 31, the 2005 consolidated and balance 2004 sheets. is included in accrued wages, vacation Oakland hangar as part ofcharge its of ongoing $7.7 restructuring million efforts. in Accordingly,result the the of first Company the quarter recorded lease of an termination. 2005 impairment associated Additionally, for with the the the Company leasehold lease recorded improvements termination, a that which charge will have of be been $0.3 abandoned paid. million as for a certainNote costs 16. Shareholders’ Equity aggregate proceeds of $200.4 million.that The have Company been had recorded approximately as $0.4 an million offset of to offering additional related paid-in expenses capital onNote the 17. consolidated balance sheets. Contingencies liability is expected. Management believesaffect the the ultimate Company’s disposition financial of position thesecurrent or matters understanding results is of of not the operations. likely relevant However,costs to law this materially and and belief risks facts; is associated it based with is on litigation subject management’s and to the various actions contingencies, of including judges the and potential juries. current labor contract covering Alaska’sOn pilots July as 21, established 2005, by the angranted Company arbitrator, the filed which Company’s a was motion motion effective to to May dismiss. dismiss 1, This the 2005. matter lawsuit. is On closed. October 28, 2005, the districtof court Machinists (IAM) seeking to compel arbitration of a dispute regarding the permissibility, under the collective and one year of medicalthe coverage Company after estimated severance the date. projected SinceActual claims Alaska costs cost self-insures will for for likely affected employee differ employees medicallonger from and coverage, need the recorded the estimate a coverage if corresponding provided employees accrual. or by accept lower Alaska positions than or with our simply other estimate. submit employersimpacted The claims and employees Company during no that expects the select to one the record yearadjustments extended additional period are medical adjustments that expected coverage in are to becomes 2006, higher be known, as nominal. although the any number remaining of Company’s restructuring accrual as ofrestructuring and charges for during the the years same ended period December of 31, 2003 2005 ($ and in 2004. millions): There were no Annual Report emusmn a eodda nofe ocptlcosts. The capital expenditures. to reinforcement offset deck an flight as of recorded reimbursement was in reimbursement Administration Aviation Federal the from Alaska for million ($52.8 million the $71.4 2003, of May amount In the 2003. in Horizon). 30, grant for September cash million and through one-time $18.6 TSA 2003 the and the 1, of by June share imposed period its not the (TSA) received were during Company Administration fees paid Security security not Transportation passenger were each the Additionally, fees on to 2002. carrier based paid February allocated fees in carriers, carrier inception air and its to remitted since payments fees cash security one-time of of share billion carrier’s $2.3 included Act The legislation. Compensation Government U.S. 18. Note or 2005 31, December at significant not known was the for accrual in costs The locations remediation available. 2004. various estimated currently at for information business accrual on of an based course established contamination normal has the Company in The occurs system. that Company’s contamination petroleum a other issued and yet fuel not has 2006. court September the for but set IAM 2006, been The 16, has prosecute. February date order to on trial an failure cause A entered for show matter. court dismissed to the the be order on 2006, not court’s ruling 6, should the February counterclaim to amended On its response an so. why its file do cause submitted shall not show (as IAM did to subcontracting the IAM IAM ramp that the the Seattle stated but directing the court 2006, quo on The 18, status based negotiations). January IAM’s was parties’ by the it the counterclaim dismissed extent during on court the conduct judge The to other court counterclaim. claim to federal IAM bargaining opposed a the faith by dismiss bad denied to the injunction and motion and preliminary heard a claim, for was filed motion motion Alaska a That 2005. filed Alaska. 2, IAM by 475 June the subcontracting Alaska approximately event, the 2005, of this reverse 13, reduction after to May immediate Shortly seeking On the IAM. if contract. in the work labor resulting by ramp new Seattle, represented Seattle acceptable in employees the an operation subcontract on service and would IAM ramp quo it the the status that with subcontracted Act stating agreement Labor things, reach Railway other not the among could the violated by, it 2005, Alaska bargaining 10, that faith May alleging bad On Alaska in Seattle. against engaged in claim operation counter service a ramp filed Alaska’s IAM of subcontracting of agreement, bargaining nAgs 03 h opn eevd$. ilo $. ilo o lsaad$. ilo o Horizon) for million $0.2 and Alaska for million ($2.5 million $2.7 received Company the 2003, August In into signed was Act) (the Act Appropriations Supplemental Wartime Emergency the 2003, 16, April On jet to related primarily costs remediation environmental for responsible be potentially could Company The 90 Annual Report issued by the 91 Internal Control—Integrated Framework REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We have audited the accompanying consolidated balance sheets of Alaska Air Group, Inc. as of We conducted our audits in accordance with the standards of the Public Company Accounting Oversight In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board Committee of Sponsoring Organizations ofFebruary the 14, Treadway 2006 Commission expressed (COSO), an andof, unqualified our internal opinion report control on dated over management’s financial assessment reporting. of, and the effective operation KPMG LLP Seattle, Washington February 14, 2006 The Board of Directors andAlaska Shareholders Air Group, Inc.: December 31, 2005 and 2004,cash and flows the for related each consolidated of statementsof the of the years operations, consolidated in shareholders’ financial the equity statements, two and financial we year statements also period and have ended financial audited December statement financial 31,responsibility schedule statement 2005. is are schedule In to the II. connection express responsibility These with an of consolidated based our opinion the on audits on Company’s our these management. audits. consolidated Our financial statements and financial statement schedule Board (United States). Those standardsabout require whether that the we consolidated plan financial andexamining, statements perform on are the a free audit test of to basis, material obtainalso evidence misstatement. reasonable includes supporting An assurance assessing the audit the amounts includes accounting andevaluating principles disclosures the used in overall and the financial significant financial statement estimates statements.our presentation. made An opinion. We by audit believe management, that as our well audits as provide a reasonable basis for the financial position of Alaskaoperations Air and Group, their Inc. cash as flows ofconformity for December with each 31, U.S. of 2005 generally the and accepted years 2004,statement accounting in and schedule, principles. the the when Also two results considered in year of in our periodpresents their relation opinion, ended fairly, to the December in the related 31, all basic financial 2005, material consolidated in respects, financial the statements information taken set as forth a therein. whole, (United States), the effectiveness ofDecember Alaska 31, Air 2005, Group, based Inc.’s on internal criteria control established over in financial reporting as of Annual Report eray1,2006 14, February Washington Seattle, unqualified an LLP expressed KPMG 2006 14, in February years dated the report statements of our financial each and 2004, consolidated for 2005, and those flows 31, 2005 on cash December 31, opinion and ended December equity period of shareholders’ year as operations, two Inc. of the Group, statements Air consolidated Alaska related of the sheets and balance consolidated the States), (United established criteria on based (COSO). 2005, material Commission 31, all Treadway December in of maintained, as Inc. reporting Group, financial in Air over Alaska criteria control opinion, on internal our based effective in respects, respects, Also, material (COSO). all Commission in Treadway stated, the fairly is 2005, 31, in December established of as reporting financial over the with compliance of degree that the risk that the or deteriorate. to conditions, may subject in procedures are changes or periods of policies future because to inadequate effectiveness become of may evaluation controls any of projections Also, misstatements. statements. financial the the on of effect disposition material reasonable or a provide use, have (3) acquisition, could and unauthorized that company; of made assets the detection being company’s of timely are directors or company and prevention the management regarding of of accordance assurance expenditures authorizations in and with statements receipts reasonable accordance financial that provide in of and (2) only preparation principles, company; permit accounting the to detail, accepted of necessary reasonable generally assets as in with the recorded that, of are records dispositions transactions of and that maintenance transactions assurance the the to reflect reporting pertain fairly financial (1) in and over that purposes accurately control procedures external internal and for company’s policies statements A those financial principles. includes of accounting preparation accepted the generally and with reporting accordance financial of reliability the regarding a provides audit our that believe such We opinion. performing circumstances. our and the for control, in basis internal necessary reasonable of considered effectiveness we management’s operating as evaluating and procedures reporting, design Our other financial the respects. over evaluating material control assurance and all internal reasonable testing in of obtain assessment, maintained understanding to was an audit reporting obtaining the financial included perform over audit and control plan internal we effective that whether require about standards Those States). (United Board internal Inc.’s Group, Air audit. Alaska our an of on express effectiveness based to the reporting is on financial responsibility opinion over Our an its control reporting. and for financial assessment and over management’s reporting control on financial internal opinion over of control effectiveness internal the (COSO) effective of Commission maintaining assessment Treadway for the responsible of is Organizations management in Sponsoring financial Inc.’s established of over criteria Committee control on the internal based by effective 2005, issued maintained 31, Inc. December Group, of Air as Alaska reporting that Reporting, Financial over Control Inc.: Group, Air Shareholders Alaska and Directors of Board The nenlCnrlItgae Framework Control—Integrated Internal eas aeadtd nacrac ihtesadrso h ulcCmayAcutn vrih Board Oversight Accounting Company Public the of standards the with accordance in audited, have also We control internal effective maintained Inc. Group, Air Alaska that assessment management’s opinion, our In detect or prevent not may reporting financial over control internal limitations, inherent its of Because assurance reasonable provide to designed process a is reporting financial over control internal company’s A Oversight Accounting Company Public the of standards the with accordance in audit our conducted We Internal on Report Management accompanying the in included assessment, management’s audited have We EOTO NEEDN EITRDPBI CONIGFIRM ACCOUNTING PUBLIC REGISTERED INDEPENDENT OF REPORT nenlCnrlItgae Framework Control—Integrated Internal sudb h omte fSosrn raiain fthe of Organizations Sponsoring of Committee the by issued . 92 sudb h omte fSosrn raiain of Organizations Sponsoring of Committee the by issued nenlCnrlItgae Framework Control—Integrated Internal . lsaArGroup, Air Alaska Annual Report 93 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We have audited the accompanying consolidated balance sheet of Alaska Air Group, Inc. and subsidiaries We conducted our audit in accordance with the standards of the Public Company Accounting Oversight In our opinion, such consolidated financial statements present fairly, in all material respects, the financial To the Board of DirectorsSeattle, and Washington Shareholders of Alaska Air Group, Inc. (the “Company”) as of Decemberequity, 31, and 2003, cash and flows the for relatedyear the consolidated ended year statements December then of 31, ended. operations, 2003, Our shareholders’ statement listed audit schedule in also are the included the Index the responsibility at financialopinion of Item statement on the 15(a). schedule these Company’s These for financial management. financial the statements Our statements based responsibility and on is financial our to audit. express an Board (United States). Those standardsabout require whether that the we financial plan statements andbasis, are perform evidence free the supporting of audit the material to amounts misstatement. obtainassessing and An reasonable the disclosures audit assurance accounting in includes principles the examining, used financialthe on and statements. overall a significant An test financial estimates audit statement made also presentation. by includes opinion. We management, believe as that well our as audit evaluating provides a reasonable basis for our position of Alaska Air Group,their Inc. cash and flows subsidiaries for as the ofUnited year December States then 31, of ended 2003, America. in and Also, conformity theirDecember in with results 31, our accounting of 2003, opinion, principles operations when such generally and considered financial acceptedpresents in statement in fairly relation schedule the in to for all the the material basic year respects consolidated ended the financial information statements set taken forth as therein. a whole, DELOITTE & TOUCHE LLP Seattle, Washington February 27, 2004 Annual Report APnticm ls)bfr conigchange accounting before (loss) income net GAAP tax of net charges, Impairment tax of net charges, tax Restructuring of net gains, hedging tax Mark-to-market of net recovery, fee Navigation tax of net change compensation, accounting Government before (loss) income net Adjusted the provisions, return aircraft leased For created. was reserve which for purpose for reserve from Deduction (A) liabilities: long-term other as recorded Reserve (b) applies: it which to asset from deducted Reserve (a) 2005 31, December Ended Year liabilities: long-term other as recorded Reserve (b) applies: it which to asset from deducted Reserve (a) 2004 31, December Ended Year liabilities: long-term other as recorded Reserve (b) applies: it which to asset from deducted Reserve (a) 2003 31, December Ended Year Millions) (In aac srcasfe oohrln-emlaiiisi h es setne nteudryn aircraft. underlying the on extended is lease the if liabilities long-term other to reclassified is balance provision return aircraft Leased parts spare equipment flight for allowance Obsolescence accounts doubtful for Allowance provision return aircraft Leased parts spare equipment flight for allowance Obsolescence accounts doubtful for Allowance provision return aircraft Leased parts spare equipment flight for allowance Obsolescence accounts doubtful for Allowance EOCLAINBTENAJSE EUT N MUT CALCULATED AMOUNTS AND RESULTS ADJUSTED BETWEEN RECONCILIATION NE EEAL CETDACUTN RNILS(GAAP) PRINCIPLES ACCOUNTING ACCEPTED GENERALLY UNDER AUTO N ULFIGACCOUNTS QUALIFYING AND VALUATION ...... — ...... — — — 6.3 3.6 ...... $6.9 $ ...... — — ...... 3.0 $ ...... 1.7 $ ...... 2.3 $ ...... lsaArGop Inc. Group, Air Alaska lsaArGop Inc. Group, Air Alaska ...... $ ...... $ ...... 94 ...... Beginning 2005 1.)(18 — — — (31.8) (12.7) Balance 3. 78$(.)$40.3 (4.8) $ $7.8 6.9 $ $37.3 $(10.6) $37.3 (1.3) $3.3 $ $14.2 $3.3 $14.2 $35.3 (5.0) $ $35.3 (8.3) $5.0 $ $14.2 $3.5 $40.1 50$52$3.)$6.)$(88.3) $(67.5) $(30.8) 5.2 $ 55.0 863. — $(43.4) — $(67.2) 13.5 $ $(15.3) — 84.5 31.7 38.6 2004 2.)——(6.4) — — (26.7) oExpense to Additions Charged 29$(.)$3.3 $ (6.5) $ 2.7 $2.9 $ (1.5) $ $1.2 3.0 $ (1.2) $ $2.5 1.7 $ (1.6) $ $1.0 2003 430351.3 0.3 44.3 Deductions (A) 2002 ceueII Schedule Balance Ending 2001 Annual Report 95 EXHIBIT INDEX aska Air Group, Inc., as amended through February 12, 2003 (Exhibit 3(ii) to 2002 10-K) (Exhibit 3.1 to Second Quarter 2002 10-Q) Association, as Trustee, and FirstAir Supplemental Group, Indenture Inc. dated and September U.S. 30,due Bank 2004 2023 National between (Exhibit Association, Alaska 4.1 as to Trustee, Third relating Quarter to 2004 senior 10-Q) convertible notes Lynch & Co., Merrill Lynch,of Pierce, Senior Fenner Convertible & Notes Smith due Incorporated 2023 and (Exhibit each 4.3 of to the First Initial Quarter Purchasers 2003National 10-Q) Association relating to Senior2003 Convertible 10-Q) Notes due 2023 (Exhibit 4.3 to First Quarter National Association relating to Senior2003 Convertible 10-Q) Notes due 2023 (Exhibit 4.5 to First Quarter America, N.A. as administrative agent,Association Citicorp as USA, documentation Inc. agent, as and syndication other agent, lenders. U.S. (Exhibit Bank 10.1 National to FirstAirlines, Quarter Inc. 2005 (Exhibit 10-Q) 10.1 to Second Quarter 2005 10-Q) Airlines, Inc. (Exhibit 10.2 to Second Quarter 2005 10-Q) Industries, Inc. and Bombardier, Inc. (Exhibit 10.1 to Third Quarter 2005New 10-Q) York Branch, as securityDeutsche agent, Girozentrale Norddeutsche (Exhibit Landesbank 10.2 Girozentrale, to and Third DekaBank Quarter 2005 10-Q) (Exhibit 10.19 to Third Quarter 2004 10-Q) restricted stock unit agreements (Exhibit 10.2 to 2004 10-K)*** Statement No. 33-52242)*** Alaska Airlines, Inc. for thelease lease agreements of and a Letter B737-400 Agreement aircraft, #1 summaries dated of January 19 22, substantially 1990 identical (Exhibit 10-14 to 1990 10-K) Pursuant to Item 601(a)(2) of Regulation S-K, this Exhibit Index immediatelyCertain precedes of the the exhibits. following exhibits have heretofore been filed with the Commission and are incorporated *3.1 Restated Certificate of*3.2 Incorporation of Alaska Air Group, Inc. as amended Bylaws through of May Al 21, 1999 *4.1 Indenture dated as of March 21, 2003 between Alaska Air Group, Inc. and*4.2 U.S. Bank National *4.3 Form of Senior Convertible Note due 2023 Registration (Exhibit Rights 4.1 Agreement to dated First as Quarter of 2003 March 10-Q) 21,*4.4 2003 between Alaska Air Group, Inc., Merrill Pledge Agreement dated as of March 21, 2003*4.5 between Alaska Air Group, Inc. in favor of Control U.S. Agreement Bank dated as of March 21, 2003 between Alaska Air Group, Inc. and U.S. Bank *10.1 Credit Agreement dated as of March 25, 2005 among Alaska Airlines, Inc., as borrower, Bank of *10.6 Alaska Air Group,*10.7 Inc. Performance Based Pay Plan (formerly “Management Incentive 2004 Plan”)*** Alaska Air*10.8 Group, Inc. Long-Term Incentive Equity Plan and form of Alaska stock Air option Group, and Inc. 1988 Stock Option Plan, as amended through May 19, 1992 (Registration herein by reference from theare document numbered described in in accordance parenthesis. with Certain Item others 601 are of filed Regulation herewith. S-K. The exhibits *#10.2 Aircraft General Terms Agreement*#10.3 dated June 15, 2005, between the Boeing Company Purchase and Agreement Alaska No. 2497*#10.4 dated June 15, 2005, between the Boeing Company Supplemental and to Alaska Master Purchase*#10.5 Agreement dated October 18, 2005 by and between Credit Horizon Agreement Air dated October 19, 2005 between Alaska Airlines, Inc. and HSH Nordbank AG *#10.9 Lease Agreement dated January 22, 1990 between International Lease Finance Corporation and Annual Report ofdniltetetwsrqetda oaprino hsdocument. this of portion a to as requested was treatment Confidential 1350 arrangement. Section or U.S.C. plan 18 compensatory to or # Pursuant contract Officer management 1350 Financial Indicates Section Chief U.S.C. herewith. of *** 18 Filed Certification to 906 Pursuant filed. Section Officer 1350 Previously Executive Section ** Chief U.S.C. of 18 Certification to 906 Pursuant Section Officer * 1350 Financial Section Chief U.S.C. of 18 Certification to 302 Pursuant Section Officer Executive **32.2 Chief LLP) of Touche Certification & 302 (Deloitte Section Firm Accounting **32.1 Public Registered Independent LLP) of (KPMG Consent Firm Accounting **31.2 Public Registered Independent of Consent Registrant the **31.1 of Subsidiaries **23.2 **23.1 Charges Fixed to Earnings of Ratio of **21 Computation of Statement **12.1 and Inc. Industries, Air Horizon between 2003 18, September of as dated Agreement Codeshare *#10.18 for Bombardier and Inc. Industries, Air Horizon between 1998 21, December dated Agreement *#10.14 1. etrfo PGLPrgrigcag nacutn rnil Ehbt1. oFrtQuarter First to 18.1 (Exhibit principle accounting in change regarding LLP KPMG from Letter Alaska and *18.1 Bagley D. George between and by Agreement First Non-Compete to and 10 Retirement (Exhibit Bagley D. George and Inc. Alaska Airlines, between Alaska *10.19(b) 1996 between 29, agreement December Employment of as dated arrangement plan retirement Supplemental *10.19(a) *10.19 to 10.18 Gr (Exhibit Air Alaska 1999 27, October dated Agreement Control of Change Inc. Group, Air Alaska Statement *10.17 (Registration Plan Equity Incentive Long-Term 1999 Inc. Group, Air Alaska *10.16 *10.15 by amended as Plan, Retirement Supplementary Officers Elected 1995 Inc. Group, Air Alaska (Registration Plan Equity Incentive Long-Term Officer Non 1997 Inc. Group, Air 333- Alaska Statement *10.13 (Registration Plan Stock Director Employee Non Inc. Group, Air 333- Alaska Statement *10.12 (Registration Plan Equity Incentive Long-Term 1996 Inc. Group, Air Alaska *10.11 *10.10 0510-Q) 2005 8-K)*** 2005 14, September to 10.1 (Exhibit Inc. Airlines, 10-Q)*** 2002 Quarter 10-K)*** 2004 to 10.19 (Exhibit Bagley George and Inc. Airlines, 10-Q) 2003 Quarter Third to 10.1 (Exhibit Inc. Airlines, Frontier 10-K) Form 1999 10-K) Form 1998 to 10.16 333-87563)*** (Exhibit aircraft 700 series jets regional Canadair 25 of purchase the Supplementary Officers Elected 10-K)*** 1995 1997 Inc. to Group, 10.16 Retirement Air (Exhibit Supplementary Alaska Plan Officers the Retirement Elected to 1995 Amendment Inc. Second Group, and Air Plan Alaska the to Amendment First 333-39899)*** Statement 33727)*** 09547)*** 01 oAedetN.1t eitainSaeetN.33177 ae etme 3 2003) 23, September dated 333-107177 No. Statement Registration (Exhibit to Plan 1 Compensation Deferred No. Nonqualified Amendment Inc. to Group, 10.17 Air Alaska the to Amendment u,Ic oqaiidDfre opnainPa,a mne yFirst by amended as Plan, Compensation Deferred Nonqualified Inc. oup, 96 Annual Report Exhibit 31.1 YER S. A William S. Ayer ILLIAM Chairman, President & CEO /s/ W CERTIFICATIONS December 31, 2005; a material fact necessary tostatements make were the made, statements not made, misleading in with light respect of to the the circumstances period under covered which by such report, this fairly report; present in allthe material registrant respects as the of, financial and condition, for, results the of periods operations presented and in cash this flows report; of controls and procedures (as definedover in financial Exchange reporting Act (as Rules defined 13a-15(e)we in and have: Exchange 15d-15(e)) Act and Rules internal 13a-15(f) control and 15d-15(f))a) for Designed the such registrant disclosure and controlsbe and designed procedures, under or our caused supervision, suchconsolidated to disclosure subsidiaries, ensure controls is that and made material procedures known information to in to relating which us to this by the report others registrant, is within including being those its prepared; entities,b) particularly Designed during such the internal period controlreporting over to financial be reporting, designed or under causedfinancial our such reporting supervision, internal and to control the provide over preparation reasonable financial generally of assurance accepted financial regarding accounting statements the principles; for reliability external of purposes inc) accordance Evaluated with the effectiveness ofreport the our registrant’s conclusions disclosure about controls the andperiod effectiveness procedures covered of and by the presented this disclosure in report controls this based and on procedures, suchd) as evaluation; Disclosed of and in the this end report ofoccurred any the during change the in registrant’s the most registrant’sto recent internal materially fiscal control affect, quarter over the that financial registrant’s has reporting internal materially that control affected, over or financial is reporting; reasonably and likely internal control over financial reporting,registrant’s to board the of registrant’s directors auditors (or and persons the performing audita) the committee all equivalent of significant functions): the deficiencies andfinancial material reporting weaknesses which in are the reasonably designsummarize likely or and to operation report adversely of financial affect internal information; the control and registrant’s over abilityb) to any record, fraud, process, whether orrole not in material, the that registrant’s involves internal management control or over other financial employees reporting. who have a significant I, William S. Ayer, certify that: 1. I have reviewed this annual report on2. Form 10-K of Alaska Air Based Group, on Inc. my for knowledge, the this period report ended does not contain any untrue statement3. of a material fact or Based omit on to my state knowledge, the financial statements, and other financial information included4. in this quarterly The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure 5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of February 17, 2006 By Annual Report eray1,20 By 2006 17, February .Tergsrn’ te etfigofcr n aedslsd ae norms eeteauto of evaluation recent most our on based disclosed, have I and officers certifying other registrant’s The 5. disclosure maintaining and establishing for responsible are I and officer certifying other registrant’s The quarterly this in 4. included information financial other and statements, financial the knowledge, state my to on omit Based or fact material a of 3. statement untrue any contain not does ended report period this the knowledge, for my Inc. on Group, Based Air Alaska of 10-K Form 2. on report annual this reviewed have I 1. that: certify Tilden, D. Bradley I, )ayfad hte rntmtra,ta novsmngmn rohrepoeswohv significant a have who reporting. employees financial other over or control management internal involves registrant’s that the material, in not role or whether process, fraud, record, any to b) ability over registrant’s and control the information; internal affect financial of adversely report operation to and or likely summarize design reasonably the are in which weaknesses reporting material financial and deficiencies the functions): significant of equivalent all committee the a) audit performing the persons and (or auditors directors registrant’s of the board to registrant’s reporting, financial over control internal likely and reasonably reporting; is financial or over affected, control that materially internal reporting has registrant’s financial that the over quarter affect, control fiscal materially internal recent to registrant’s most the registrant’s in the change during the any occurred of report end this the in and of Disclosed evaluation; as d) such procedures, on and based this controls report in disclosure this presented the by and of covered procedures effectiveness period and the controls about disclosure conclusions registrant’s our the report of effectiveness the with Evaluated accordance c) in purposes of external reliability for principles; the statements accounting regarding financial accepted assurance of generally financial reasonable preparation over provide the control to and internal supervision, reporting such our financial caused under or designed reporting, be financial to over reporting control period internal the such during Designed particularly b) entities, prepared; its those being including within is registrant, others report the by this to us which relating to in to information known procedures material made and that is controls ensure subsidiaries, disclosure to consolidated such supervision, caused our or under procedures, designed and be controls and disclosure registrant such the Designed for a) 15d-15(f)) and control 13a-15(f) internal Rules and Act 15d-15(e)) Exchange have: and in we 13a-15(e) defined Rules (as Act reporting Exchange financial in over defined (as procedures and controls of report; flows this cash in and presented operations periods of the results for, condition, and financial of, the as respects registrant material the all in present report; fairly this report, such by which covered under period circumstances the the to of respect light with in misleading made, not statements made, the were make statements to necessary fact material a 2005; 31, December CERTIFICATIONS s B /s/ he iaca Officer Financial Chief RADLEY rde .Tilden D. Bradley .T D. ILDEN xii 31.2 Exhibit Annual Report Exhibit 32.1 YER S. A William S. Ayer ILLIAM PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED /s/ W (1) The Report fully complies with the requirements of Section 13(a) or(2) 15(d) The of information the contained Securities in the Report fairly presents, in all material respects, the financial Chairman, President & Chief Executive Officer In connection with the Annual Report of Alaska Air Group, Inc. (the “Company”) on Form 10-K for the Exchange Act of 1934, as amended; and condition and results of operations of the Company. period ended December 31, 2005“Report”), as I, filed William with S. the Ayer, Securitiesto Chairman, and 18 President Exchange U.S.C. & Commission Section Chief on 1350, Executive the as Officer date adopted of hereof pursuant the (the to Company, Section certify, 906 pursuant of the Sarbanes-Oxley Act of 2002, that: February 17, 2006 By Annual Report eray1,2006 17, February By eto 30 saotdprun oScin96o h abnsOlyAto 02 that: 2002, of Act U.S.C. Sarbanes-Oxley 18 the to of (the pursuant 906 hereof certify, Section date Company, to the the pursuant on of adopted Commission Officer as Exchange Financial 1350, and Chief Section Securities Tilden, the D. with Bradley filed I, as “Report”), 2005 31, December ended period odto n eut foeain fteCompany. the of operations of results and condition and amended; as 1934, of Act Exchange the for 10-K Form on “Company”) (the Inc. Group, Air Alaska of Report Annual the with connection In 2 h nomto otie nteRpr arypeet,i l aeilrset,tefinancial the respects, material all in presents, fairly Report the in Securities contained the information of The 15(d) (2) or 13(a) Section of requirements the with complies fully Report The (1) s B /s/ ETFCTO USATT 8USC ETO 30 SADOPTED AS 1350, SECTION U.S.C. 18 TO PURSUANT CERTIFICATION USATT ETO 0 FTESRAE-XE C F2002 OF ACT SARBANES-OXLEY THE OF 906 SECTION TO PURSUANT he iaca Officer Financial Chief RADLEY rde .Tilden D. Bradley .T D. ILDEN xii 32.2 Exhibit Annual Report [THIS PAGE INTENTIONALLY LEFT BLANK] Annual Report Directors Group Air Alaska Directory Corporate lrrf,Inc. Florcraft, CEO & Chairman 70 age Wien A. Richard LLC Energy Star Pacific CEO & President 54 age Thompson Kenneth J. Region Northwest Pacific NA Bank Fargo Wells CEO 61 age Rindlaub V. John Institute Alaskans First Fellow Senior 62 age Mallott I. Byron Software Seatab CEO 57 age Madsen F. Dennis Bank Northrim CEO and President Chairman, 64 age Langland Marc R. Commerce of Chamber Regional Diego San CEO & President A Jr. Knight, J. Jessie Group Air Alaska Emeritus Chairman 67 age Kennedy R. Bruce Alaska of University President 61 age Hamilton R. Mark Foundation Seattle The CEO & President 54 age Campbell J. Phyllis Company Weyerhaeuser Planning Strategic & Finance President, Vice Senior 52 age Bedient M. Patricia Airlines Alaska & Group Air Alaska CEO & President Chairman, 51 age Ayer S. William e55 ge B iac Treasurer & Finance President, Vice Staff Jr. Schaefer, F. John Controller & Finance President, Vice Staff Pedersen S. Brandon Secretary Corporate and Counsel General Affairs, Corporate & Legal President, Vice Loveless Keith CFO Executive Tilden D. Bradley CEO & President Chairman, Ayer S. William Officers A lsaArGroup Air Alaska Thompson Kenneth J. Hamilton R. Mark Madsen F. Dennis Chair Wien, A. Richard Safety: Thompson Kenneth J. Langland Marc R. Jr. Knight, J. Jessie Chair Kennedy, R. Bruce Nominating: & Governance Rindlaub V. John Madsen F. Dennis Jr. Knight, J. Jessie Campbell, J. Phyllis Compensation: Rindlaub V. John Hamilton R. Mark Bedient M. Patricia Mallott, I. Byron Audit: OARD SSIGNMENTS C OMMITTEE Vice : rsdn & President Chair Chair lsaAirlines Alaska V Officers V Services Communication & Information Reeder M. Robert Alaska MacKay L. William Service-Airports Customer Johnson S. Glenn E CEO & President Chairman, Ayer S. William S CFO & Finance Tilden D. Bradley Planning & Marketing Saretsky A. Gregg Operations Finan P. Kevin oprt elEstate Real Corporate White W. Edward Engineering & Maintenance Mohr L. Frederick Secretary Corporate & Counsel General Affairs, Corporate & Legal Loveless Keith Experience Customer & Sales Jarvis B. Stephen Services Employee Hamel J. Dennis Management Revenue & Planning Garvett S. Donald Operations Flight Jr. Forrest, F. Benjamin ENIOR XECUTIVE ICE ICE P P RESIDENTS RESIDENTS V ICE P RESIDENTS : : : P S CEO & President Pinneo D. Jeffrey Officers S V Services Customer Schneider L. Andrea Operations Gerharter M. Thomas aktn Planning & Marketing Zachwieja A. Patrick Secretary Corporate Administration, & Legal Thomas E. Arthur Engineering & Maintenance Sherbeck M. Celia Treasurer & Finance Schmidt H. Rudi Resources Employee McCluskey K. Marne Operations Flight Hahn C. Eugene oio Air Horizon Affairs Government & Public Sprague A. Joseph Treasurer & Finance Jr. Schaefer, F. John Controller & Finance Pedersen S. Brandon Counsel General Deputy Law, Regulatory & Commercial O’Grady R. Thomas Maintenance Minicucci Benito Support Technical Jones Jeffrey Services Employee Dobbs J. Kelley Counsel General Deputy Law, Employment & Labor Dammel V. Cathryn RESIDENTS TAFF ENIOR ICE P V RESIDENTS V ICE ICE : P RESIDENTS : : Corporate Profile Investor Information
Alaska Air Group, Inc., is the Corporate Headquarters holding company for Alaska Airlines 19300 International Blvd. and Horizon Air, Seattle-based Seattle, Washington 98188 carriers that collectively serve 88 Telephone: (206) 392-5040 destinations in the United States, Mailing Address: P.O. Box 68947 Canada, and Mexico. Alaska Air Seattle, Washington 98168-0947 Group was organized as a Delaware corporation in 1985. Transfer Agent and Registrar Computershare Investor Services Alaska Airlines, Inc., an Alaska P.O. Box 43023 corporation founded in 1932, is Providence, RI 02940-3023 noted for its award-winning Telephone: 1-877-282-1168 customer service. Alaska, which Internet: http://www.computershare.com accounts for about 81% of Air Group revenues, provides scheduled air Independent Auditors service to 48 cities. In addition to its KPMG LLP service to Alaska, Washington, Seattle, Washington Oregon, California, Nevada and Arizona, the airline flies to Boston, Annual Meeting Chicago, Dallas, Denver, Orlando, 2 p.m., Tuesday, May 16, 2006 Newark, and both Reagan National Museum of Flight and Dulles International in 9404 East Marginal Way South Washington D.C. Alaska also Seattle, Washington provides service to British Columbia and Alberta in Canada, and to nine destinations in Mexico. Its major Listing of Securities hubs are Anchorage, Seattle, New York Stock Exchange Portland and Los Angeles. Common Stock (Symbol: ALK)
Horizon Air Industries, Inc., a Washington corporation organized in 1981, is similarly noted for outstanding customer service. Horizon Air accounts for about 19% of Air Group revenues and provides air transportation to 46 destinations in California, Colorado, Oregon, Washington, Idaho, Montana, Nevada, and British Columbia and Alberta, Canada. Its major hubs are Seattle, Portland and Boise. Alaska Air Group, Inc. www.alaskaair.com www.horizonair.com P.O. Box 68947 Alaska Airlines Reservations Horizon Air Reservations Seattle, WA 98168-0947 1-800-ALASKAAIR (252-7522) 1-800-547-9308