2006 Annual Report It’s about Spirit. 1932 is really not so long ago in the grand scheme of things. But for an , a history spanning 75 years is remarkable. As we embark on our 75th year, can look back at a past rich in great people, great service and, most of all, what we’ve come to call the “Alaska Spirit.”

The state of Alaska is more than a major geography for us – it’s the soul of our airline. The spirit of the “Great Land” runs deep in our veins. It’s where our values of resourcefulness, integrity, professionalism, caring and Alaska Spirit come from. It’s also the source of our dedication to providing a special brand of service to our customers.

Our Alaska Spirit is stronger than ever. And it is in this spirit that we celebrate our 75th anniversary.

The company that became was born In 1952, Alaska Airlines began scheduled Alaska Air Cargo became the fi rst to operate in 1932. Bush pilots of that era, fl ying in planes like service to the Lower 48. Alaska was the fi rst an all-cargo 737-400 last year. The this Bellanca CH-300 “Pacemaker,” braved formidable to off er infl ight entertainment in the ’50s airline moves more than 150 million pounds conditions to transport passengers and supplies when it showed a Jerry Lewis movie aboard of cargo annually, providing a lifeline to within the state of Alaska. a DC-4 like the “Starliner Portland” above. many communities in the state of Alaska. In 1995, Alaska became the fi rst U.S. airline Alaska Airlines, Disney and the Make-A-Wish The Alaska Spirit lives on every day in to sell tickets over the Internet and, later, the Foundation partnered to create a unique paint scheme each of our dedicated employees who fi rst to pioneer kiosk and Web check-in. Last that features Make-A-Wish and Disney’s “Genie” from demonstrate the professionalism and year, customers booked tickets worth more the fi lm Aladdin. Each year, Alaska provides nearly care that has become the hallmark of than $1 billion through alaskaair.com. 400 trips to children facing life-threatening illnesses. Alaska Airlines. It’s about Heart.

Horizon Air. Behind that name are the thousands of men and women whose passion for serving customers in a “can-do” spirit has over 25 years shaped our story into something distinct and attractive to customers. It’s this heartfelt approach, as much as our technological innovations and customer- pleasing onboard service, that is at the core of the “Horizon experience.” And it’s one reason why the editors of Air Transport World magazine named us 2007 of the Year. As we head into our promising future, we’re committed to staying true to the people- focused principles of diff erentiation that have served us so well, never losing sight of what we declared in 1981: “It’s our privilege to serve you.”

With two refurbished F-27s and a few dozen employees, Horizon’s caring, go-the-extra-mile At no extra charge, customers enjoy Horizon takes off in 1981. customer service earns the loyalty of regional wines as well as microbrews travelers. and Starbucks® coff ee on Horizon. The colorful 25th anniversary livery on this Q400 was unveiled last year and has been turning heads at airports around our system ever since. With this aircraft we recreated our maiden fl ight from to Yakima, celebrating the very special customer-service-based culture established by Horizon’s founders.

Horizon is a pioneer in regional airline The convenience of its planeside “Ala Cart” Horizon employees give back to their technology, such as the head-up fl ight baggage service is one reason why Horizon communities in many ways, such as helping guidance system, which helps ensure safe is a favorite of business travelers. with this Habitat for Humanity house that landings under varied weather conditions. Horizon sponsored in Pasco. , Chairman and CEO

To Our Stockholders

This business is all about people — it always has been and A 75-year Legacy always will be. The company that ultimately became Alaska Airlines Specifi cally, at it’s about 14,000 people was born in 1932, when Linious “Mac” McGee began working across our two airlines to take really good care of fl ying from Anchorage to Bristol Bay, Alaska, in a three- our customers. Ultimately, it is our customers who decide seat Stinson. McGee and his fellow bush pilots braved our future; therefore, our success depends not only on the formidable weather, primitive navigation and Alaska’s vast type of service we provide, but also on the way we provide and unforgiving terrain. that service. And our employees at Alaska Airlines and I suppose you could say we face similar challenges today. have a reputation for exceeding expectations, Weather certainly creates some formidable inconveniences; as you’ll see from a customer letter on the next page. some might say that our current air traffi c control system, 2007 marks Alaska Airlines’ 75th anniversary, following while not exactly primitive, is certainly in need of updating; right on the heels of the 25th anniversary of Horizon Air in and Alaska’s terrain would still be vast and unforgiving 2006. When you look around, there are not many airlines if not for technological advances that provide pinpoint that can boast 75, much less 100, years of combined service. navigation accuracy and the ability to fl y safely in low- visibility conditions. As you might expect, those years have brought some very good times and some extremely diffi cult ones. But a In addition, we have to contend with record-high fuel common thread running through our collective histories prices, fl uctuations in the economy, layer upon layer of is that we have always risen to the challenge. All of us at taxes and fees, bankruptcy laws that often result in a Alaska and Horizon today are benefi ciaries of the hard-won competitive advantage for those who fail and default on successes of those who have gone before us. their obligations — and I could go on. But as daunting as they seem, many of the challenges we face are within our control, and I would argue that even the ones that are not can be managed. The following letter is just one example of how employees take care of our passengers every day. The question we must answer is whether we, like our predecessors, have the resolve to do what is necessary to take control of our future. The answer is yes, we are “I was traveling to the Bay Area for a determined to continue their legacy. business meeting. We were planning to play golf at Half Moon Bay after we Alaska Air Group’s former Chairman and CEO Bruce landed, heading right to the course. Well, Kennedy said it well: “It was not miracles, but solid teamwork over the years that enabled us to overcome my clubs never made that plane, and after serious challenges.” seeing my frustration, the agent said he would lend me his set of golf clubs that From working around the clock as McGee did just to stay were in his car and then bring mine to me in business to dodging bullets while fl ying Yemenite Jews the next day at our offi ce across the Bay. to their new homeland in the 1940s; from fl ying to Russia during the ‘50s Cold War to employees paying for fuel out WOW! What service! While delivering of their own pockets just to keep fl ying in the early ‘70s; my set of clubs the next day, he asked me from surviving — and thriving — through deregulation to the merger-mania that hit our industry in the ‘80s; and how I did with his set. I told him that from the oil shocks and low-cost competition of the ‘90s to I shot a 75 with them. He said that is a new millennium marked by Sept. 11, 2001, and a new crop impossible because they have never shot of well-fi nanced, low-cost competitors — our employees below a 90 in their lives. have worked together not only to survive, but to take advantage of new opportunities and grow. This service went above and beyond the normal and was greatly appreciated. Clearly, fi nding a way to overcome challenges is in our I will always be an Alaska customer.” DNA. Now it’s our turn to add a new chapter to the airline’s history. Alaska Airlines 2010 Plan

We are now four years into Alaska’s 2010 Plan — a blueprint returns for investors. In turn, investors provide new capital, to transform the airline into one of the best in America for allowing us to reinvest in our business and grow, which our customers, our investors and our employees. We’ve helps keep our unit costs low and provides retirement made steady progress toward achieving the “virtuous security and new career opportunities for employees. When cycle” at the heart of our plan, which begins with friendly fully achieved, these steps augment one another, resulting employees who deliver a fl ying experience that represents in a healthy, growing company and sustained profi tability. the best value in the industry. This naturally leads to a world-class brand and strong customer preference for our But in order to off er our customers good value — that is, a product that supports profi tability and provides consistent product they want at a price they are willing to pay — we must have low costs. So we set a course to signifi cantly Our new Horizon Air service to Sonoma County and lower Alaska’s unit costs and improve unit revenue with a Alaska’s newly announced nonstop service from Portland goal of achieving an average 10 percent pretax margin. That to Boston and Orlando expand our growing list of fl ights margin will fund annual growth of 8 to 10 percent, which to the places our customers want to go. will help keep our costs low in the future. Report Card

Let’s look at how we did in 2006 and what we have ALASKA AIR GROUP NET PROFIT planned for 2007. Generally Accepted Accounting Principles (GAAP) Profi tability Adjusted for unusual items Air Group’s core business has improved steadily since 2001. For the fi rst time, total revenue exceeded $3 billion in 2006, contributing to an adjusted net profi t of $137.7 million. 13.5 5.2 ($ millions) AVERAGE REVENUE PER PASSENGER

Horizon Air * see reconciliation of GAAP to adjusted amounts on page 98 ** ($5.9) mil. after accounting change Alaska Airlines Listening to Our Customers

Listening to our customers and designing our strategic plans around what is important to them has always been the key to our success. Our customers have sent a clear message — they care a lot about fares. And that’s why we continue to focus on reducing costs. Customers also want * Includes Frontier Jet Express flying under a capacity purchase agreement. Unit an easy experience from curb to curb; on-line ticketing revenues and unit costs are lower for this flying than for the rest of Horizon’s network. and Web or kiosk check-in; a speedy bag check; a fast trip through security; a friendly, engaging experience onboard; an on-time arrival and a quick bag retrieval when LOAD FACTOR they reach their destination. Delivery on all these service elements is essential to our continued success. Horizon Air Alaska Airlines In addition, Alaska Airlines customers have a choice of fi rst-class or coach seating as well as an opportunity to become members in our award-winning Mileage Plan. And Horizon Air customers enjoy the best of the Pacifi c Northwest — Starbucks coff ee, complimentary Percent of seats filled regional wines and microbrews, and a warm, friendly fl ying experience. Alaska Airlines posted a $200.5 million adjusted pretax ALASKA AIRLINES UNIT COSTS profi t on revenues of $2.7 billion for a 7.4 percent adjusted pretax profi t margin in 2006. That’s a signifi cant 9.0¢ 8.73¢ improvement over last year’s 3.5 percent margin and brings 8.52¢ us another step closer to our goal of 10 percent. 8.5¢ 8.34¢ 7.92¢ 8.01¢ Horizon Air’s $23.2 million adjusted pretax profi t marked 8.0¢ 7.81¢ 7.55¢ its fourth consecutive year of improved profi ts. Total 7.5¢ operating revenues were up 15.7 percent to $644 million, Cost per Available Seat Mile Continuous (excluding fuel and unusual items) 7.0¢ producing an adjusted pretax profi t margin of 3.6 percent. improvement 2001 2002 2003 2004 2005 2006 2007 Air Group’s fuel hedging program saved the company target $100 million in 2006. And while we don’t expect the same HORIZON AIR UNIT COSTS level of savings in the future, we are continuing to hedge a portion of our planned fuel consumption to reduce fuel volatility — one of our highest costs. Of course, the best way 20¢ 18.95¢ to conserve fuel is not to burn it in the fi rst place, and our 18¢ new, fuel-effi cient 737-800 aircraft provide a permanent 15.99¢ 15.80¢ fuel hedge while reducing carbon emissions, as well. 16¢ 14.19¢ 14.20¢ One of the benefi ts of our strong fi nancial performance 14¢ 13.58¢

Cost per Available Seat Mile 13.35¢ is that we were able to contribute $122 million in 2006 to Continuous (excluding fuel and unusual items) 12¢ improvement Alaska’s defi ned-benefi t pension plans, making them the 2001 2002 2003 2004 2005 2006 2007 best-funded plans in the industry. target

Fleet beyond Alaska, our commitment to the people of the Great The annual cost reductions achieved in 2005 made it Land is as solid as ever. possible for Alaska to place an order with Boeing for up Horizon’s fl eet is changing, too. As part of our transition to 100 new 737 aircraft to support our long-term fl eet and to a younger, larger-capacity fl eet, we plan to take delivery growth plan. The plan includes retiring our MD-80s to of 13 Q400 aircraft in 2007, and we recently announced achieve an all-737 fl eet by the end of 2008. an order for 15 more Q400s for delivery starting in late Alaska is in the process of replacing its 737-200 passenger 2008. As these Q400s arrive, we plan to sublease the rest and cargo “combi” jets with a dedicated freighter and fi ve of our Q200s. Nine CRJ-700s will also return to our fl eet 737-400 combis that have been specially retrofi tted to meet after completing their contract-fl ying mission for Frontier the shipping and transportation needs of our customers JetExpress. These fl eet changes will improve effi ciency and in the state of Alaska. Alaskans depend on us not only increase capacity, allowing us to off er greater customer to travel from one city to another, but also to get their value in markets where demand is highest, provide more products to market and to move vital supplies to and within feed traffi c to Alaska Airlines and explore new market the state. Even though our route system now reaches far opportunities. Technology

We continue to use technology to make life easier for our And speaking of a great product – In January, Air Transport customers and to reduce costs. In 2006, we surpassed World announced that Horizon Air had been named $1 billion in ticket sales on alaskaair.com and horizonair.com. Regional Airline of the Year for 2007. What better way to top off a 25-year anniversary! The industry-leading We look forward to unveiling our “Airport of the Future” publication cited Horizon’s safety record, commitment to design at Seattle-Tacoma International Airport later customer service, technological leadership and profi tability this year. This innovative process is already in place in during some of the most challenging times for the Anchorage, where it has cut customer check-in time in half. industry. We are understandably proud of our Horizon We’re also using state-of-the-art cockpit technology to brand and the vital role Horizon’s employees play in adding enhance safety and reliability. Our RNP procedures, strength to the Alaska Air Group network. developed by Alaska pilots, combined with head-up display ላሌ guidance systems have enhanced both carriers’ ability We’ve come a long way from our humble beginning as to navigate challenging terrain and land in low-visibility a bush operation in 1932. But our heart and soul remain conditions. fi rmly rooted in our rich past. For 75 years, the employees The Future at Alaska Airlines have gone above and beyond to take

While we are very optimistic about the future, our ultimate care of our customers and the communities we serve, and success depends on facing the challenges before us we have been willing to make tough decisions in order to realistically and executing our plan. remain profi table and independent. Nothing would make us prouder than for our successors to say the same thing As we look ahead, we see increased competitive pressures 75 years from now. both from restructured legacy airlines and from fast- growing low-cost carriers, which underscores the importance of continuing to earn customers’ loyalty Sincerely, every day.

To that end, our top priorities for 2007 are aimed at enhancing the value we off er our customers through: William S. Ayer • improving our operational performance, Chairman, President and CEO • continuing to reduce costs, and Alaska Air Group • reaching long-term agreements with Alaska and Horizon April 30, 2007 pilots that recognize the important jobs they perform and the competitive realities of our industry.

These eff orts, along with hundreds of initiatives to streamline our operation, will improve our profi tability and ensure our ability to deliver a great product at a competitive price. Proxy Statement and of Shareholders Proxy Statement Notice of Annual Meeting Proxy Statement TI AEITNINLYLF BLANK] LEFT INTENTIONALLY PAGE [THIS NOTICE OF ANNUAL MEETING OF STOCKHOLDERS P.O. Box 68947 Seattle, 98168

To our Stockholders:

The Annual Meeting of Stockholders of Alaska Air Group, Inc. will be held at the Hotel Captain Cook in Statement Proxy Anchorage, Alaska at 2 p.m. Alaska Standard Time on Tuesday, June 12, 2007, for the following purposes: 1. To elect three directors for one-year terms; 2. To consider and vote upon the five stockholder proposals described in the accompanying proxy statement, if those proposals are properly presented at the meeting; and 3. 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 April 20, 2007, are entitled to receive this notice, and to vote at the meeting. All stockholders are requested to be present in person or by proxy. For the convenience of stockholders who do not expect to attend the meeting in person and wish to have their shares voted, a form of proxy and an envelope are enclosed. Stockholders may also vote by internet or telephone. Any stockholder who later finds that he or she can be present at the meeting, or for any reason desires to do so, may revoke his or her proxy at any time before it is voted.

Voting by the internet or telephone is fast and convenient and your vote is immediately confirmed and tabulated. By using the internet or telephone to vote, you help Alaska Air Group reduce postage and proxy tabulation costs.

• To vote by internet, visit www.proxyvote.com. • To vote by telephone, call 1-800-690-6903.

We appreciate your participation, since a majority of the common stock must be represented either in person or by proxy to constitute a quorum in order to conduct of business.

By Order of the Board of Directors,

Keith Loveless Corporate Secretary and General Counsel

April 30, 2007 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. rx Statement Proxy The Board set April 20, 2007 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 42,616,739 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 2006 Annual Report, were delivered to stockholders and made available via the internet on or about April 30, 2007. The Company’s Form 10-K for the year ended December 31, 2006 is included in the 2006 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.

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 three directors and, if properly presented, up to five stockholder proposals. When you sign and mail the proxy card or submit your proxy by telephone or the internet, you appoint each of William S. Ayer and Keith Loveless, or their respective substitutes or nominees, 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 three director nominees (Proposal 1) • AGAINST the other stockholder proposals (Proposals 2 through 6)

How do I vote my shares? Stockholders of record can vote by using the proxy card or by telephone or by the internet. Beneficial owners whose stock is 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 or, if made available by the bank, by telephone or the internet. • 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.

Beneficial owners, 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 he or she obtains a “legal proxy” from the person or entity holding the stock for him or her (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 Proxy Statement 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.

Listed below are the various means — internet, phone and mail — you can use to vote your shares without attending the annual meeting. Subject to the time deadlines for internet and phone voting applicable to stockholders and the time deadline for all voting applicable to 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 10 using the internet can change his or her vote on May 11 by using the internet, phone, or mail, and the May 11 vote would revoke the earlier May 10 vote. A stockholder of record can attend the annual meeting and vote, which will also 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 stockholder of record can attend the meeting and vote, which will have the effect of revoking a previously given proxy or voting instruction.

You can vote on the internet. Stockholders of record and beneficial owners of the Company’s common stock can vote via the internet 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 can vote by phone. Stockholders of record and beneficial owners of the Company’s common stock can vote by phone. Instructions for voting by phone are provided along with your proxy card or voting instruction form. 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 can 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. Broadridge Financial Solutions, Inc. (“Broadridge”) internet and telephone voting facilities for stockholders of record and beneficial holders will be available 24 hours a day, and will close at 11:59 p.m. Eastern Time on Statement Proxy June 10, 2007. However, to allow sufficient time for voting by the trustee, voting instructions for 401(k) plan shares must be received according to the trustee’s instructions.

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 gave written notice to the Company on or before March 14, 2007. The only such business as to which the Company received proper advance notice from a stockholder are (i) the five stockholder proposals described in this proxy statement and included on the Company’s proxy card, (ii) certain stockholder proposals that we were permitted to exclude from this proxy statement under applicable rules and regulations of the Securities and Exchange Commission and (iii) one additional stockholder proposal relating to corporate political contributions, which was submitted after the deadline for inclusion in this proxy statement but which the stockholder intends to bring before the meeting from the floor. 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 not received notice that any business other than that described or referenced in this proxy statement will be brought before the meeting. As to any other matters that may properly come before the meeting and are not on the proxy card, the proxy grants to Messrs. Ayer and Loveless the authority to vote the shares for which they hold proxies in accordance with their best judgment. With respect to the additional stockholder proposal referenced above, as well as any stockholder proposals that have been excluded from this proxy statement under applicable rules of the Securities and Exchange Commission, Messrs. Ayer and Loveless intend to utilize the discretionary authority conferred by the proxies submitted to vote against such proposals.

What does it mean if I receive more than one proxy card, voting instruction form or email notification from the Company? 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 by delivering 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, by 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 June 10, 2007 (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 broker 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 in accordance with instructions from the trustees. Subject to these qualifications, such holders have the same rights as other record and beneficial holders to change their votes.

3 If you are a registered stockholder, you can 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 can 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 can obtain a new voting instruction form by contacting the trustee of such plan. You can 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 form and submit it in accordance with the accompanying instructions and in a timely manner, any earlier proxy card or voting instruction form will be revoked and your choices on the proxy card or voting instruction form will be voted as you instruct.

What are broker non-votes?

Proxy Statement 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 Board of Directors. 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. Mr. Stephen Nieman, a stockholder of the Company, has informed the Company of his intention to nominate up to four persons at the annual meeting for election to the Board of Directors, although the Company is not yet aware that Mr. Nieman has filed his own proxy statement. Mr. Nieman submitted his nominees prior to the Board’s election to have eleven directors effective as of June 12, 2007. We currently believe that the election of directors will not be “contested” for purposes of New York Stock Exchange (“NYSE”) Rule 452 and, accordingly, a broker will have the discretion to vote your shares in the absence of specific instructions regarding Proposal 1. The current position of the NYSE is that an election is not contested unless the “challengers ...doamailing to all stockholders who hold their shares beneficially or in street name through banks, brokers or other intermediaries.”

Stockholder Proposals. Brokers will not be allowed to vote on any of the Proposals 2-6 for which you do not provide instructions. For example, if you provide instructions for Proposals 2-5, but not for Proposal 6, the broker will not cast a vote on your behalf on Proposal 6; in other words, there will be a “broker non-vote” on Proposal 6.

How are shares voted that are held in a Company 401(k) plan? At the record date, 1,429,690 shares were held in trust for Alaska Air Group 401(k) plan participants. The trustees, Vanguard and Fidelity, 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 trustee 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, please follow the instructions provided by the trustee. 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 broker by indicating on your voting instruction form that you plan to attend and vote your shares

4 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. Because shares held by employees in the 401(k) plans must be voted by the trustee these shares may not be voted at the meeting.

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. Statement Proxy 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 Broadridge’s website, http://enroll.icsdelivery.com/alk.

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 Company has adopted a majority voting policy for the election of directors. Under the policy, directors are elected at each annual meeting by a majority of votes cast, meaning that the number of votes “for” a director must exceed the number of votes “against” that director. In the event that a nominee for director receives more “against” votes for his or her election than “for” votes, the board must consider such director’s resignation following a recommendation by the Board’s Governance and Nominating Committee. The majority voting policy does not apply, however, in the event that the number of nominees for director exceeds the number of directors to be elected. In such circumstances, directors will instead be elected by a plurality of the votes cast, meaning that the persons receiving the highest number of “for” votes, up to the total number of directors to be elected at the annual meeting, will be elected.

The Company has been informed that an opposing solicitation for the election of up to four directors will be made. (See “Opposing Solicitation” on page 54.) If there are 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 held by the named proxies, Messrs. Ayer and Loveless, will be voted for the substitute nominee.

How many votes must each of the stockholder proposals (Proposal 2 through 6) receive in order to pass? A majority of the shares present in person or by proxy at the meeting and entitled to vote on the subject matter of the proposal must be voted for each stockholder proposal in order for it to pass. “Abstain” votes are

5 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 for 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 is disregarded for purposes of determining the outcome of the vote on the stockholder proposal. See “What are broker non-votes?” Page 4.

How are votes counted? Voting results will be tabulated by Broadridge Financial Solutions, Inc. Mr. William Marsh of IVS and Associates, or his designee, will serve as the independent inspector of elections.

Proxy Statement 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 1 through June 11 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.

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 2007. 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) 392-5131, 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. On April 25, 2007, Mr. John V. Rindlaub, whose term expires this year, notified the Board that he does not plan to stand for election at the Annual Meeting. The Board of Directors wishes to thank Mr. Rindlaub for his dedication and service to the Board over the past 11 years. The rx Statement Proxy Company’s Certificate of Incorporation provides that the Board of Directors shall be composed of no less than nine and no more than 15 directors. On April 25, 2007 the Board passed a resolution providing that the Company shall have 11 directors effective as of the Annual Meeting on June 12, 2007. The Company’s Bylaws provide that the class of directors up for election this year shall serve a one-year term. 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. Three directors are nominees for election this year and each has consented to serve a one-year term ending in 2008. The remaining directors will continue to serve the terms set out below.

NOMINEES FOR ELECTION TO TERMS EXPIRING IN 2008

Director Name Principal Occupation or Employment and other Business Affiliations Age Since William S. Ayer ...... Mr.Ayer has been a director since 1999. He is Chairman, President 52 1999 and CEO of Alaska Air Group and Alaska Airlines and Chairman of Horizon Air. He has served as Alaska Airlines’ President since November 1997 and he served as Alaska Airlines’ Chief Operating Officer from May 2000 to January 2002. Prior to that, he served in various marketing, planning and operational 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. R. Marc Langland ..... Mr.Langland has been a director since 1991. He is Lead Director and 65 1991 Chair of the Board’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 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. and Usibelli Coal Mine, and is a member of the Anchorage Chamber of Commerce and a board member and past chairman of Commonwealth North. Dennis F. Madsen ..... Mr.Madsen has been a director since 2003 and serves on the 58 2003 Compensation and Audit Committees. He was President and CEO of Recreational Equipment, Inc. (REI), a retailer and online merchant for outdoor gear and clothing from 2000 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 Chairman 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.

7 CONTINUING DIRECTORS WHOSE TERMS EXPIRE IN 2008

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 55 2002 the Board’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 62 2001 Board’s Audit and Safety Committees, as well as on the Horizon Air Proxy Statement 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 serves on the Board’s 63 1982 Safety and Governance and Nominating Committees. Currently he is a Senior Fellow of the First Alaskans Institute, a nonprofit organization dedicated to the development of Alaska Native peoples and their communities. In January 2007, Mr. Mallott was appointed to the Smithsonian Institution’s National Museum of the American Indian’s Board of Trustees. From 1995 to 1999, he served as Executive Director (chief 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, Yak-Tat Kwaan, Inc. and Native American Bank, NA. Richard A. Wien ...... Mr.Wien has been a director since 1982. He is Chair of the Board’s 72 1982 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.

8 CONTINUING DIRECTORS WHOSE TERMS EXPIRE IN 2009

Director Name Principal Occupation or Employment and Other Business Affiliations Age Since Patricia M. Bedient .... Ms.Bedient has been a director since December 2004. She serves as 53 2004 the Chair of the Board’s Audit Committee and on the Board of Alaska

Airlines. Ms. Bedient is Executive Vice President and Chief Financial Statement Proxy Officer 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 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. He is Chairman Emeritus 68 1972 of Alaska Air Group and served as the Company’s 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 Board’s 56 2002 Compensation and Governance and Nominating Committees. He is Executive Vice President of External Affairs at Sempra Energy, a company that develops energy infrastructure, operates utilities, and provides related products and services to more than 29 million consumers in the United States, Europe, Canada, Mexico, South America and Asia. Before assuming his current position in 2006, Mr. Knight served as the President and Chief Executive Officer of the San Diego Regional Chamber of Commerce from 1999 to 2006, and as a commissioner of the Public Utilities Commission from 1993 through 1998. Mr. Knight is also on the boards of Alaska Airlines and the San Diego Padres Baseball Club. He is a standing member of the Council on Foreign Relations. J. Kenneth Thompson . . Mr. Thompson has been a director since October 1999 and serves on 55 1999 the Board’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 serves on a number of community service organizations.

9 Voting Standard The Company’s Bylaws and Governance Guidelines state that the standard for the election of directors is a majority of votes cast. A “majority of votes cast” means the number of shares voted “for” a director exceeds 50% of the votes cast with respect to that director. If the 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, composed entirely of independent directors, will evaluate and make a recommendation to the Board of Directors with respect to the proffered resignation. The Board of Directors must take action on the recommendation within 90 days following certification of the stockholder vote. No director who tenders a resignation may participate in the Governance and Nominating Committee’s or the Board of Directors’ consideration of the matter. The Company will publicly disclose the Board of Directors’ decision including, as applicable, the reasons for rejecting a resignation.

Proxy Statement The majority voting policy does not apply, however, if the Board of Directors determines that the number of nominees for director exceeds the number of directors to be elected. In such circumstances, directors will instead be elected by a plurality of the votes cast, meaning that the persons receiving the highest number of “for” votes, up to the total number of directors to be elected at the annual meeting, will be elected. With regard to the election to take place at the 2007 annual meeting, the Board of Directors intends to nominate the three persons identified as its nominees in this proxy statement. In addition, Mr. Stephen Nieman, a stockholder of the Company, has informed us of his intention to nominate the following persons at the annual meeting for election to the board: himself, Mr. Richard Foley, Mr. Terry Dayton, and Mr. Carl Olson. If Mr. Nieman properly brings his nominations before the meeting, the number of nominees will exceed the number of directors to be elected, in which case the directors will be elected by a plurality vote rather than a majority vote at this annual meeting. In such event, the three persons receiving the highest number of “for” votes at the annual meeting will be elected.

Required Vote As indicated above, Mr. Nieman, a stockholder of the Company, has informed the Company of his intention to nominate up to four persons at the annual meeting for election to the Board of Directors. If Mr. Nieman properly brings his nominations before the meeting, the directors will be elected by a plurality vote, meaning that the three persons receiving the highest number of “for” votes at the annual meeting will be elected. If Mr. Nieman does not properly bring his nominations before the meeting, then the directors will be elected by a majority of the votes cast. This required vote is discussed further under the section entitled “Proposal No. 1 Election of Directors — Voting Standard” above.

10 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 serve, discussing matters with our Chairman and Chief Executive Officer and other officers, reviewing Statement Proxy materials provided to them, and visiting our facilities.

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 chair 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 ...... Jessie J. Knight, Jr...... x x R. Marc Langland ...... x* Byron I. Mallott ...... x x Dennis F. Madsen ...... x x John V. Rindlaub ...... x x J. Kenneth Thompson ...... x x Richard A. Wien ...... x*

The principal functions of the standing Board committees are as follows:

Audit Committee Pursuant to its charter, the Audit Committee’s responsibilities include the following: 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.

11 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 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;

Proxy Statement • develop and monitor a Corporate Compliance program, including a Code of Conduct and Ethics policy, 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 Pursuant to its charter, the Compensation Committee’s responsibilities include the following: 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 elected executive officers 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.

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 Funds Investment Committee, and approve 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 executive-level development and succession plans.

12 11. Administer and make recommendations to the Board of Directors with respect to the Company’s equity and other long-term incentive equity 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. Statement Proxy

Pursuant to its charter, the Compensation Committee is authorized to retain such compensation consultants and other outside experts or advisors as it believes to be necessary or appropriate to carry out its duties. In 2006, the Compensation Committee retained the firm of Deloitte Consulting LLP (“Deloitte Consulting”) as independent compensation consultants to assist it in determining compensation matters for our senior executive officers. The Committee made its 2006 compensation decisions, including decisions with respect to the Named Executive Officers’ compensation, after consultation with Deloitte Consulting. Deloitte Consulting advised the Committee with respect to trends in executive compensation, determination of pay programs, assessment of competitive pay levels and mix (e.g., proportion of fixed pay to incentive pay, proportion of annual cash pay to long-term incentive pay), and setting compensation levels. As described in the Compensation Discussion and Analysis on page 26, Deloitte Consulting reviewed our appropriate peer group companies and helped the Committee to obtain and evaluate current executive compensation data for these peer group companies. The Compensation Committee is not authorized to delegate its authority with respect to executive compensation to any other person.

Our executive officers, including the Named Executive Officers, do not have a role in determining the form or amount of compensation paid to our Named Executive Officers and our other senior executive officers. However, our Chief Executive Officer does make recommendations to the Compensation Committee with respect to compensation paid to the other executive officers.

During 2006, the Committee reviewed its charter and recommended that the Board of Directors modify the charter to allow the Committee to utilize forms of equity as part of the Company’s short-term incentive compensation plan, the Performance-Based Pay plan. The Board adopted a modified charter to reflect the recommended change.

Governance and Nominating Committee Pursuant to its charter, the Governance and Nominating Committee’s responsibilities include the following: 1. Develop and monitor the Corporate Governance Guidelines.

2. Evaluate the size and composition of the Board and annually review compensation paid to members of the Board.

3. Develop criteria for Board membership.

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.

13 Safety Committee Pursuant to its charter, the Safety Committee’s responsibilities include the following: 1. Monitor management’s 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.

In 2006, the Board of Directors held five regular meetings. The standing Board committees held the

Proxy Statement following number of meetings in 2006: • Audit Committee — 12 • Compensation Committee — 7 • Governance and Nominating Committee — 4 • Safety Committee — 4

Each director attended at least 94% of all Board and applicable committee meetings during 2006. 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 and 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 Mr. Rindlaub and Ms. Bedient are audit committee financial experts as defined in the rules of the Securities and Exchange Commission (“SEC”).

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 a 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 $120,000 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

14 member is a current employee of the audit firm working in its audit, assurance or tax compliance practice; and (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. Statement Proxy

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.

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.

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, those firms 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.

15 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; Proxy Statement • 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; • 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 is referred to as 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 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 2007 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.

16 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 stockholder of record. Any stockholder that is not the stockholder of record must submit such evidence as the Committee deems reasonable to evidence the

required ownership percentage and holding period. Statement Proxy • 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 address, principal occupation or employment, number of shares of the Company’s stock beneficially owned, if any, a 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 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 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 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 Qualified Stockholder who made a proposal.

17 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

Proxy Statement 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.

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

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.

18 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 rx Statement Proxy 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 chair of the Governance and Nominating Committee.

2006 DIRECTOR COMPENSATION The following table presents information regarding the compensation paid during 2006 to members of our Board of Directors who are not also our employees (referred to herein as “Non-Employee Directors”). The compensation paid to Mr. Ayer, who is also one of our employees, is presented in the Summary Compensation Table and the related explanatory tables. Mr. Ayer does not receive additional compensation for his service as a director.

Change in Pension Value and Fees Nonqualified Earned Non-Equity Deferred or Paid Stock Option Incentive Plan Compensation All Other in Cash Awards Awards Compensation Earnings Compensation Total Name ($)(1) ($)(2) ($)(2) ($)(2) ($)(2) ($)(3) ($) (a) (b) (c) (d) (e) (f) (g) (h) Patricia M. Bedient ...... 58,000 0 0 0 0 3,764 61,764 Phyllis J. Campbell ...... 55,600 0 0 0 0 5,269 60,869 Mark R. Hamilton ...... 53,300 0 0 0 0 21,144 74,444 Bruce R. Kennedy(5) ...... 47,400 0 0 0 0 36,816(4) 84,216 Jessie J. Knight, Jr...... 50,350 0 0 0 0 8,729 59,079 R. Marc Langland ...... 53,250 0 0 0 0 22,378 75,628 Dennis F. Madsen ...... 52,950 0 0 0 0 10,903 63,853 Byron I. Mallott ...... 58,300 0 0 0 0 53,572 111,872 John V. Rindlaub ...... 56,300 0 0 0 0 6,461 62,761 J. Kenneth Thompson ...... 50,800 0 0 0 0 23,464 74,264 Richard A. Wien ...... 54,800 0 0 0 0 10,795 65,595 (1) In 2006, each of our Non-Employee Directors received at least 50% of their $30,000 annual retainer for 2006 in the form of Alaska Air Group common stock shares issued under the Company’s Non-Employee Director Stock Plan (rounded down to the nearest whole share). The Board of Directors (or a committee appointed by the Board of one or more individuals who are not eligible to participate in the plan) administers the plan as to Non-Employee Director awards and has the ability to interpret and make all required determinations under the plan, subject to plan limits. In connection with the payment of a portion of a Non-Employee Director’s annual retainer in the form of common stock, the Board of Directors has established stock ownership guidelines that strongly encourage Non-Employee Directors to accumulate shares of Company stock equal in value to one year’s retainer within five years of becoming a director. Ms. Bedient and Messrs. Knight, Madsen and Thompson elected to receive the entire amount of their annual retainer in stock, per the terms of the Plan. The number of shares awarded was determined pursuant to the terms of our Director’s Stock Plan by dividing the dollar value of the retainer to be paid in stock by $37.19, the average closing price of our stock for the 30 trading days preceding the date of our 2006 annual meeting. Accordingly, each of our Non-Employee Directors received 403 shares on May 16, 2006, except the four directors identified above who each received 806 shares on that date. These shares were fully vested on issue. No option awards were granted to our Non-Employee Directors during 2006.

19 In 2006, in addition to the $30,000 annual retainer referenced above, the compensation for our Non-Employee Directors included the following: • Attendance fees of $2,000 for each Audit Committee meeting and $1,200 per day for each Board or other committee meeting in which a Non-Employee 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 chair and $5,000 to other committee chairs; • an annual retainer of $1,000 to Non-Employee Directors who also 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. Proxy Statement (2) None of our Non-Employee Directors held any unvested stock awards as of December 31, 2006. We do not grant stock options to our Non-Employee Directors. Our directors do not participate in any non-equity incentive compensation plans, nor do they participate in a nonqualified deferred compensation plan. Directors do not receive pension benefits for their service. (3) As part of a director’s compensation, each Non-Employee Director, the Non-Employee Director’s spouse and the Non-Employee Director’s dependent children are provided transportation on Alaska Airlines and Horizon Air. These amounts represent the value of the transportation provided by the Company to each of these directors and their family members during 2006, plus taxes paid by the Company on behalf of the directors on the value of the travel. Each director also receives membership to our airport Boardrooms. Value of Travel Taxes Boardroom Director Value Paid Membership Patricia M. Bedient ...... 2,268 1,221 275 Phyllis J. Campbell ...... 3,246 1,748 275 Mark R. Hamilton ...... 13,565 7,304 275 Bruce R. Kennedy ...... 7,411 3,991 275 Jessie J. Knight, Jr...... 4,988 3,466 275 R. Marc Langland ...... 14,367 7,736 275 Dennis F. Madsen ...... 6,908 3,720 275 Byron Mallott ...... 34,643 18,654 275 John V. Rindlaub ...... 4,021 2,165 275 J. Kenneth Thompson ...... 15,073 8,116 275 Richard A. Wien ...... 6,838 3,682 275 (4) In addition to the benefits referred to in footnote (3) above, this amount includes $25,139, which represents the Company’s cost to provide office space and related expenses to Mr. Kennedy during 2006 pursuant to a resolution passed by the Board of Directors in connection with Mr. Kennedy’s retirement in 1990. (5) During the years that Mr. Kennedy was employed by the Company, he accrued annual retirement benefits under the Company’s Retirement Plan for Salaried Employees and its 1976 Elected Officers Supplementary Retirement Plan. Mr. Kennedy’s benefits paid under these plans in 2006 were $65,667 and $176,880, respectively. Mr. Kennedy does not receive any retirement benefits in connection with his service as a director.

CEO AND CFO CERTIFICATIONS In accordance with NYSE listing standards, the Company’s 2006 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 exhibits to the Company’s Annual Report on Form 10-K.

20 CODE OF CONDUCT AND ETHICS The Company has adopted a Code of Conduct and 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 and 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 Statement Proxy 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 It is our general policy to conduct our business activities and transactions with the highest level of integrity and ethical standards and in accordance with applicable laws. Our Code of Conduct and Ethics imposes an obligation on each director and executive officer to disclose any potential conflict of interest involving such person and the Company. In addition, our Corporate Governance Guidelines require board members to disclose to the Board (through the Audit Committee) any financial interest or personal interest that he or she has in any contract or transaction that is being considered by the Board for approval. We also identify related party transactions by having our directors and executive officers complete director and officer questionnaires. Our Corporate Compliance Officer and the Audit Committee review all potential conflicts of interest and transactions with related parties regarding directors and executive officers.

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.

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. Form 4s due May 19, 2006, for Ms. Bedient, Ms. Campbell, and Messrs. Hamilton, Kennedy, Knight, Langland, Madsen, Mallott, Rindlaub, Thompson and Wien, relating to stock issued in payment of their annual board retainers, were instead filed on May 26, 2006. Except for these reports on Form 4, based on a review of copies of reports furnished to the Company and written representations that no other reports were required, the Company believes that everyone subject to Section 16(a) filed the required reports on a timely basis during 2006.

INDEPENDENT AUDITORS Selection of Independent Auditors for the Current Fiscal Year The Audit Committee of the Board of Directors has selected KPMG LLP (“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.

21 Fees Paid to Independent Auditors During fiscal years 2006 and 2005, the Company retained KPMG as its principal auditors. The independent auditors provided services in the following categories and amounts:

2006 KPMG LLP Audit Fees for the Company’s Annual Financial Statements and Quarterly Reviews(1) ...... $1,219,139 Audit-Related Fees(2) ...... 175,718 Tax Fees(3) ...... 25,446 All Other Fees(4) ...... 34,417 Total Fees for 2006 ...... $1,454,720

2005

Proxy Statement Audit Fees for the Company’s Annual Financial Statements and Quarterly Reviews(1) ...... $1,026,509 Audit-Related Fees(2) ...... 284,853 Tax Fees(3) ...... 56,234 All Other Fees(4) ...... 29,132 Total Fees for 2005 ...... $1,396,728 (1) Audit fees represent the arranged fees for the years presented, including 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 paid for professional services in connection with tax consulting related to specific aircraft leasing and acquisition matters. These services were pre-approved by the audit committee. (4) Fees paid for professional services in connection with (i) the audit of passenger facility charges and examination of related controls, (ii) the examination of agreed-upon procedures for the U.S. Citizenship and Immigration Services, and (iii) agreed-upon procedures regarding Air Group’s employee incentive pay plans.

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.

22 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 five percent (5%) of the total fees paid by the Company to its auditor during the fiscal year in which the services are provided; • such services were not recognized by the Company at the time of the engagement to be non-audit services; and Statement Proxy • such services are promptly brought to the attention of the Audit Committee and approved prior to the completion of the audit.

During fiscal year 2006, there were no such services that were performed pursuant to the “de minimis 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, 2006. 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 we have discussed with KPMG their independence.

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, 2006.

Audit Committee of the Board of Directors Patricia M. Bedient, Chairperson Mark R. Hamilton, Member Dennis F. Madsen, Member John V. Rindlaub, Member

23 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

This table shows how much Company common stock is owned as of March 31, 2007, 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

Proxy Statement • may acquire through stock option exercises through May 30, 2007.

Options Shares Exercisable Stock Percent of Beneficially within Units and Outstanding Name Owned(1) 60 Days Interests(2) Total(3) Shares Patricia M. Bedient ...... 1,951 0 0 1,951 * Phyllis J. Campbell ...... 2,659 0 0 2,659 * Mark R. Hamilton ...... 1,780 0 0 1,780 * Bruce R. Kennedy ...... 1,987 0 0 1,987 * Jessie J. Knight, Jr...... 3,121 0 0 3,121 * R. Marc Langland ...... 5,000 0 0 5,000 * Dennis F. Madsen ...... 2,807 0 0 2,807 * Byron I. Mallott ...... 3,392 0 0 3,392 * John V. Rindlaub ...... 6,002 0 0 6,002 * J. Kenneth Thompson ...... 5,951 0 0 5,951 * Richard A. Wien ...... 6,000 0 0 6,000 * William S. Ayer ...... 39,551 445,350 34,600 484,901 1.1% Kevin P. Finan ...... 4,369 64,650 19,180 69,019 * Gregg A. Saretsky ...... 4,736 91,892 19,140 96,628 * Bradley D. Tilden ...... 6,436 113,200 19,200 119,636 * Keith Loveless ...... 520 69,600 14,750 70,120 * Jeffrey D. Pinneo ...... 2,604 73,100 16,530 75,704 * Glenn S. Johnson ...... 231 57,750 14,160 57,981 * Brandon S. Pedersen ...... 0 3,950 6,450 3,950 * John F. Schaefer, Jr...... 94 500 3,750 594 * All directors and all executive officers as a group (20 persons) ...... 97,204 919,992 147,760 1,017,196 2.4% * Less than 1% (1) Consists of the aggregate total of shares of common stock held by the reporting person either directly or indirectly, including 401(k) plan holdings. (2) Consists of the aggregate total of Restricted Stock Units (RSUs) granted in 2004, 2005, 2006 and 2007 which will vest November 10, 2007, August 30, 2008, September 13, 2009, and January 31, 2010, respectively. (3) Total does not include stock units because they are not yet vested.

24 The table below identifies those known to have beneficial ownership of more than 5% of the Company’s outstanding common stock, as of December 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) ...... 3,829,500 9.0 rx Statement Proxy 152 West 57th Street New York, NY 10019 AXA Financial, Inc (2) ...... 3,387,061 7.9 1290 Avenue of the Americas New York, New York 10104 Dimensional Fund Advisors Inc.(3) ...... 3,026,178 7.1 1299 Ocean Avenue, 11th Floor Santa Monica, 90401 CA PRIMECAP Management Company(4) ...... 2,661,050 6.2 225 South Lake Ave, #400 Pasadena, CA 91101 Barclays Global Investors, NA(5) ...... 2,436,921 5.7 45 Fremont Street , CA 94105 (1) Information is based on a Schedule 13G filed by Donald Smith & Co., Inc. (“Donald Smith”) on February 12, 2007. Donald Smith reported in the Schedule 13G that it had sole voting power of 3,116,900 of the shares. (2) Information is based on a Schedule 13G filed by ASA Financial, Inc. (“AXA”) on February 14, 2007. AXA reported that shares covered are owned by AXA Rosenberg Investment Management LLC and AXA Konzern AG (Germany) each with power over 902,648 shares and 3,900 shares, respectively. (3) Information is based on a Schedule 13G filed by Dimensional Fund Advisors Inc. (“Dimensional”) on February 1, 2007, and a subsequent Schedule 13F filed on April 19, 2007, reporting an increase as of March 31, 2007. 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. (4) Information is based on a Schedule 13G filed by PRIMECAP Management Company on February 9, 2007. PRIMECAP reported in the Schedule 13G that it had sole voting power over all 98,000 shares. (5) Information is based on a Schedule 13G filed by Barclay Global Investors, NA (“Barclay”) on January 9, 2007. Barclay reported that shares covered are owned by Barclay Global Investors, NA and Barclay Global Fund Advisors each with power over 1,314,456 and 1,122,465 shares, respectively.

25 COMPENSATION DISCUSSION AND ANALYSIS This section contains a discussion of the material elements of compensation awarded to, earned by or paid to our principal executive officer, our principal financial officer, and our three other most highly compensated executive officers. These individuals are referred to as the “Named Executive Officers” in this proxy statement. Our Named Executive Officers include officers of Alaska Air Group; the Chief Executive Officer (CEO) of Horizon Air Industries, an operating subsidiary; and two elected officers of subsidiary Alaska Airlines who have policy-making roles at the Alaska Air Group level (see the Summary Compensation Table on page 34).

Our executive compensation programs are determined and approved by our Compensation Committee. None of the Named Executive Officers are members of the Compensation Committee or otherwise had a role in determining the compensation of other Named Executive Officers. However, the Chief Executive Officer of Alaska Air Group does make recommendations to the Compensation Committee with respect to compensation

Proxy Statement paid to the other executive officers.

Executive Compensation Philosophy and Overview Objectives The objectives of the Company’s executive compensation programs are as follows: • to attract and retain highly qualified executives who share our Company values and commitment to the 2010 strategic plan by designing the total compensation package to be entrepreneurial, fair, and competitive with appropriate reference points as described below; • to motivate executives to provide excellent leadership and achieve Company goals by linking short- term and long-term incentives to the achievement of specific annual goals as reflected in executives’ commitment plans, the Performance-Based Pay plan, and the Company’s 2010 strategic plan; • to align the interests of executives, employees, and stockholders by tying a large portion of total direct compensation to the achievement of objective goals related to the Company’s safety record, cost structure, employee engagement and profitability; and • to provide executives with reasonable security, through a combination of performance-based incentives, retirement plans and change-in-control agreements that motivate them to continue employment with the Company and achieve goals that will make the Company remain competitive and thrive in the long term.

The Compensation Committee conducts an annual review of the Company’s executive compensation to ensure that it is structured to satisfy these objectives. The Committee considers how each component of compensation motivates the executive to help the Company achieve its performance goals and/or how it promotes retention of an executive who shares the Company’s values. Central to the structure of the Company’s executive compensation is the Company’s 2010 strategic plan, which is a blueprint to transform Alaska Airlines into one of the best airlines in America for our employees, customers, and our investors. The Committee views commitment to the Company’s 2010 strategic plan as crucial to the success of the Company and therefore structures executive compensation to attract and retain executives who share this commitment.

Methodology The Compensation Committee considers air carrier peer group data as well as general industry data when evaluating whether Named Executive Officer compensation is fair and competitive. The greater focus is on peer group air carriers because these are the primary companies that compete with the Company for key talent, customers, and stockholder investment. Peer group air carrier companies also receive greater emphasis because in our industry the vast majority of our employees are unionized and have pay that is often compared to their industry peers. Our Company values pay equity for all employees, including executive employees. For 2006, the

26 peer group consisted of Air Tran Holdings, AMR Corporation, Continental Airlines Inc., Inc., Frontier Airline Holdings, Jet Blue Airways Corporation, Corporation, Corporation, UAL Corporation and US Airways Group Inc. The Committee also considers general industry data of companies with similar revenues because it recognizes that a tension can exist between external market conditions and the airline industry. The Committee applies a 2/3 and 1/3 weighting on airline and general industry market data, respectively, to establish a “market consensus.” rx Statement Proxy The Committee uses tally sheets to review each element of compensation. Base salaries, perquisites and personal benefits, retirement benefits and change-in-control benefits are primarily intended to attract and retain highly qualified executives. These are the elements of the Company’s executive compensation program where the value of the benefit in any given year is not dependent on performance (although base salary amounts and benefits determined by reference to base salary may increase from year to year depending on performance, among other things). We believe that in order to attract and retain top executives we need to provide them with predictable compensation levels that reward their performance and continued service. Base salaries and perquisites and personal benefits are paid out on a short-term or current basis. Annual incentives based on the achievement of objective performance goals are paid out on a longer-term basis, as are long-term incentives such as equity awards. Annual incentives and long-term incentives are intended to motivate executives to achieve superior performance levels. We believe that this mix of short-term and longer-term compensation allows us to achieve our dual goals of attracting and retaining highly qualified executives with an entrepreneurial spirit and providing meaningful performance incentives for those executives.

Emphasis on “At Risk” Pay Our compensation structure is designed to promote teamwork, initiative and resourcefulness by key employees whose performance and responsibilities directly affect our results of operations. The Committee considers the market consensus data to establish total direct compensation. The Committee believes that emphasis on “at risk” compensation at the senior executive levels of the Company is an important element in achieving a pay-for-performance culture, since it aligns management’s interests with those of the Company’s stockholders. Thus, once market consensus is established, the Committee tailors total direct compensation paid to Named Executive Officers to place a substantial emphasis on “at risk” pay that is tied to performance objectives. For 2006, the Committee approved target-level compensation for Mr. Ayer, our Chief Executive Officer, that is 80% “at risk” and tied directly to stockholder value creation. With respect to the other Named Executive Officers, the Committee approved target compensation that is 67% “at risk” and tied directly to stockholder value creation.

COMPENSATION OF COMPENSATION OF OTHER CHIEF EXECUTIVE OFFICER NAMED EXECUTIVE OFFICERS

20% Base Pay 33% Base Pay 80% “At Risk” 67% “At Risk”

The Committee believes that the appropriate way to compensate executive officers is to consider many principles of compensation, including market pay, internal equity, and fundamental fairness. The Committee recognizes that Chief Executive Officer compensation at many publicly traded companies in the United States has dramatically increased over a short period of time. This leads the Committee, with the Chief Executive Officer’s full support, to not blindly accept “benchmarking” data to set compensation levels. The Committee

27 recognizes that this data is susceptible to “ratcheting.” Thus, while the Committee has considered peer group data as described above, the Committee has thoughtfully applied other compensation principles such as internal equity when determining Chief Executive Officer compensation. The Committee’s determination of total direct compensation for the Chief Executive Officer position therefore reflects a substantial discount from market consensus. At current levels, the Chief Executive Officer’s total direct compensation represents approximately two times that of the Executive Vice President level, and approximately four times that of the Vice President level. By considering internal equity, the Committee believes that the resulting data points are more reliable and more insulated from external ratcheting effects.

As a basis for comparison, our Chief Executive Officer’s base salary, as compared to the last year published, remained significantly below the median in relation to our peer group as well as in relation to market consensus.

CEO Base Pay Comparisons (Airlines) Proxy Statement 2005, 2006 and 2007 Base Salary Alaska Air Group, Inc...... $360,000 2005 Base Salary (Air Group peers) Air Tran Holdings ...... $467,000 AMR Corporation ...... $527,000 Continental Airlines, Inc...... $752,000 Delta Air Lines, Inc...... $431,000 Frontier Airline Holdings ...... $295,000 Jet Blue Airways Corporation ...... $200,000 Northwest Airlines Corporation ...... $571,000 Southwest Airlines Corporation ...... $405,000 UAL Corporation ...... $606,000 US Airways Group, Inc...... $550,000 Median Base Salary (Air Group peers) ...... $497,000

For the Named Executive Officers other than the Chief Executive Officer, the Committee targets base compensation at considerably less than the median also, but with an opportunity to get to the median or to exceed it through incentive compensation.

Annual incentive compensation under the Performance-Based Pay plan is primarily intended to motivate Named Executive Officers to achieve specific Company strategies and operating objectives. We believe it helps us attract and retain top executives who fit a team-oriented and performance-driven culture. Our long-term equity incentives are primarily intended to align Named Executive Officers’ long-term interests with stockholders’ long-term interests, although we believe they also play a role in helping us to attract and retain top-performing executives.

The Committee aligns executive compensation with the Company’s strategic plan by choosing a target level for the Performance-Based Pay plan that is consistent with the Company’s strategic plan goals. In 2007 the Committee commenced using performance shares as a form of equity. The performance shares will only be issued to executives if the Company hits a pre-determined average pre-tax profit margin metric over the course of three years. By designating a proportion of an executive’s compensation in performance shares, the Committee further aligned total direct compensation for executives with the Company’s strategic plan goals.

Current Executive Compensation Elements Base Salaries The Committee reviews salaries for our Named Executive Officers annually. In general, the Committee targets base salary levels in the 25th percentile based on market consensus data identified in the annual review described above. In setting specific salary levels for each Named Executive Officer, the Committee assesses the

28 executive’s duties and scope of responsibilities, past performance and expected future contributions to the Company, the market demand for the executive’s skills, the executive’s influence on long-term Company strategies and success, and the executive’s individual leadership performance. The Committee believes generally that is it reasonable that higher-level executives should be compensated with pay that reflects greater risk and remains contingent upon the success of the Company. Thus, as an individual reaches the senior executive level, base pay is de-emphasized as a component of compensation. rx Statement Proxy In setting Chief Executive Officer compensation for 2006, the Committee received candid and direct input from Mr. Ayer. At the initiation of Mr. Ayer, his base salary for 2006 remained at the same level it has for the past year, and lower than it had been in the three years prior to that. The Committee believes that Mr. Ayer’s leadership in this matter has been invaluable in re-affirming the Company’s values and commitment to the 2010 strategic plan.

Based on its 2006 review of executive compensation, the Committee increased the base salary levels of the other Named Executive Officers. The Committee maintained their base salaries within the 25th percentile, and the effective amount of the increase was between 4% and 12%. The Committee believes that 25th percentile base salary levels for the other Named Executive Officers, with the opportunity to earn market-level compensation through short- and long-term incentive plans that pay when performance objectives are met, are appropriate.

Annual Incentives Our executive officers participate in the Performance-Based Pay plan, which places at risk a significant portion of an executive’s compensation, linking it to annual profitability and operational goals. For awards under the Performance-Based Pay plan to be paid, the Company must achieve or exceed profit and/or operating goals established annually by the Committee. In 2006, the Performance-Based Pay plan performance measures included safety (10% weight), employee engagement (10% weight), unit cost excluding fuel (10% weight) and adjusted profitability (70% weight). Under the Performance-Based Pay plan formula, awards increase proportionately based on the degree to which the various goals are met.

Consistent with the Committee’s philosophy of placing a high percentage of total cash compensation at risk for executives, in 2006 Mr. Ayer could have earned up to 100% of base pay if target Performance-Based Pay plan goals were met, and up to 200% if maximum goals were reached. The other Named Executive Officers 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. If minimum goals were not reached, Mr. Ayer and the other Named Executive Officers would not receive a payment. During 2006, Alaska Airlines performed at 149.7% and Horizon Air performed at 149.6% of target with respect to the Performance-Based Pay plan goals.

The Company’s 2006 Performance-Based Pay payouts were based on the Company’s annual performance relative to safety, employee engagement, and financial performance goals established by the Committee. The Company exceeded its target goals on profitability, employee engagement, and safety. The Committee exercised its discretion pursuant to the Performance-Based Pay plan to settle certain 2006 payouts under the plan in Company common stock (in lieu of a cash payment), thus further linking executive compensation with stockholder value. The cash amounts of the 2006 payouts under the plan (before taxes, and before converting the cash bonuses to stock amounts) were as follows: Mr. Ayer, $538,965; Mr. Tilden, $233,531; Mr. Saretsky, $243,204; Mr. Finan, $223,245, and Mr. Pinneo, $206,665. Mr. Pinneo’s payout was made in cash. Each of the other Named Executive payouts for 2006 was made in Alaska Air Group (ALK) common stock (in lieu of payment of the cash amount set forth above for that executive), with the number of shares deliverable to each executive determined by dividing the executive’s cash payout for 2006 (after subtracting the amount of tax withholding required) by $42.85, the per-share closing price of ALK common stock as reported on the New York Stock Exchange on January 31, 2007. The number of shares of ALK common stock actually delivered to each of these executives was as follows: Mr. Ayer, 9,175 shares; Mr. Tilden, 3,915 shares; Mr. Saretsky, 4,085 shares; Mr. Finan, 3,739 shares.

29 In addition, all of our employees, including our executive officers, participate in a separate incentive plan called Operational Performance Rewards, which pays a monthly incentive payment to all employees when particular operational performance targets are met. Awards are based on operational performance and customer satisfaction, and the maximum annual payout for each employee is $1,200. In 2006, Alaska Airlines employees, including Mr. Ayer, Mr. Tilden, Mr. Saretsky and Mr. Finan, were paid $450 under Operational Performance Rewards. Horizon Air employees, including Mr. Pinneo, were paid $850 under Operational Performance Rewards.

The Committee believes that the 2006 incentives paid to the Named Executive Officers under these plans are reasonable in view of competitive practices, the Company’s performance and the contribution of those officers to that performance during 2006.

Proxy Statement Long-Term Incentive Equity Awards The Company’s policy is that the long-term compensation of its Named Executive Officers and other executive officers should be directly linked to the value provided to stockholders. Therefore, the Company has historically made annual grants of stock option and restricted stock unit awards to provide further incentives to our executives to increase stockholder value. The Committee bases its award grants to executives each year on a number of factors, including: • the executive’s contribution to the success of the Company’s financial performance; • the equity participation level of comparable executives at comparable companies and internal equity; • the executive’s position with the Company and base compensation; • the executives performance of his or her individual responsibilities; and • the accounting impact to the Company and potential dilution effects of the grant.

Stock Options. The Company makes a portion of its long-term incentive grants to Named Executive Officers in the form of stock options with an exercise price that is equal to the fair market value of our common stock on the grant date. Thus, the Named Executive Officers will only realize value on their stock options if our stockholders realize value on their shares. The stock options also function as a retention incentive for our executives as they vest ratably over the four-year period after the date of grant.

In September 2006, the Committee granted stock options to each of our Named Executive Officers. The material terms of these options are described following the table “2006 Grants of Plan-Based Awards.” Mr. Ayer’s long-term incentive compensation for 2006 was represented by solely by his stock option grant and will have value only if the price of our common stock increases. Mr. Ayer expressly requested that the Committee not grant him a restricted stock unit award for 2006. For each of the other Named Executive Officers, these option grants constitute approximately 50% of the officer’s total long-term incentive compensation for 2006, with the restricted stock units described below constituting the remaining approximately 50%.

Restricted Stock Units. The Company also grants long-term incentive awards to Named Executive Officers in the form of restricted stock units. In general, the restricted stock units vest only on the third anniversary of the date they are granted and, upon vesting, are paid in shares of our common stock. Thus, the units are designed both to link executives’ interests with those of our stockholders as the units’ value is based on the value of our common stock and to provide a long-term retention incentive for the vesting period. In September 2006, the Committee granted restricted stock unit awards to each of our Named Executive Officers other than Mr. Ayer, who, as noted above, requested that he not be granted a restricted stock unit award for 2006.

Performance Shares. For 2007, the Company’s executive compensation program will include performance shares as part of long-term incentive compensation. The shares will vest only if certain performance conditions are met.

30 Perquisites and Personal Benefits In addition to cash and equity compensation, the Company provides the Named Executive Officers with certain perquisites and personal benefits, including automobile expenses and travel benefits. We believe that any perquisites offered to executives should be modest and should not make up a large proportion of the executive’s compensation. rx Statement Proxy Retirement Benefits/Deferred Compensation Opportunities The Company provides retirement benefits to the Named Executive Officers under the terms of qualified and non-qualified defined-benefit and defined-contribution retirement plans. The Retirement Plan for Salaried Employees (the “Salaried Retirement Plan”) and our 401(k) plan are both tax-qualified retirement plans that the Named Executive Officers participate in on substantially the same terms as our other participating employees. However, due to maximum limitations imposed by the Employee Retirement Income Security Act of 1974 (“ERISA”) and the Internal Revenue Code on the annual amount of a pension which may be paid under a qualified defined benefit plan, the benefits that would otherwise be payable to the Named Executive Officers under the Salaried Retirement Plan are required to be limited. Because we do not believe that it is appropriate for the Named Executive Officers’ retirement benefits to be reduced because of limits under ERISA and the Internal Revenue Code, and because we wish to provide supplemental retirement benefits, we established the 1995 Elected Officers Supplementary Retirement Plan (the “Supplementary Retirement Plan”), an unfunded defined benefit plan designed to permit Named Executive Officers and other officers to receive the full amount of benefits that would be paid under the Salaried Retirement Plan but for the limitations imposed by ERISA and the Internal Revenue Code and to provide supplemental retirement benefits. Under our Nonqualified Deferred Compensation Plan, our Named Executive Officers are also permitted to elect to defer up to 100% of their annual Performance-Based Pay payments. The Company believes that providing the Named Executive Officers with deferred compensation opportunities is a cost-effective way to permit executives to receive the tax benefits associated with delaying the income tax event on the compensation deferred.

Please see the “2006 Pension Benefits” and “2006 Nonqualified Deferred Compensation” tables and information following them for a description of these plans.

Severance and Other Benefits Upon Change-in-Control and Termination of Employment We have entered into change-in-control agreements with each of our Named Executive Officers because we believe that the occurrence, or potential occurrence, of a change-in-control transaction will create uncertainty and disruption during a critical transaction time for the Company. This uncertainty results from the fact that many change-in-control transactions result in significant organizational changes, particularly at the senior executive level. In order to encourage these executive officers to remain employed with the Company during an important transition time for the company, and when prospects for continued employment following the transaction are often uncertain, we provide these officers with enhanced severance benefits if their employment is actually or constructively terminated by us without cause in connection with a change-in-control. The benefits for the Named Executive Officers are generally determined as if they continued to remain employed for three years following their actual termination date.

We believe that the Named Executive Officers should receive change-in-control severance benefits only if their employment is constructively or actually terminated in connection with a change-in-control. Given that none of the Named Executive Officers have employment agreements that provide for fixed positions or duties or for a fixed base salary or actual or target annual incentive absent some form of constructive termination severance trigger, potential acquirers could constructively terminate a Named Executive Officer’s employment and avoid paying any severance benefits at all (i.e., following a change-in-control, an acquirer could materially demote a Named Executive Officer, reduce his or her salary and eliminate his or her annual incentive opportunity

31 to force the Named Executive Officer to terminate his or her own employment and thereby avoid paying severance). Because we believe that constructive terminations in connection with a change-in-control are conceptually the same as actual terminations, and because we believe that acquirers would otherwise have an incentive to constructively terminate Named Executive Officers to avoid paying severance, the Change-in-Control Agreements provide that the executive may terminate employment in connection with a change-in-control for stated “good reasons” that we believe would result, in those circumstances, in the constructive termination of the Named Executive Officer’s employment.

We do not believe that Named Executive Officers should be entitled to receive their cash severance benefits merely because a change-in-control transaction occurs. The payment of cash severance benefits is only triggered by an actual or constructive termination of employment following a change-in-control transaction. However, as described following the table under “2006 Grants of Plan-Based Awards,” outstanding options and other equity- based awards granted under our 2004 Long-Term Incentive Equity Plan (the “2004 Plan”), including those Proxy Statement awards held by our Named Executive Officers, will generally accelerate on a change-in-control of the Company unless otherwise provided by the Board. Although this vesting will occur whether or not a Named Executive Officer’s employment terminates, we believe it is appropriate and a standard market competitive practice to fully vest equity awards in these change-in-control situations and allow the award-holder to benefit from any gain under the award at the time of the transaction.

As part of their change-in-control severance benefits, Named Executive Officers are reimbursed for the excise taxes imposed on their severance payments and any other payments under Section 4999 of the Internal Revenue Code. We have provided the Named Executive Officers with a “gross-up” for any excise taxes that may be imposed because we determined the appropriate level of change-in-control severance payment for each Named Executive Officer without factoring in the adverse effects that may result from imposition of excise taxes. The excise tax gross-up is intended to make the Named Executive Officer whole for any adverse tax consequences they may become subject to under Section 4999 of the Internal Revenue Code.

Policy with Respect to Section 162(m) Section 162(m) of the Internal Revenue Code generally prohibits the Company from deducting certain compensation over $1 million paid to Named Executive Officers 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 and believes that a substantial portion of compensation paid under its current program (including the annual incentives and stock option grants described above) satisfies the requirements under Section 162(m). However, the Company reserves the right to design programs that recognize a full range of performance criteria important to its success, even where the compensation paid under such programs may not be deductible. For 2006, the Company believes that no portion of its tax deduction for compensation paid to its Named Executive Officers will be disallowed under Section 162(m).

32 COMPENSATION COMMITTEE REPORT(1) The Compensation Committee has certain duties and powers as described in its charter. The Compensation Committee is currently composed of the four non-employee directors named at the end of this report, each of whom is independent as defined by the New York Stock Exchange listing standards.

The Compensation Committee has reviewed and discussed with management the disclosures contained in Statement Proxy the Compensation Discussion and Analysis section of this proxy statement. Based upon this review and discussion, the Compensation Committee recommended to our Board of Directors that the Compensation Discussion and Analysis section be included in the Company’s 2006 Annual Report on Form 10-K on file with the SEC.

Compensation Committee of the Board of Directors Phyllis J. Campbell, Chairperson Jessie J. Knight, Jr. Dennis F. Madsen John V. Rindlaub

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Compensation Committee members whose names appear on the Compensation Committee Report above were committee members during all of 2006. No member of the Compensation Committee is or has been a former or current executive officer of the Company or has had any relationships requiring disclosure by the Company under the SEC’s rules requiring disclosure of certain relationships and related-party transactions. None of the Company’s executive officers served as a director or a member of a compensation committee (or other committee serving an equivalent function) of any other entity, the executive officers of which served as a director or member of the Compensation Committee during the fiscal year ended December 31, 2006.

(1) SEC filings sometimes “incorporate information by reference.” This means the Company is referring you to information that has previously been filed with the SEC, and that this information should be considered as part of the filing you are reading. Unless the Company specifically states otherwise, this report shall not be deemed to be incorporated by reference and shall not constitute soliciting material or otherwise be considered filed under the Securities Act or the Securities Exchange Act.

33 2006 SUMMARY COMPENSATION TABLE The following table presents information regarding compensation of our principal executive officer, our principal financial officer and our three other most highly compensated executive officers for services rendered during 2006. These individuals are referred to as “Named Executive Officers” in this Proxy Statement.

Change in Pension Value and Nonqualified Non-Equity Deferred All Stock Option Incentive Plan Compensation Other Name and Principal Salary Bonus Awards Awards Compensation Earnings Compensation Total Position Year ($) ($) ($)(1) ($)(1) ($)(2) ($)(3) ($)(5) ($) (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) William S. Ayer ...... 2006 360,000 0 302,484 606,675 538,965 57,541 55,402 1,921,067 Chairman, President and Proxy Statement CEO Bradley D. Tilden ...... 2006 260,000 0 130,554 151,486 233,531 49,450 69,389 894,410 Executive Vice President/Finance and Chief Financial Officer Gregg A. Saretsky ...... 2006 280,000 0 135,095 157,286 243,204 104,362 81,705 1,001,652 Executive Vice President/Marketing and Planning Kevin P. Finan ...... 2006 260,000 0 139,967 110,504 225,846 195,773 64,973 997,063 Executive Vice President/Operations Jeffrey D. Pinneo(4) ...... 2006 237,000 0 117,593 142,786 209,995 30,202 60,917 798,493 President and CEO (Horizon Air Industries)

(1) The amounts reported in Columns (e) and (f) of the table above reflect the aggregate dollar amounts recognized for stock awards and option awards, respectively, for financial statement reporting purposes with respect to 2006 (disregarding any estimate of forfeitures related to service-based vesting conditions). No stock awards or option awards granted to Named Executive Officers were forfeited during 2006. Detailed information about the amount recognized for specific awards is reported in the table under “Outstanding Equity Awards at Fiscal-Year End” below. For a discussion of the assumptions and methodologies used to value the awards reported in Column (e) and Column (f), please see the discussion of stock awards and option awards contained in Note 10 (Stock-Based Compensation Plans) to the Company’s Consolidated Financial Statements, included as part of the Company’s 2006 Annual Report filed on Form 10-K with the SEC and incorporated herein by reference. For information about the stock awards and option awards granted to our Named Executive Officers for 2006, please see the discussion under “Grants of Plan-Based Awards” below. (2) As described in the “Compensation Discussion and Analysis” section, the Company paid Performance-Based Pay plan incentive compensation to Named Executive Officers for 2006 based on the Company’s achievement of above-target performance on four objective goals established by the Compensation Committee at the beginning of the year relative to safety, employee engagement, cost, and profitability. Further aligning Named Executive Compensation with stockholder value, the payments were paid in shares of common stock (other than the payment made to Mr. Pinneo), with the number of shares calculated by dividing the amount of the payment as determined under the Performance-Based Pay plan formula by $42.85 which represents the per-share closing price of our common stock on January 31, 2007, the date the shares were issued. (3) The amount reported in Column (i) of the table above reflects the 2006 change in value of the Named Executive Officers’ pensions from the Alaska Air Group, Inc. Retirement Plan for Salaried Employees and the Alaska Air Group, Inc. 1995 Elected Officers Supplementary Retirement Plan, plus the 2006 total earnings from the Named Executive Officer’s Nonqualified Deferred Compensation Plan. (4) 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 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 Salaried Retirement Plan during his tenure as President and CEO of Horizon Air.

34 (5) The following table presents detailed information on the types and amounts of compensation reported for the Named Executive Officers in Column (i) of the Summary Compensation Table, including the value of Company contributions to the Named Executive Officer’s account under the Company’s 401(k) plan, the value of Company-paid term life insurance premiums for the Named Executive Officer, and the value of personal benefits such as automobile expense, travel and gross-up payments for taxes attributable to these personal benefits:

Term Life Travel

Company Insurance Benefit Statement Proxy Contribution Premiums and to 401(k) and Taxes Automobile Taxes Name Account Paid Expense Paid William S. Ayer ...... 6,600 1,832 22,000 24,970 Bradley D. Tilden ...... 6,600 987 18,100 43,702 Gregg A. Saretsky ...... 6,600 996 18,175 55,934 Kevin P. Finan ...... 6,600 2,283 17,664 38,426 Jeffrey D. Pinneo ...... 14,916 1,140 16,890 27,971

Compensation of Named Executive Officers The primary elements of each Named Executive Officer’s total compensation reported in the table are base salary, an annual performance-based incentive opportunity, a long-term equity incentive opportunity consisting of nonqualified stock options and restricted stock units, an increase in accumulated retirement pension benefits and earnings on deferred compensation account balances. Named Executive Officers also earned the other benefits listed in Column (i) of the 2006 Summary Compensation Table on page 34, as further described in footnote (5) to the table.

The 2006 Summary Compensation Table on page 34 should be read in conjunction with the tables and narrative descriptions that follow. A description of the material terms of each Named Executive Officer’s base salary and annual incentive opportunity is provided immediately following this paragraph. The 2006 Grants of Plan-Based Awards table and the accompanying description of the material terms of the stock options and stock unit awards granted provide information regarding the long-term equity incentives awarded to Named Executive Officers in 2006. The Outstanding Equity Awards at Fiscal Year End and 2006 Option Exercises and Stock Vested tables on pages 38-40 provide further information on the Named Executive Officers’ potential realizable value and actual value realized with respect to their equity awards.

The 2006 Pension Benefits table on page 40 and the footnotes following it describe each Named Executive Officer’s retirement benefits under our defined-benefit pension plans and a supplemental retirement plan. Similarly, the Non-Qualified Deferred Compensation table on page 42 and the related description of the material terms of our non-qualified deferred compensation plans provides a more complete picture of the potential future payments due to our Named Executive Officers. The discussion of the potential payments due upon a termination of employment or change-in-control that follows is intended to further explain the potential future payments that may become, payable to our Named Executive Officers under certain circumstances involving a change in control.

Description of Salary and Short-Term Incentive Amounts We do not have employment agreements with our Named Executive Officers, and as a result the base salary and incentive amounts listed above are not fixed by contract. At the beginning of each fiscal year, the Compensation Committee sets the base salary for the Chief Executive Officer and approves the base salaries for each Named Executive Officer for the upcoming year. In making their determination, the Committee considers the factors discussed in the section titled “Base Salaries” on pages 28-29 of the Compensation Discussion and Analysis.

For 2006, each of our Named Executive Officers was eligible for an annual incentive award under the Company’s Performance-Based Pay plan. (Under the SEC’s new rules for disclosure of executive compensation, performance-based awards such as the incentives paid under this Performance-Based Pay plan are listed to as

35 “non-equity incentive plan awards.”) The Performance-Based Pay plan is administered by the Compensation Committee and provides officers and other non-union employees, as well as employees who are members of the Transport Workers Union, an opportunity to earn an award for that year based on the Company’s performance relative to certain pre-established goals.

Awards under the Performance-Based Pay plan are generally payable in cash but may, if the Committee so determines, be payable in shares of our common stock awarded under our 2004 Plan. As noted above, with the exception of Mr. Pinneo, the Committee determined to pay all Named Executive Officers’ 2006 incentive in fully vested shares of our common stock. Please see page 29 of the Compensation Discussion and Analysis above for more information concerning our Performance-Based Pay plan and the payments for 2006. Additional information concerning the threshold, target and maximum payouts for the 2006 year is reported in the table under “2006 Grants of Plan-Based Awards” below. Proxy Statement 2006 GRANTS OF PLAN-BASED AWARDS The following table presents information regarding the incentive awards granted to the Named Executive Officers for 2006. Each of the non-equity incentive plan awards reported in the table below was granted under our Performance-Based Pay plan. Each of the equity-based awards reported in the table below was granted under our 2004 Plan.

All All Other Other Option Grant Stock Awards: Date Estimated Possible Estimated Future Fair Payouts Under Payouts Under Awards: Number Number of Exercise Value Non-Equity Incentive Equity Incentive of Stock Plan Awards Plan Awards of Securities or Base Shares Under- Price of and Thresh- Thresh- of Stock lying Option Option Approval Grant old Target Maximum old Target Maximum or Units Options Awards Awards Name Date Date ($) ($) ($) (#) (#) (#) (#) (#) ($/Sh) ($)(1) (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) William S. Ayer ...... 1/31/07 1/31/07 0 360,000 720,000 0 0 0 0 0 0 n/a 9/13/06 9/13/06 0 0 0 0 0 0 0 37,300 37.96 705,309 9/13/06 9/13/06 0 0 0 0 0 0 0 0 0 0 Bradley D. Tilden ...... 1/31/07 1/31/07 0 260,000 520,000 0 0 0 0 0 0 n/a 9/13/06 9/13/06 0 0 0 0 0 0 0 11,550 37.96 427,750 9/13/06 9/13/06 0 0 0 0 0 0 5,300 0 0 0 Gregg A. Saretsky ...... 1/31/07 1/31/07 0 280,000 560,000 0 0 0 0 0 0 n/a 9/13/06 9/13/06 0 0 0 0 0 0 0 11,550 37.96 427,750 9/13/06 9/13/06 0 0 0 0 0 0 5,300 0 0 0 Kevin P. Finan ...... 1/31/07 1/31/07 0 260,000 520,000 0 0 0 0 0 0 n/a 1/12/06(2) 1/26/06 0 0 0 0 0 0 1,000 0 0 0 9/13/06 9/13/06 0 0 0 0 0 0 0 10,730 37.96 436,735 9/13/06 9/13/06 0 0 0 0 0 0 4,920 0 0 0 Jeffrey D. Pinneo ...... 1/31/07 1/31/07 0 237,000 474,000 0 0 0 0 0 0 n/a 9/13/06 9/13/06 0 0 0 0 0 0 0 9,780 37.96 362,286 9/13/06 9/13/06 0 0 0 0 0 0 4,490 0 0 0

(1) The amounts reported in Column (l) reflect the fair value of these awards on the grant date as determined under the principles used to calculate the value of equity awards for purposes of the Company’s financial statements and may or may not be representative of the value eventually realized by the executive. For a discussion of the assumptions and methodologies used to value the awards reported in Column (l), please see the discussion of stock awards and option awards contained in Note 10 (Stock-Based Compensation Plans) to the Company’s Consolidated Financial Statements, included as part of the Company’s 2006 Annual Report filed on Form 10-K with the SEC and incorporated herein by reference. (2) This award was approved in conjunction with a promotion to the position of Executive Vice President/Operations on January 26, 2006. The Compensation Committee set Mr. Finan’s compensation on January 12, 2006 and awarded a grant of stock units effective with his promotion date of January 26, 2006.

36 Description of Equity-Based Awards Each of the equity-based awards reported in the Grants of Plan-Based Awards Table was granted under, and is subject to, the terms of the 2004 Plan. The 2004 Plan is administered by the Compensation Committee. The Committee has authority to interpret the plan provisions and make all required determinations under the plans. This authority includes making required proportionate adjustments to outstanding awards upon the occurrence of

certain corporate events such as reorganizations, mergers and stock splits, and making provisions to ensure that Statement Proxy any tax withholding obligations incurred in respect of awards are satisfied. Unless otherwise provided by the Committee, awards granted under the 2004 Plan are generally only transferable to a beneficiary of a Named Executive Officer upon his death.

Options Each option reported in Column (j) of the table above was granted with a per-share exercise price equal to the fair market value of a share of our common stock on the grant date. For these purposes, and in accordance with the terms of the 2004 Plan and our option grant practices, the fair market value is equal to the closing price of a share of our common stock on the applicable grant date.

Each option granted to our Named Executive Officers in 2006 is subject to a four-year vesting schedule, with 25% of the option vesting on each of the first four anniversaries of the grant date. If a Named Executive Officer’s employment terminates for any reason other than due to his death, disability or retirement, the unvested portion of the option will immediately terminate. If the Named Executive Officer’s employment is terminated as a result of the officer’s death or disability, the option will immediately vest and become exercisable. If the Named Executive Officer’s employment is terminated as a result of the officer’s retirement, the option will continue to vest and become exercisable over the three-year period following the retirement date (subject to earlier termination at the end of the option’s stated term). For these purposes, “retirement” generally means a termination of employment on or after attaining age 60, attaining age 55 with at least five years of service with the Company, or becoming entitled to commence benefits under a Company-sponsored defined benefit plan in which the officer participates. Unless otherwise provided by the Board of Directors, if there is a change-in-control of the Company, the options will generally become fully vested and exercisable.

Once vested, each option will generally remain exercisable until its normal expiration date. Each of the options granted to our Named Executive Officers in 2006 has a term of ten years. However, vested options may terminate earlier in connection with a termination of the officer’s employment or a change-in-control of the Company.

The options granted to Named Executive Officers during 2006 do not include any dividend rights.

Restricted Stock Units Column (i) of the table above reports awards of restricted stock units granted to our Named Executive Officers for 2006. Each restricted stock unit represents a contractual right to receive one share of our common stock. Restricted stock units granted to our Named Executive Officers for 2006 will generally vest in one installment on the third anniversary of the grant date, provided that the officer continues to be employed with the Company through that date. However, the restricted stock units will become fully vested if the Named Executive Officer’s employment terminates due to the officer’s death or disability. If the Named Executive Officer’s employment terminates due to the officer’s retirement, the restricted stock units will continue to vest for the three-year period following the retirement date. (See the description of “Options” above for the definition of “retirement.”) Unless otherwise provided by the Board of Directors, the restricted stock units will also generally become fully vested upon a change-in-control of the Company.

The restricted stock units granted to Named Executive Officers during 2006 do not include any dividend rights.

37 OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END The following table presents information regarding the outstanding equity awards held by each of our Named Executive Officers as of December 31, 2006, including the vesting dates for the portions of these awards that had not vested as of that date. This table also includes the amounts recognized for each of these awards for financial reporting purposes for 2006 as reflected in the Summary Compensation Table above. For purposes of clarity, awards that were not outstanding as of December 31, 2006 but that were recognized for financial reporting purposes for 2006 have also been included in the table below. Additional information on these awards is presented in the table under “2006 Option Exercises and Stock Vested” below.

Option Awards Stock Awards Number of Shares Market or Units Value of Proxy Statement Number of Number of of Shares or Securities Securities Allocable Stock Units of Allocable Underlying Underlying Financial That Stock Financial Unexercised Unexercised Option Charge Have That Charge Option Options Options Exercise Option Recognized Award Not Have Not Recognized Grant Exercisable Unexercisable Price Expiration for 2006 Grant Vested Vested for 2006 Name Date (#) (#) ($) Date ($) Date (#) ($)(1) ($) (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) William S. Ayer ...... 12/19/97 17,600 0 35.25 12/19/07 0 5/7/98 24,100 0 47.125 5/7/08 0 5/25/99 33,100 0 39.6875 5/25/09 0 1/25/00 40,100 0 30.50 1/25/10 0 1/30/01 41,900 0 31.80 1/30/11 0 11/12/01 39,000 0 25.20 11/12/11 0 1/30/02 75,000 0 30.89 1/30/12 19,557 5/31/02 75,000 0 27.85 5/31/12 101,994 2/11/03 41,250 13,750(2) 18.76 2/11/13 100,603 3/1/04 15,350 15,350(3) 26.10 3/1/14 100,476 11/17/04 10,000 10,000(4) 28.85 11/17/14 65,500 11/17/04 15,400(4) 608,300 148,924 8/30/05 11,525 34,575(6) 32.96 8/30/15 165,543 8/30/05 14,000(6) 553,000 153,561 9/13/06 0 37,300(7) 27.96 9/13/16 53,002 Totals ...... 423,925 110,975 606,675 29,400 1,161,300 302,485 Bradley D. Tilden ..... 12/19/97 2,600 0 35.25 12/19/07 0 5/7/98 4,100 0 47.125 5/7/08 0 5/25/99 8,400 0 39.6875 5/25/09 0 1/25/00 11,600 0 30.50 1/25/10 0 1/30/01 13,000 0 31.80 1/30/11 0 11/12/01 15,600 0 25.20 11/12/11 0 5/31/02 30,000 0 27.85 5/31/12 26,152 2/11/03 10,000 5,000(2) 18.76 2/11/13 26,445 3/1/04 6,450 6,450(3) 26.10 3/1/14 36,154 11/17/04 5,350(4) 211,325 51,728 8/30/05 5,350(6) 211,325 58,669 8/30/05 3,225 9,675(6) 32.96 8/30/15 46,321 9/13/06 0 11,550(7) 37.96 9/13/06 16,413 9/13/06 5,300(7) 209,350 20,157 Totals ...... 104,975 32,675 151,485 16,000 632,000 130,554 Gregg A. Saretsky ..... 3/15/98 10,000 0 57.3125 3/15/08 0 5/7/98 8,000 0 47.125 5/7/08 0 5/25/99 11,200 0 39.6875 5/25/09 0 1/25/00 13,600 0 30.50 1/25/10 0 1/30/01 15,500 0 31.80 1/30/11 0 11/12/01 10,800 0 25.20 11/12/11 0 5/31/02 30,000 0 27.85 5/31/12 26,153 2/11/03 2 5,200(2) 18.76 2/11/13 27,503 3/1/04 6,750 6,750(3) 26.10 3/1/14 38,738 11/17/04 5,570(4) 220,015 53,863 8/30/05 5,570(6) 220,015 61,075 8/30/05 3,375 10,125(6) 32.96 8/30/15 48,480 9/13/06 0 11,550(7) 37.96 9/13/16 16,413 9/13/06 5,300(7) 209,350 20,157 Totals ...... 109,227 33,625 157,287 16,440 649,380 135,095

38 Option Awards Stock Awards Number of Market Shares Value of or Units Shares Number of Number of of or Units Securities Securities Allocable Stock of Stock Allocable Underlying Underlying Financial That That Financial Unexercised Unexercised Option Charge Have Have Charge Option Options Options Exercise Option Recognized Award Not Not Recognized Statement Proxy Grant Exercisable Unexercisable Price Expiration for 2006 Grant Vested Vested for 2006 Name Date (#) (#) ($) Date ($) Date (#) ($)(1) ($) (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) Kevin P. Finan ...... 7/26/00 14,500 0 28.56 7/26/10 0 1/30/01 14,800 0 31.80 1/30/11 0 11/12/01 17,700 0 25.20 11/12/11 0 2/11/03 4,425 4,425(2) 18.76 2/11/13 38,055 3/1/04 4,400 4,400(3) 26.10 3/1/14 25,608 11/10/04 3,880(5) 153,260 36,255 8/30/05 6,880(6) 271,760 75,445 8/30/05 2,200 6,600(6) 32.96 8/30/15 31,600 1/26/06 1,000 39,500 9,554 9/13/06 0 10,730(7) 37.96 9/13/16 15,241 9/13/06 4,920(7) 194,340 18,714 Totals ...... 58,025 26,155 110,504 16,680 658,860 139,968 Jeffrey D. Pinneo ..... 5/7/98 3,000 0 47.125 5/7/08 0 5/25/99 3,900 0 39.6875 5/25/09 0 1/25/00 4,700 0 30.50 1/25/10 0 1/30/01 6,000 0 31.80 1/30/11 0 11/12/01 2,700 0 25.20 11/12/11 0 5/31/02 30,000 0 30.89 5/31/12 40,800 2/11/03 7,000 5,000(2) 18.76 2/11/13 19,264 3/1/04 5,400 5,400(3) 26.10 3/1/14 30,043 11/17/04 4,870(4) 192,365 47,083 8/30/05 4,870(6) 192,365 53,428 8/30/05 2,700 8,100(6) 32.96 8/30/15 38,781 9/13/06 0 9,780(7) 37.96 9/13/16 13,898 9/13/06 4,490(7) 177,355 17,082 Totals ...... 65,400 28,280 142,786 14,230 562,085 117,593

(1) The dollar amounts shown in Column (j) are determined by multiplying the number of shares or units reported in Column (i) by $39.50 (the closing price of our common stock on the last trading day of fiscal 2006). (2) The options unexercisable under the 2/11/03 grant will become fully vested on 2/11/07. (3) The options unexercisable under the 3/1/04 grant will become vested as follows: Mr. Ayer — 7,675 on 3/1/07 and 7,675 on 3/1/08; Mr. Tilden – 3,225 on 3/1/07 and 3,225 on 3/1/08; Mr. Saretsky – 3,375 on 3/1/07 and 3,375 on 3/1/08; Mr. Finan — 2,200 on 3/1/07 and 2,200 on 3/1/08; and Mr. Pinneo — 2,700 on 3/1/07 and 2,700 3/1/08. (4) The RSUs awarded on 11/17/04 will become fully vested on 11/10/07. The options granted to Mr. Ayer on 11/17/04 will become vested as follows: 5,000 on 11/17/07 and 5,000 on 11/17/08. (5) The RSUs awarded on 11/10/04 will become fully vested on 11/10/07. (6) The RSUs awarded on 8/30/05 will become fully vested on 8/30/08. The options unexercisable under the 8/30/05 grant will become vested as follows: Mr. Ayer — 11,525 on 8/30/07, 11,525 on 8/30/08 and 11,525 on 8/30/09; Mr. Tilden — 3,225 on 8/30/07, 3,225 on 8/30/08 and 3,225 on 8/30/09; Mr. Saretsky — 3,375 on 8/30/07, 3,375 on 8/30/08, and 3,375 on 8/30/09; Mr. Finan — 2,200 on 8/30/07, 2,200 on 8/30/08 and 2,200 on 8/30/09; and Mr. Pinneo — 2,700 on 8/30/07, 2,700 on 8/30/08 and 2,700 on 8/30/09. (7) The RSUs awarded on 9/13/06 will become fully vested on 9/13/09. The options unexercisable under the 9/13/06 grant will become vested as follows: Mr. Ayer — 9,325 on 9/13/07, 9,325 on 9/13/08, 9,325 on 9/13/09 and 9,325 on 9/13/10; Mr. Tilden — 2,887 on 9/13/07, 2,888 on 9/13/08, 2,887 on 9/13/09 and 2,888 on 9/13/10; Mr. Saretsky — 2,887 on 9/13/07, 2,888 on 9/13/08, 2,887 on 9/13/09 and 2,888 on 9/13/10; Mr. Finan — 2,682 on 9/13/07, 2,683 on 9/13/08, 2,682 on 9/13/09 and 2,683 on 9/13/10; and Mr. Pinneo — 2,445 on 9/13/07, 2,445 on 9/13/08, 2,445 on 9/13/09 and 2,445 on 9/13/10.

39 2006 OPTION EXERCISES AND STOCK VESTED The following table presents information regarding the exercise of stock options by Named Executive Officers during 2006, and on the vesting during 2006 of other stock awards previously granted to the Named Executive Officers. Option Awards Stock Awards Number of Shares Acquired on Value Realized on Number of Shares Value Realized Exercise Exercise Acquired on Vesting on Vesting Name (#) ($)(1) (#) ($) (a) (b) (c) (d) (e) William S. Ayer(2) ...... 10,800 154,440 0 0 Bradley D. Tilden ...... 4,000 80,960 0 0 Gregg A. Saretsky ...... 15,200 254,020 0 0

Proxy Statement Kevin P. Finan ...... 0 0 0 0 Jeffrey D. Pinneo ...... 8,800 164,310 0 0 (1) The dollar amounts shown in Column (c) above for option awards are determined by multiplying (i) the number of shares of our common stock to which the exercise of the option related, by (ii) the difference between the per-share closing price of our common stock on the date of exercise and the exercise price of the options. (2) Mr. Ayer exercised these options just prior to expiration and continues to hold the shares.

2006 PENSION BENEFITS The following table presents information regarding the present value of accumulated benefits that may become payable to the Named Executive Officers under our qualified and nonqualified defined-benefit pension plans. Present Value of Number of Years Accumulated Payments During Credited Service Benefit Last Fiscal Year Name Plan Name (#)(1) ($)(1) ($) (a) (b) (c) (d) (e) William S. Ayer ...... Salaried Retirement Plan 11.308 320,655 0 Supplemental Plan 11.398 1,576,642 Bradley D. Tilden ...... Salaried Retirement Plan 15.844 321,244 0 Supplemental Plan 7.919 439,900 Gregg A. Saretsky ...... Salaried Retirement Plan 8.771 188,061 0 Supplemental Plan 8.771 484,521 Kevin P. Finan ...... Salaried Retirement Plan 19.230 771,986 0 Supplemental Plan 6.430 881,370 Jeffrey D. Pinneo(2) ...... Salaried Retirement Plan 3.816 16,736 0 Supplemental Plan 4.920 133,043 (1) The years of credited service and present value of accumulated benefits shown in the table above are presented as of December 31, 2006 assuming that each Named Executive Officer retires at normal retirement age and that benefits are paid out in accordance with the terms of each plan described below. For a description of the material assumptions used to calculate the present value of accumulated benefits shown above, please see Note 9 (Employee Benefits Plans) to the Company’s Consolidated Financial Statements, included as part of the Company’s 2006 Annual Report filed on Form 10-K with the SEC and incorporated herein by reference. (2) When Mr. Pinneo was elected President and CEO of Horizon Air in 2002, he was 100% vested under the Salaried Retirement Plan (as defined below) on account of prior service at Alaska. At that time, Horizon Air, which does not have a plan similar to the 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 Salaried Retirement Plan during his tenure as President and CEO of Horizon Air.

40 Pension and Other Retirement Plans The Company maintains two primary defined benefit pension plans covering the Named Executive Officers. The Alaska Air Group, Inc. Retirement Plan for Salaried Employees (the “Salaried Retirement Plan”) is our qualified defined benefit employee retirement plan, and the Named Executive Officers participate in this plan on the same general terms as our other eligible employees. However, due to limitations imposed by the Employee

Retirement Income Security Act of 1974 (“ERISA”) and the Internal Revenue Code on the annual amount of a Statement Proxy pension which may be paid under a qualified defined benefit plan, the pension benefits that would otherwise be payable to the Named Executive Officers under the Salaried Retirement Plan’s benefit formula are required to be limited. The Alaska Air Group, Inc. 1995 Elected Officers Supplementary Retirement Plan (the “Supplementary Retirement Plan”) is an unfunded defined benefit plan designed to permit Named Executive Officers and other officers to receive the full amount of benefits that would be paid under the Salaried Retirement Plan but for the limitations imposed by ERISA and the Internal Revenue Code and to provide supplemental retirement benefits. The material terms of the Salaried Retirement Plan and the Supplementary Retirement Plan are described below.

Salaried Retirement Plan The Salaried Retirement Plan is a tax-qualified, defined-benefit retirement plan for salaried Alaska Airlines employees hired prior to April 1, 2003, in which all of the Named Executive Officers participate. Each of our Named Executive Officers is fully vested in his accrued benefits under the Salaried Retirement Plan. Benefits payable under the Salaried Retirement Plan are generally based on years of credited service with the Company and its affiliates 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.

The tax law limits the compensation on which annual retirement benefits are based. For 2006, this limit was $220,000. The tax law also limits the annual benefits that may be paid from a tax-qualified retirement plan. For 2006, this limit on annual benefits was $175,000. To the extent the retirement benefits of our Named Executive Officers and certain other employees under the Salaried Retirement Plan exceed these limits, the excess benefits may be paid under the Supplementary Retirement Plan as described below.

Supplementary Retirement Plan In addition to the benefits described above, the Named Executive Officers are eligible to receive retirement benefits under the Supplementary Retirement Plan. The Supplementary Retirement Plan is a nonqualified, unfunded, noncontributory defined-benefit plan. Normal retirement benefits are payable once the officer reaches age 60. Benefits are calculated as a monthly amount on a straight life annuity basis. In general, the monthly benefit is determined as a percentage (between 50% to 75% of a participant’s final average monthly base salary) with the percentage determined based on both the officer’s length of service with the Company and length of service as an elected officer. This benefit amount is subject to offset by the amount of the officer’s Social Security benefits and the amount of benefits paid under the Salaried Retirement Plan to the extent such benefits were accrued after the officer became a participant in the Supplementary Retirement Plan. (There is no offset for any Salaried Retirement Plan benefits accrued for service before the officer became a participant in the Supplementary Retirement Plan.)

Participants in the Supplementary Retirement Plan become fully vested in their benefits under the plan upon attaining age 50 and completing 10 years of service as an elected officer. Plan benefits will also become fully vested upon a change of control of the Company or a termination of the participant’s employment due to death or disability.

41 2006 NONQUALIFIED DEFERRED COMPENSATION The following table presents information regarding the contributions to and earnings on the Named Executive Officers’ balances under the Company’s nonqualified defined contribution plans during 2006, and also shows the total deferred amounts for the Named Executive Officers as of December 31, 2006.

Executive Registrant Aggregate Aggregate Aggregate Contributions Contributions Earnings in Withdrawals/ Balance at Last in Last FY in Last FY Last FY Distributions FYE Name ($) ($) ($) ($) ($)(1) (a) (b) (c) (d) (e) (f) William S. Ayer ...... 0 0 14,156 11,342 231,340 Bradley D. Tilden ...... 0 0 802 51,912 0 Gregg A. Saretsky ...... 0 0 3,165 5,407 50,997

Proxy Statement Kevin P. Finan ...... 0 0 2,445 0 40,465 Jeffrey D. Pinneo ...... 0 0 531 907 8,555 (1) Under the Deferred Compensation Plan, the Named Executive Officers and other key employees may elect to receive a portion of some or all of their Performance-Based Pay awards on a deferred basis. We do not make any matching or other contributions to any employee’s account under this plan. For 2006, amounts deferred under the Deferred Compensation Plan were credited with interest at a rate of 6.25%. This rate (as in prior years) is based on the mean between the high and the low rates during the first 11 months of the preceding year of yields of Ba2-rated industrial bonds as determined by the plan administrator (rounded to the nearest one-quarter of one percent). Beginning in 2007, participants under the plan will have the opportunity to elect among the investment funds offered under our 401(k) plan for purposes of determining the return on their plan accounts. Alternatively, participants may allocate some or all of their plan account to an interest-bearing option with a rate equal to the yield on a Moody’s index of Ba2-rated industrial bonds as of November of the preceding year, rounded to the nearest one-quarter of one percent. Subject to applicable tax laws, amounts deferred under the plan are generally distributed on termination of the participant’s employment, although participants may elect an earlier distribution date and/or may elect payment in a lump sum or installments. Only the portion of earnings on deferred compensation that is considered to be at above-market rates under SEC rules is included as compensation for each Named Executive Officer in Column (h) of the Summary Compensation Table. Total earnings for each Named Executive Officer listed in Column (d) above were also included as earnings in the Summary Compensation Table.

POTENTIAL PAYMENTS UPON CHANGE-IN-CONTROL We do not have employment or severance contracts in place with our Named Executive Officers. We do have Change-in-Control Agreements with each of our Named Executive Officers. Under these agreements, if a change of control (as defined in the agreement) occurs, a three-year “employment period” would go into effect. During the employment period, the executive would be entitled to: • receive the highest monthly salary the executive received at any time during the 12-month period preceding the change of control; • receive an annual incentive payment equal to the higher of the executive’s target Performance-Based Pay plan incentive or the average of his annual incentive payments for the three years preceding the year in which the change of control occurs; • continue to accrue age and service credit under our defined benefit retirement plan; and • participate in fringe benefit programs that are at least as favorable as those in which the executive was participating prior to the change of control.

If the Named Executive Officer’s employment is terminated by the Company without cause or by the executive for good reason (as those terms are defined in the agreement) during the employment period (or, in

42 certain circumstances, if such a termination occurs prior to and in connection with a change in control), the executive would be entitled to receive a lump sum payment equal to the value of the payments and benefits identified above that the executive would have received had he continued to be employed for the entire employment period. In the event that the executive’s benefits under the agreement are subject to the excise tax imposed under Section 280G of the Internal Revenue Code, the Company will make a tax payment to the executive so that the net amount of such payment (after taxes) he receives is sufficient to pay the excise tax due. rx Statement Proxy In addition, as noted above, the executive’s unvested benefits under our Supplemental Retirement Plan and, unless two-thirds of our Board determines otherwise, outstanding and unvested stock options and restricted stock unit grants will generally become vested on a change-in-control. The outstanding equity awards held by each of our Named Executive Officers as of December 31, 2006 are described above under “Outstanding Equity Awards at Fiscal Year End” and each officer’s accrued benefits under our retirement plans are described above under “2006 Pension Benefits.”

In the table below, we have estimated the potential cost to us of the payments and benefits each Named Executive Officer would have received if his employment had terminated under the circumstances described above on December 31, 2006. As described above, the amount an executive would be entitled to receive would be reduced pro-rata for any period the executive actually worked during the employment period.

Enhanced Cash Retirement Benefit Equity Excise Tax Severance(1) Benefit(2) Continuation(3) Acceleration(4) Gross-up(5) Total William S. Ayer ...... 2,400,000 111,600 229,200 2,042,200 1,212,000 $5,995,000 Bradley D. Tilden ...... 1,344,000 732,500 225,700 903,200 818,000 $4,023,400 Gregg A. Saretsky ...... 1,344,000 678,300 270,100 931,700 751,000 $3,975,100 Kevin P. Finan ...... 1,248,000 798,300 220,900 869,300 725,800 $3,862,300 Jeffrey D. Pinneo ...... 1,137,600 1,027,200 133,100 806,200 821,400 $3,925,500 (1) Represents the amount obtained by multiplying three by the sum of the executive’s highest rate of base salary during the preceding 12 months and the higher of the executive’s target incentive or his average incentive for the three preceding years. (2) Represents the sum of (a) the actuarial equivalent of an additional three years of age and service credit under our non-qualified retirement plan using the executive’s highest 12-month salary and higher of target or three-year average incentive, (b) the present value of the accrued but unvested portion of the non-qualified retirement benefits that would vest upon a change of control, and (c) the matching contribution the executive would have received under our qualified defined contribution plan had the executive continued to contribute the maximum allowable amount during the employment period. (3) Represents the estimated cost of (a) three years of premiums under our medical, dental, life, disability, and accidental death insurance programs and (b) three years of continued participation in fringe benefit programs. (4) Represents the “in-the-money” value of unvested stock options and the face value of unvested restricted stock awards that would vest upon a change of control based on a stock price of $39.50 (the closing price of our stock on the last trading day of fiscal 2006). (5) For purposes of this calculation, we have assumed that the executive’s outstanding stock options would be assumed by the acquiring company pursuant to a change of control.

This calculation is an estimate for proxy disclosure purposes only. Payments on an actual change-in-control may differ based on factors such as transaction price, timing of employment termination and payments, methodology for valuing stock options, changes in compensation, and reasonable compensation analyses.

43 SHAREHOLDER PROPOSAL NO. 2 REIMBURSEMENT FOR SHORT-SLATE PROXY CONTESTS

Proposalist Bill Davidge, a Horizon Air aircraft mechanic, has notified the Alaska Air Group, Inc. that he intends to present the following proposal at the 2007 Annual Meeting. Mr. Davidge’s address is 51459 EM Watts Road, Scappose, OR 97056, and Mr. Davidge owns 1,847 shares of the Company’s common stock.

RESOLVED, that shareholders of the Alaska Air Group, Inc. urge the board of directors (the “Board”) to initiate the appropriate process in 2007 to amend the company’s governance documents (certificate of incorporation and/or bylaws) to provide procedures for the reimbursement of the reasonable expenses, including but not limited to legal, advertising, solicitation, printing and mailing costs (collectively, “Expenses”), incurred by a shareholder or group of shareholders (in each case, a “Nominator”) in a contested election of directors,

Proxy Statement provided that: (a) the election of fewer than 50% of the directors to be elected is contested; (b) the amount of the reimbursement shall not exceed the amount determined by the following formula: (i) if any candidate nominated by the Nominator is elected to the Board, 100% of the Nominator’s Expenses shall be reimbursed; (ii) if no such candidate is elected, the Reimbursable Percentage shall be determined by: (A) dividing the highest number of votes received by an unelected candidate nominated by the Nominator by the lowest number of votes received by an elected candidate, and (B) multiplying the Reimbursable Percentage by the Expenses; provided, however, that if the Reimbursable Percentage is less than 30%, no Expenses shall be reimbursed. (c) the bylaw shall not apply if shareholders are permitted to cumulate their votes for directors, and (d) the bylaw shall apply only to contested elections commenced after the bylaw’s adoption.

Vote Yes on No. 2

MANAGEMENT RESPONSE TO SHAREHOLDER PROPOSAL 2: THE BOARD OF DIRECTORS RECOMMENDS A VOTE AGAINST PROPOSAL 2 FOR THE FOLLOWING REASONS:

This Proposal would require the Company to unnecessarily incur increased costs in order to promote the special interest candidates of a minority of stockholders. The Company does not believe that using corporate assets to subsidize or fully finance campaigns by special interest candidates is in the interest of the Company and its stockholders. In light of the robust process already in place to ensure qualified directors are selected, the Company believes that such reimbursement is an unnecessary and imprudent use of financial and human resources that does not serve the best interests of the Company and stockholders as a whole.

The costs of a contest for a seat on a public company’s board can be substantial, including printing and mailing a proxy statement, advertising expenses and legal fees. By forcing management to earmark corporate assets to encourage minority campaigns, the proposal would eliminate management’s discretion to allocate those same Company funds to more productive uses that would enhance stockholder value.

Requiring all of the stockholders to subsidize the solicitation expenses of dissident candidates would also encourage divisive director elections, and could transform every director election into a proxy contest. This in turn would require the Company to incur additional expenses and further divert human resources to these

44 contests. In general, the Board believes that such dissident candidates are likely to represent the interests of only a narrow minority, rather than the Company and stockholders as a whole, and are less likely to work in a collegial manner to advance the best interests of the Company and stockholders as a whole. To impose upon the Company the obligation to pay for the campaigns of dissident candidates, regardless of the suitability of these candidates or the current composition of the Board, would not represent good governance and would do little to further the Board’s goal of creating long-term stockholder value. rx Statement Proxy Moreover, stockholders are already able to recommend their own candidates to be nominated by the Governance and Nominating Committee or can nominate director candidates independently and solicit proxies. The Governance and Nominating Committee regularly screens the qualifications of persons suggested by stockholders and others as potential directors in order to determine whether such potential candidates have the qualifications to serve the best interests of the Company and stockholders as a whole. Under the Company’s Corporate Governance Guidelines, the Governance and Nominating Committee is charged with assessing the relevant experience, intelligence, independence, commitment, ability to work with the CEO and within the Board culture, prominence, diversity, age, understanding of the Company’s business, and other factors deemed relevant. In addition to this nomination procedure, the Bylaws of the Company already permit stockholders to nominate director candidates to the Board and to solicit proxies in favor of their candidates. From time to time, stockholders in the past have run and financed such campaigns on their own.

In light of the robust procedures in place for nominating directors, requiring the Company to fund the campaigns of dissident candidates is unnecessary and costly in terms of financial and human resources, and is not in the best interests of the Company and its stockholders.

ACCORDINGLY, THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “AGAINST” PROPOSAL 2.

45 SHAREHOLDER PROPOSAL NO. 3 CUMULATIVE VOTING PROPOSAL

Proposalist Brian Stromberg has notified the Alaska Air Group, Inc. that he intends to present the following proposal at the 2007 annual meeting. Mr. Stromberg’s address is 1110 NW 21st Avenue, Battle Ground, WA 98604, and Mr. Stromberg owns 57 shares of the Company’s common stock.

RESOLVED, that the initiate in 2007 the appropriate process to amend our company’s governance documents (certificate of incorporation and/or bylaws) to ensure that cumulative voting is permitted to elect director nominees to the board.

Cumulative voting offers an alternative to the traditional voting system used to elect corporate board of directors, In a cumulative voting system, the number of votes available to a shareholder is equal to the number of Proxy Statement shares held, multiplied by the number of positions up for election. Shareholders may split votes between the candidates as they see fit or may even reserve such “cumulated” votes for a single candidate, For instance, in an election for a five-seat body, voters could choose to give one vote each to five candidates, two votes to one candidate and three to another, or all five votes to a single candidate. By using cumulative voting, minority shareholders gain a greater opportunity to have the board of directors accountable to all shareholders rather than a narrow majority. The AAG current majority voting system is simply a veto action. It only gives shareholders the right to reject a board’s nominee. The board then gets to replace the candidate with another nominee of their choosing. Cumulative voting is proactive corporate governance that allows shareholders to elect a candidate(s) independent of management. Under the current system, the entire board of directors is generally only accountable to 51% of the shareholders or those with vast shares of stock. Giving a voice to stockholders whose holdings are sufficient to elect at least one but not all the directors preserves the right of the majority to control the corporation while at the same time increasing accountability and allowing other perspectives to be heard in the boardroom.

Structural reforms are necessary to protect the average shareholder- This has been made evident in recent prominent cases including Enron, Tyco, and WorldCom, Cumulative voting is practiced at companies around the world including Sears-Roebuck and Company, Hewlett-Packard, and Toys’R’ Us. CaIPERS, Parnassus Investments, Calvert and PAX World Fund all generally advocate for the adoption of cumulative voting for the election of directors. Cumulative voting is allowed under Delaware General Corporation Law Title 8, Chapter 1, Subchapter VII, Section 214.

As a minority shareholder (connected with other stakeholders working to create wealth for everyone connected to our business) I believe it is only right that we are empowered with a tool which would broaden the perspective of our board, particularly in encouraging directors independent of management and representative of all shareholders. In 2004 the AAG board of directors chose to ignore a recommendation on this topic that won 62% of the vote, Please vote YES on No. 3 Cumulative Voting to amend our company governance documents to ensure that cumulative voting is utilized to elect director nominees to the board.

MANAGEMENT RESPONSE TO SHAREHOLDER PROPOSAL 3:

THE BOARD OF DIRECTORS RECOMMENDS A VOTE AGAINST PROPOSAL 3 FOR THE FOLLOWING REASONS:

The possibility of factionalism that cumulative voting presents is one factor in the trend against its adoption and, in fact, a substantial majority of public companies have eliminated cumulative voting.

The Board opposes the Proposal because it believes that each of its directors should have the support of stockholders as a whole. Implementing a new system of cumulative voting would mean that each of its directors may no longer have general support from stockholders, and is not in the best interest of stockholders.

46 The Board believes that directors should be elected through a system that assures that directors will represent the interests of all stockholders, not just those of particular groups. Currently all of our directors have been elected by a majority of shares voted. Cumulative voting could enable individual stockholders or groups of stockholders with less than a majority of the shares to pool their votes to elect directors concerned with advancing the positions of the narrow group responsible for their election. The Board believes this potential conflict between a director’s fiduciary duty to represent all of the Company’s stockholders and an allegiance to a special interest group could threaten the integrity and efficiency with which the Board discharges its duties. In Statement Proxy addition, the Board believes that the support by directors of the special interests of the constituencies that elected them could create partisanship and divisiveness among Board members and impair the Board’s ability to operate effectively as a governing body, to the detriment of all the Company’s stockholders.

Moreover, in March 2006, the Board adopted a majority voting policy requiring nominees under which directors must receive a majority of the votes cast in uncontested elections. In any non-contested election of directors, any director nominee who receives a greater number of votes “withheld from his or her election than votes “for” such election shall immediately tender his or her resignation. The Board is then required to act on the recommendation of the Governance and Nominating Committee on whether to accept or reject the resignation, or whether other action should be taken.

Majority voting for directors has been widely supported by commentators, and has received high stockholder support when presented in the form of a stockholder proposals. Many supporters of majority voting do not, however, support cumulative voting in combination with majority voting because of the risk that the combination could be destabilizing and imprudent. For example, Institutional Shareholder Services has taken the general position that it recommends voting against cumulative voting proposals for Companies that have adopted majority voting thresholds for directors.

The Board believes that the Company’s current system of electing directors, which is similar to that of most major publicly-traded corporations and which entitles each share to one vote for each nominee, will continue to work successfully in the future, as it has in the past. Eleven of the twelve members of the Board are independent non-management directors and all directors have been elected by a majority of shares voted. The Board believes that this structure is the most effective means to ensure that the Board will continue to exercise independent judgment and remain accountable to all of the Company’s stockholders, rather than to a particular group.

ACCORDINGLY, THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “AGAINST” PROPOSAL 3.

47 SHAREHOLDER PROPOSAL NO. 4 BOARD CHAIRMAN AND CEO

Proposalist Brian Hollister, a Horizon Air Captain, has notified the Alaska Air Group, Inc. (“AAG”) that he intends to present the following proposal at the 2007 Annual Meeting. Mr. Hollister’s address is 1211 SE Ellsworth Road #94, Vancouver, WA 98664, and Mr. Hollister owns 132 shares of the Company’s common stock.

RESOLVED, that the shareholders urge the Board of Directors to initiate the appropriate process in 2007 to amend the company’s governance documents (certificate of incorporation and/or bylaws) to require that, subject to any presently existing contractual obligations of the Company, an independent director shall serve as Chairman of the Board of Directors, and that the Chairman of the Board of Directors shall not concurrently serve Proxy Statement as the Chief Executive Officer.

SUPPORTING STATEMENT In AAG’s proxy statement filed on April 14, 2006, the Company states that The Board of Directors performs a number of functions for AAG and its shareholders, including: • Overseeing the management of the company on your behalf; • Reviewing AAG’s long-term strategic plans; • Exercising direct decision-making authority in key areas; • Selecting the CEO and evaluating the CEO’s performance; and • Reviewing development and succession plans for AAG’s top executives

Proponent believes that separation of the roles of Chairman of the Board and the CEO will provide greater accountability of management to the shareholders, and provide more independent oversight of management, including the CEO, by the Board of Directors.

Corporate governance experts have questioned how one person serving as both Chairman of the Board and CEO can effectively monitor and evaluate his or her own performance. The National Association of Corporate Directors’ Blue Ribbon Commission on Directors’ Professionalism has recommended that an independent director should be charged with “organizing the board’s evaluation of the CEO and provide ongoing feedback; chairing executive sessions of the board; setting the agenda and leading the board in anticipating and responding to crises.” AAG itself states that one of the Board’s responsibilities is “selecting the CEO and evaluating the CEO’s performance.” Proponent believes that this responsibility would be best served if the CEO, whose authority is set and whose performance is evaluated by the Board of Directors, is not a member of that Board. Proponent further believes that the concern for the Board’s ability to independently evaluate the performance of the CEO is particularly compromised if the individual serving as CEO is also the Chairman of the very Board that is charged with evaluating his or her performance.

Proponent believes that the independence of the Board of Directors would best be ensured if the office of CEO remains independent of the Board, the body that is responsible for overseeing management, and that the position of Chairman of the Board be held by an independent director, a non employee of the AAG.

Vote “YES” on this Proposal No. 4 to support Board independence!

For further information, see www.votepal.com

48 MANAGEMENT RESPONSE TO SHAREHOLDER PROPOSAL 4:

THE BOARD OF DIRECTORS RECOMMENDS A VOTE AGAINST PROPOSAL 4 FOR THE FOLLOWING REASONS:

At the current time, the Board, like most other public companies, believes that having the CEO serve as Chairman provides clear and effective leadership. In fact, only 6% of the 100 largest companies mandate a Statement Proxy separation of the CEO and Chairman.

The Board believes that this Proposal is unnecessary and is not in the best interest of the Company and its stockholders because it would eliminate the flexibility of the Board to determine the best director to serve as Chairman of the Board. The Proposal would eliminate the option of choosing a CEO or other member of management to serve as Chairman of the Board now or at any time in the future. Restricting the business judgment of the Board as to who is the best candidate to serve as Chairman at any given point in time would be detrimental to stockholders.

The Proposal is unnecessary because independent directors already set the compensation of the CEO, review the performance of the CEO, directly oversee senior executive compensation, nominate and evaluate directors, and directly oversee other critical matters such as the integrity of the Company’s financial statements. Eleven of the Board’s twelve directors, and every member of the Board’s Audit Committee, Compensation Committee, Governance and Nominating Committee and Safety Committee, are non-management directors of the Company that meet the NYSE requirements for independence. Independent non-management directors also meet in executive session without the CEO at least quarterly. In addition, the Board has appointed an independent Lead Director, whose responsibilities include approval of all Board agendas, presiding at periodic executive sessions of independent directors, leading the independent directors’ annual evaluation of the CEO, discussing any proposed changes to committee assignments with each affected director annually in advance of the committee making its committee recommendations to the Board, and performing such other functions and responsibilities as requested by the Board from time to time.

Independent oversight is provided by the composition of the Board itself, role of the Board’s presiding independent director and the independent composition of the Board’s Audit Committee, Compensation Committee, Governance and Nominating Committee and Safety Committee. If the Board determines in the future that it would be appropriate to separate the roles of Chairman and CEO, it already has that flexibility.

For the reasons above, the Board believes that the Proposal is unnecessary and imposes a restriction on the exercise of the Board’s business judgment which is not in the best interest of the Company and its stockholders.

ACCORDINGLY, THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “AGAINST” PROPOSAL 4.

49 SHAREHOLDER PROPOSAL NO. 5 SPECIAL SHAREHOLDER MEETINGS Proposalist Terry Dayton, a Horizon Air communications agent, has notified the Alaska Air Group, Inc. (“AAG”) that he intends to present the following proposal at the 2007 Annual Meeting. Mr. Dayton’s address is 10510 East 6th Avenue, Spokane, WA 99206, and Mr. Dayton owns 463 shares of the Company’s common stock.

RESOLVED, that the shareholders urge the Board of Directors to initiate the appropriate process n 2007 to amend the company’s governance documents (certificate of incorporation and/or bylaws) to require that holders of at least 10% to 25% of the outstanding common stock are empowered with the authority to call a special shareholder meeting.

Shareholders should have the ability, within reasonable limits, to call a special meeting when they think a Proxy Statement matter is sufficiently important to merit expeditious consideration. Shareholder control over timing is especially important in the context of a major acquisition or restructuring, when events unfold quickly and issues may become moot by the next annual meeting.

Thus this proposal asks our board to amend our governance documents to establish a process by which holders of 10% to 25% of our outstanding common shares may demand that a special meeting be called. The corporate laws of many states provide that holders of only 10% of shares may call a special meeting, absent a contrary provision in the charter or bylaws. Accordingly, a 10% to 25% threshold strikes a reasonable balance between enhancing shareholder rights and avoiding excessive distraction at our company.

Prominent institutional investors and organizations support a shareholder right to call a special meeting. Fidelity and Vanguard are among the mutual funds supporting a shareholder right to call a special meeting. The proxy voting guidelines of many public employee pension funds, including the New York City Employees Retirement System and the Connecticut Retirement Plans and also favor preserving this right, Governance ratings services, such as The Corporate Library and Governance Metrics International, take special meeting rights into account when assigning company ratings.

This topic also won 65% support of JPMorgan Chase & Co. (JPM) shareholders at the 2006 JPM annual meeting.

Vote YES on Proposal No. 5 to established the right of stockholders to call special meetings.

MANAGEMENT RESPONSE TO SHAREHOLDER PROPOSAL NO. 5: THE BOARD OF DIRECTORS RECOMMENDS A VOTE AGAINST PROPOSAL 5 FOR THE FOLLOWING REASONS: The Board believes that it is not in the interest of the Company and its stockholders to incur the financial and administrative expense and business disruption that would result from enabling a minority of stockholders to call stockholder meetings for any reason, at any time and as frequently as they choose.

The Board’s annual meeting of stockholders already provides ample opportunity to raise appropriate matters. Stockholders have frequently used the stockholder meetings to have their concerns communicated to the whole of the Company’s stockholders, including through proposals such as this Proposal. For those extraordinary circumstances where a matter cannot wait until the next annual meeting, the Company’s Bylaws, consistent with Delaware law, permit a majority of Directors or a Chairman of the Board to call a special meeting. The Board, rather than a group of minority stockholders, is best positioned to determine when it is in the interest of the stockholders as a whole to incur the extraordinary financial and administrative expense of holding a special meeting.

50 Allowing minority groups of stockholders to call meetings at will could also create major confusion. Different groups of stockholders could call meetings at any time on various matters. This could lead to significant confusion among the majority of the stockholders because stockholders would receive materials from multiple groups of stockholders at various points throughout the year requesting votes on a range of issues, some of which may be in part duplicative, rather than through the streamlined annual meeting process currently in place. Constant solicitation could lead to a chaotic rather than orderly conduct of corporate affairs, and may annoy the majority of stockholders and lead to less overall participation by stockholders of the Company in Statement Proxy important matters.

Constant solicitation would also impose significant administrative and financial burdens on the Company. Special meetings are costly in terms of both time and money. Each stockholder of record would be entitled to notice of, and to receive proxy materials for, every special meeting. This would involve legal, printing, postage and other expenses, in addition to those costs normally associated with the Board’s annual meeting. These costs would arise every time there was a new solicitation. In addition, preparing for a stockholder meeting requires significant attention from management and other employees, diverting them from running and improving the business.

Because special meetings are costly and can be disruptive, the Board believes they should not be taken lightly. The Board believes the Company’s current system minimizes this confusion and prevents a minority of stockholders from imposing upon the Company at will the burden and expense of a stockholder meeting that may not be desired by the majority of stockholders.

ACCORDINGLY, THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “AGAINST” PROPOSAL 5.

51 SHAREHOLDER PROPOSAL NO. 6 SUBJECT ANY FUTURE POISON PILL TO A SHAREHOLDER VOTE

Proposalist John Chevedden, a shareholder, has notified Alaska Air Group, Inc. (“AAG”) that he intends to present the following proposal at the 2007 Annual Meeting. Mr. Chevedden’s address is 2215 Nelson Avenue #205, Redondo Beach, CA 90278, and Mr. Chevedden owns 200 shares of the Company’s common stock.

RESOLVED, Shareholders request that our Board adopt a bylaw or charter amendment that any future or current poison pill be subject to a shareholder vote as a separate ballot item, to be held as soon as possible. A poison pill is such a drastic step that a required shareholder vote on a poison pill is important enough to be a permanent part of our bylaws or charter — rather than a fleeting short-lived policy.

Proxy Statement It is essential that a sunset provision not be used as an escape clause from a shareholder vote. Since a vote would be as soon as possible, it could take place within 4-months of the adoption of a new poison pill. Since a poison pill is such a drastic measure that deserves shareholder input, a shareholder vote would be required even if a pill had been terminated.

The Corporate Library, http://www.thecorporatelibrary.com an independent investment research firm said: We support the adoption of policies requiring shareholder approval of poison pills, either before adoption or within a short time thereafter — six months is sufficient time, we think, for a board to explore alternatives in the event of a hostile bid, but not so long that shareholders are completely disempowered. However, the use of a so-called “fiduciary out” especially in light of recent Delaware case law suggesting such a proviso is unnecessary — as well as a 12-month duration for non-shareholder-approved plans currently at some companies, undermines the effectiveness of these 12-month policies in giving shareholders a meaningful voice in a takeover context.

According to the book Power and Accountability by Nell Minow and Robert Monks: “All poison pills... give target boards of directors absolute veto power over any proposed business combination, no matter how beneficial it might be for the shareholders...”

It is important to take a step forward and support this one proposal since our 2006 governance standards were not impeccable. For instance in 2006 it was reported (and certain concerns are noted): • We had no Independent Chairman and not even a Lead Director — independent oversight concern. • We cannot vote on some directors until 2009. • There are too many active CEOs on our board with 8 — Over-commitment Concern. • Our full board had only 5 meetings in an entire year. • Four directors had 15 to 34 years tenure — Independence concern • Mr. Langland, with15 years director tenure, chaired our nomination committee — Independence concern. • Ms. Bedient chaired our Audit Committee and was not an Audit Financial Expert. • CEO pay was not adequately performance-based according to The Corporate Library. • We had no shareholder right to act by written consent or right to call a special meeting, The above status shows there is room for improvement and reinforces the reason to take one step forward now and vote yes: Subject Any Future Poison Pill to a Shareholder Vote Yes on 6

52 MANAGEMENT RESPONSE TO SHAREHOLDER PROPOSAL NO. 6: THE BOARD OF DIRECTORS RECOMMENDS A VOTE AGAINST PROPOSAL 6 FOR THE FOLLOWING REASONS: The Board opposes the Proposal as unnecessary and duplicative because the Board does not have a stockholder rights plan (sometimes referred to as a “poison pill”) and has already adopted in the Corporate Governance Guidelines a policy on stockholder approval of stockholder rights plans that addresses the Proposal’s Statement Proxy objectives.

The Company does not have and has not had a stockholder rights plan since 2002, and has no current plans to adopt one. In 2004, in response to a stockholder proposal that received a majority of affirmative votes at our annual meeting, the Company adopted a policy on rights plans designed to balance the concerns of stockholders and the Board’s fiduciary obligations under Delaware law. This policy states that the Company will adopt a stockholder rights plan only if stockholders have approved the plan, or if the Board determines, in exercising its fiduciary duties, that such a plan is in the best interests of the stockholders. Under this policy, if the Board were to adopt a stockholder rights plan without stockholder approval, it would submit the plan to stockholders for ratification, and if the plan is not ratified, it would terminate or allow the plan to expire no later than one year after adoption.

Stockholder rights plans are designed to protect a corporation from an acquisition that may not be in the best interest of the corporation and its stockholders by encouraging potential acquirers to negotiate with the corporation’s board of directors and discouraging unfair or coercive takeover tactics. While the Company does not currently have such a plan, circumstances could arise in the future where the adoption of such a plan would be an important mechanism for protecting the interests of stockholders. Requiring a stockholder vote as required by the Proposal within four months of the adoption of a rights plan might reduce the Board’s negotiating leverage with a potential acquirer and impede the Board’s ability to use such a plan effectively if it were appropriate to do so to protect the interests of the Company’s stockholders. Without a rights plan the Board would lose an important bargaining tool in negotiating a transaction with a potential acquirer or pursuing a potentially superior alternative to a hostile takeover offer.

In recommending a vote against the proposal, the Board of Directors has not determined that a rights plan should be adopted by the Company. Any such determination would be made only after careful deliberation, in light of all circumstances then prevailing, in compliance with its policy statement on poison pills as summarized above, and in the exercise of the Board’s fiduciary duties under Delaware law to represent the Company’s stockholders when evaluating the merits of any acquisition proposal. In this regard, it should be noted that your Board of Directors is elected by the stockholders, and all but one of its members are independent directors who are not employed by the Company.

ACCORDINGLY, THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “AGAINST” PROPOSAL 6.

53 OPPOSING SOLICITATION

Mr. Stephen Nieman, a stockholder of the Company, has informed the Company of his intention to nominate up to four persons at the annual meeting for election to the Board of Directors. Regardless of the outcome of the opposing solicitation, each of the Board of Directors’ nominees intends to serve if elected.

The Company is not yet aware that Mr. Nieman has filed his own proxy statement, but in anticipation of his filing, the following information is being provided pursuant to SEC regulations that require certain disclosures if the Company knows of a solicitation in opposition.

PARTICIPANTS IN THE SOLICITATION Under the SEC regulations, each member of the Board of Directors is deemed to be a “Participant” in the Proxy Statement 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 (three 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 and CEO Alaska Airlines, Inc. P.O. Box 68900 Seattle, WA 98168 Patricia M. Bedient ...... Weyerhaeuser Company Forest products Executive Vice President and CFO 33663 Weyerhaeuser Way So. Federal Way, WA 98003 Phyllis J. Campbell ...... The Seattle Foundation Philanthropic President and CEO 1200 Fifth Avenue, Suite 1300 Seattle, WA 98101 Mark R. Hamilton ...... University of Alaska System Education President 202 Butrovich Bldg. 910 Yukon Drive 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...... Sempra Energy Energy Executive Vice President, External 101 Ash Street Affairs San Diego, CA 92101 R. Marc Langland ...... Northrim Bank Banking Chairman, President and CEO P.O. Box 241489 Anchorage, AK 99524 Dennis F. Madsen ...... Seatab Software Software Chairman 15325 SE 30th Place Bellevue, WA 98007

54 Principal Business of Name and Principal Occupation Business Address Employer Byron I. Mallott ...... First Alaskans Institute Development of Alaska Native Senior Fellow 102 Cordova peoples and their communities Juneau, AK 99801 John V. Rindlaub ...... Wells Fargo Bank Banking CEO, Pacific Northwest Region 999 Third Avenue, Suite 4700 Statement Proxy Seattle, WA 98104 J. Kenneth Thompson ...... Pacific Star Energy LLC Energy President and CEO 3601 “C” Street, Suite 1400 Anchorage, AK 99503 Richard A. Wien ...... Florcraft, Inc. Retail flooring Chairman and CEO 1991 Fox Avenue Fairbanks, AK 99701

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 A. 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, 2007, is set forth in the “Security Ownership of Certain Beneficial Owners and Management” section of this Proxy Statement.

At March 31, 2007, Ms. Alberts, Ms. Gruen and Mr. Loveless owned 2,849, 3,556, and 70,120 shares, respectively, of which 2,500, 3,000 and 69,600 shares, respectively, were shares that may be acquired by exercise of employee stock options exercisable on or before May 30, 2007. No Associate (as that term is used in SEC regulations) of a Participant owns any common stock of the Company. No Participant owns any securities of any parent or subsidiary of the Company beneficially, either directly or indirectly. No Participant or Associate of any Participant owns shares of record that are not also owned beneficially.

55 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, 2005. Number of Shares of Common Stock Purchased or Participants Date (Sold/Exchanged) Footnote Shannon K. Alberts ...... 01/01/05 — 12/31/05 752 (1) 02/28/05 23 (4) 11/30/05 21 (4) 01/01/06 — 12/31/06 (510) (2) 02/28/06 18 (4)

Proxy Statement 04/21/06 500 (7) 04/21/06 (500) (7) 05/31/06 22 (4) 08/31/06 19 (4) 10/25/06 (248) (4) 10/25/06 2,900 (7) 10/25/06 (2,900) (7) 11/30/06 23 (4) 01/01/07 — 03/31/07 (95) 02/28/07 19 (4) William S. Ayer ...... 01/01/05 — 12/31/05 228 (1) 08/30/05 14,000 (3) 10/28/05 10,200 (3) 12/15/05 (1,500) (5) 01/01/06 — 12/31/06 193 (1) 01/01/07 — 03/31/07 127 (1) 08/25/06 10,800 (3) 01/31/07 9,175 (8) Patricia M. Bedient ...... 05/17/05 1,055 (6) 05/17/06 806 (6) Phyllis J. Campbell ...... 05/17/05 527 (6) 05/17/06 403 (6) Karen A. Gruen ...... 01/01/05 — 12/31/05 675 (1) 01/01/06 — 12/31/06 (632) (2) 05/08/06 1,000 (7) 05/08/06 (1,000) (7) 05/31/06 66 (4) 08/31/06 58 (4) 11/30/06 73 (4) 01/01/07 — 03/31/07 412 02/28/07 65 (4) Mark R. Hamilton ...... 05/17/05 527 (6) 05/17/06 403 (6) Bruce R. Kennedy ...... 05/17/05 1,055 (6) 11/09/05 (5,682) (6) 05/17/06 403 (6) Jessie J. Knight, Jr...... 05/17/05 1,055 (6) 05/07/06 806 (6)

56 Number of Shares of Common Stock Purchased or Participants Date (Sold/Exchanged) Footnote R. Marc Langland ...... 05/17/05 527 (6) 05/07/06 403 (6)

Keith Loveless ...... 01/01/05 — 12/31/05 278 (1) Statement Proxy 07/22/05 7,282 (7) 07/22/05 (7,282) (7) 08/30/05 6,680 (3) 01/01/06 — 12/31/06 199 (1) 04/21/06 3,818 (7) 04/21/06 (3,818) (7) 01/01/07 — 03/31/07 43 (1) Dennis F. Madsen ...... 05/17/05 1,055 (6) 05/17/06 806 (6) Byron I. Mallott ...... 05/17/05 527 (6) 05/17/06 403 (6) John V. Rindlaub ...... 05/17/05 527 (6) 05/17/06 403 (6) J. Kenneth Thompson ...... 05/17/05 527 (6) 05/17/06 806 (6) Bradley D. Tilden ...... 01/01/05 — 12/31/05 207 (1) 07/27/05 2,725 (7) 07/27/05 (2,725) (7) 08/30/05 5,350 (3) 01/01/06 — 12/31/06 1,620 (1) 01/31/06 3,915 (8) 08/04/06 4,000 (7) 08/04/06 (4,000) (7) 01/01/07 — 03/31/07 44 (1) Richard A. Wien ...... 05/17/05 527 (6) 05/17/06 403 (6) (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) Charitable gift. (6) Director retainer paid in stock. (7) Same-day exercise and sale of employee stock option. (8) Issue of common shares in lieu of cash bonus under employee stock option plan.

Understandings with Respect to Securities of the Company The non-employee 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.

57 The following Participants have employee stock options for the indicated number of shares of common stock: Ms. Alberts, 7,025; Mr. Ayer, 558,700; Ms. Gruen, 3,955; Mr. Loveless, 90,890; and Mr. Tilden, 149,950. See the “Information Regarding Transactions in the Company’s Stock by Participants” 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 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 Proxy Statement change in control. See “Potential Payments Upon Change-in-Control” 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.

REDUCE DUPLICATIVE MAILINGS The Company is required to provide an annual report and proxy statement to all stockholders of record. If you have more than one account in your name or at the same address as other stockholders, the Company or your broker may discontinue mailings of multiple copies. If you wish to receive separate mailings for multiple accounts at the same address, you should mark the designated box on your proxy card. If you are voting by telephone or the internet and you wish to receive multiple copies, you may notify us at the address and phone number at the end of the following paragraph if you are a stockholder of record or notify your broker if you hold through a broker. Once you have received notice from your broker or us that they or we will discontinue sending multiple copies to the same address, you will receive only one copy until you are notified otherwise or until you revoke your consent. If, at any time, you wish to resume receiving separate proxy statements or annual reports, or if you are receiving multiple statements and reports and wish to receive only one, please notify your broker if your shares are held in a brokerage account or us if you hold registered shares. You can notify us by sending a written request to the Company’s Corporate Secretary, Alaska Air Group, Inc., P.O. Box 68947, Seattle, WA 98168, or by calling (206) 392-5131.

SUBMISSION OF PROPOSALS FOR NEXT ANNUAL MEETING The Company expects to hold its next annual meeting on or about May 20, 2008. 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 21, 2007, 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 February 13, 2008. 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. P.O. Box 68947 Seattle, WA 98168

58 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 (Address of principal executive offices) Commission File Number 1-8957 [NO FEE REQUIRED] WASHINGTON, DC 20549 UNITED STATES (Exact name of registrant as specified in its charter) For the fiscal year ended December 31, 2006 DOCUMENTS INCORPORATED BY REFERENCE For the transition period from to Securities registered pursuant to Section 12(b) of the Act: 19300 International Boulevard, Seattle, Washington 98188 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 2007 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 shell companyAs (as of defined December in 31, Rule 2006, 12b-2 shares of of the common Exchange stock outstanding totaled 40,293,689. The aggregate market value of (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) Mark One) Act. Yes ‘ the Act. Yes ( È the Securities Exchange Act ofrequired 1934 to during file the such preceding reports), 12days. and months (2) (or has for been such Yes 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 stockbillion of (based Alaska on Air the Group, closing Inc. price held of by $39.42 nonaffiliates per on share June on 30, the 2006, New was York approximately Stock $1.57 Exchange on that date). Annual Report rsn xettos oeo h hnsta ol as u culrslst ifrfo u xettosare: expectations our from differ to results actual Company’s our the cause or could experience that historical things from the materially of differ Some to expectations. and results present risks actual involve cause statements could all Forward-looking that not words. can uncertainties although identifying You expressions, these matters. similar contain historical “will,” other statements to “expect,” or forward-looking solely “believe,” “assume” relate words “project,” not the “estimate,” do containing “intend,” are that statements “anticipate,” statements and as Act Forward-looking trends statements Exchange 1995. or forward-looking Securities of events identify the Act future generally of Reform describe 21E Litigation or Section Securities predict amended, Private that as the those 1933, and of amended, Act as Securities 1934, the of of 27A Section of meaning otherwise. indicates context the unless subsidiaries, its and Inc. Group, SIGNATURES IV PART III PART II PART I PART ao iptsadoraiiyt trc n eanqaiidpersonnel; qualified retain and attract to ability volatile; our be and can disputes which labor fuel, including costs, operating our • industry; in our changes in trends other and environment • competitive the • the within statements forward-looking contains 10-K Form this information, historical to addition In Air Alaska to refer “Company” the and “we” “our,” Group,” “Air terms the 10-K, Form this in used As 9B. ITEM 9A. ITEM 7A. ITEM 1B. ITEM 1A. ITEM TM15. ITEM 14. ITEM 13. ITEM 12. ITEM 11. ITEM 10. ITEM 9. ITEM 8. ITEM 7. ITEM 6. ITEM 5. ITEM 4. ITEM 3. ITEM 2. ITEM 1. ITEM ...... 4 ...... 100 ...... 24 ...... 101 ...... 102 ...... XIIS OSLDTDFNNILSAEETSCHEDULES STATEMENT FINANCIAL CONSOLIDATED EXHIBITS, SERVICES AND FEES ACCOUNTANT PRINCIPAL TRANSACTIONS RELATED AND RELATIONSHIPS CERTAIN AND OWNERS BENEFICIAL CERTAIN OF OWNERSHIP SECURITY REGISTRANT COMPENSATION THE EXECUTIVE OF OFFICERS EXECUTIVE AND DIRECTORS INFORMATION OTHER PROCEDURES AND CONTROLS ACCOUNTING ON ACCOUNTANTS WITH DISAGREEMENTS AND IN DATA CHANGES SUPPLEMENTARY AND STATEMENTS RISK FINANCIAL MARKET CONSOLIDATED ABOUT DISCLOSURE QUALITATIVE AND QUANTITATIVE AND CONDITION FINANCIAL OF ANALYSIS AND DISCUSSION DATA MANAGEMENT’S OPERATING AND FINANCIAL CONSOLIDATED SELECTED STOCKHOLDER RELATED EQUITY, COMMON REGISTRANT’S THE FOR MARKET HOLDERS SECURITY OF VOTE A TO MATTERS OF SUBMISSION PROCEEDINGS LEGAL PROPERTIES COMMENTS STAFF UNRESOLVED FACTORS RISK BUSINESS MANAGEMENT DISCLOSURE FINANCIAL AND OPERATIONS OF RESULTS SECURITIES EQUITY OF PURCHASES ISSUER AND MATTERS, nulRpr nFr 0Kfrteya ne eebr3,2006 31, December ended year the for 10-K Form on Report Annual atoayNt eadn owr-okn Statements Forward-Looking Regarding Note Cautionary ...... 4 ...... 20 ...... 13 ...... 100 ...... LSAARGOP INC. GROUP, AIR ALASKA ...... 99 ...... 21 ...... AL FCONTENTS OF TABLE ...... 100 ...... 33 ...... 99 ...... 99 ...... 20 ...... 2 ...... 100 ...... 100 ...... 100 ...... 24 ...... 22 ...... 27 ...... 101 ...... 55 ...... 56 ...... Annual Report 3 lessors and sublease payments from sublessees; • the timing of the MD-80 fleet disposal• and the amounts of potential our lease significant termination indebtedness; • payments with compliance with our• financial covenants; potential downgrades of• our credit ratings and the the availability implementation of of• financing; our growth strategy; our ability to• meet our cost reduction goals; operational disruptions; • general economic conditions,• as well as economic conditions the in concentration the of• geographic our regions revenue we from serve; a few actual key or markets; threatened• terrorist attacks; global instability insurance and costs; potential U.S.• military actions or activities; changes in laws• and regulations; increases in government• fees and taxes; our inability to• achieve or maintain profitability; fluctuations in our• quarterly results; an aircraft accident• or incident; liability and other• claims asserted against us; our reliance on• automated systems; and our reliance on third-party vendorsYou and should partners. not place undue reliance on our forward-looking statements because the matters they describe are subject to known andbeyond unknown our risks, control. uncertainties Our and forward-looking otherspeak statements unpredictable only are factors, as based many of on of the the whichissue date information are any on currently updates which available or this to revisions report usexpectations to was and to our filed change forward-looking with regarding statements, the the even SEC.performance matters if We or discussed subsequent expressly achievements in events disclaim will those cause any likely statements. our expressed obligation differ Over or to from time, implied the our by anticipated actual our results, results, adverse forward-looking performance to statements, or our and achievements shareholders. such that For differencesRisk are a might Factors”. discussion be Please of significant consider these and our and materially forward-looking other statements risk in factors light in of this those Form risks 10-K, as see you “Item read 1A: this report. Annual Report osse f14jtarrf,sihl oeta h 1 icata fDcme 1 2005. 31, December of as aircraft 110 the fleet than operating more Alaska’s slightly are 2006, aircraft, routes 31, jet nonstop December 114 leading At of are the Diego-Seattle. consisted airports revenues, San leading 2006 and Alaska’s on Angeles-Seattle, Alaska enplanements, Based Los between passenger Portland. Anchorage-Seattle, passengers on and more Based Anchorage carried airline. Angeles, carried have other Los we we any Seattle, 2006, 1973, than In since mainland OR. year U.S. Portland, each the from in and departures 2007, and transcontinental September passengers, some in revenue have beginning million Seattle, do and, 17.2 from we Angeles primarily although Los cities, departures; and the eight of Anchorage in to concentration from cities service largest between east/west our service provides have north/south also we our Alaska where through Mexico. and and Alaska Canada of U.S., state western the in destinations serve principally publication. Alaska “2007 industry the leading named a recently World, was Transport Horizon Air example, by For Year” recognized travelers. the regularly air of are of Airline amenities surveys Regional other and program, and awards, flyer aircraft, studies, frequent Alaska independent generous aboard by of a section form needs, first-class the customer a in to aircraft, service attention well-maintained excellent check-in, and expedited employees assignments, outstanding seat Our advance amenities. differentiating and service customer at charge of free accessible are reports those reports to quarterly amendments 10-K, and 8-K Form on Form on www.alaskaair.com. report reports annual current our 10-Q, including Commission, Form on Exchange and Securities the with filings statements. financial consolidated information the financial to Individual 14 airline, miles. Note regional 392 in a is reported is trip is Horizon passenger Horizon miles. average and 1,038 its Alaska that of and for airline length aircraft, major trip jet a passenger and is average turboprop Alaska an operates airlines, substantially. with as differ fleet operate risks all-jet subsidiaries economic an Both and operates (Horizon). competition, Inc. plans, Industries, business Air their Horizon although and (Alaska) Inc. Airlines, Alaska INFORMATION GENERAL 1. ITEM curdb i ru n18.I stelretrgoa iln ntePcfcNrhet n evs4 iisin cities 40 serves and Northwest, Pacific the in airline regional largest the is It 1986. in Group Air by acquired Horizon asne rfi ymre speetdbelow: presented is market by traffic Passenger We 1937. in incorporated and 1932 in organized was that corporation Alaska an is Airlines Alaska of level higher a providing by competitors from themselves distinguish to endeavor airlines our of Both Our 98188. Washington, Seattle, Boulevard, International 19300 at located are offices corporate Group’s Air subsidiaries: principal two with 1985 in incorporated company holding Delaware a is Inc. Group, Air Alaska oio,aWsigo oprto htfrtbgnsriei 91 a noprtdi 92adwas and 1982 in incorporated was 1981, in service began first that corporation Washington a Horizon, Total region mountain and transcontinental including markets, Other markets Canada mainland U.S. the markets and Mexico Alaska between and Alaska Within markets Coast West BUSINESS ...... h nomto otie norwbiei o ato hsana eoto om10-K. Form on report annual this of part a not is website our on contained information The ...... %5% 4% 10% 11% ...... 4%47% 45% ...... ATI PART 4 ...... 2%20% 20% ...... 2%18% 20% ...... 2006 0%100% 100% 2005 Annual Report 5 In 2006, Horizon carried 6.9 million revenue passengers. Approximately 91% of Horizon’s revenue Alaska and Horizon integrate their flight schedules to provide convenient, competitive connections between The airline industry is highly competitive and is characterized by low profit margins and high fixed costs, In 2006, the industry as a whole experienced its best financial year since 2000 and is currently expected by Delta Airlines and Northwest Airlines are currently operating under bankruptcy protection and are expected Recently, there has been speculation concerning potential consolidation in the airline industry. In late 2006, seven states and six citiesHorizon in operates Canada regional under jet the service HorizonDuring branded brand. 2006, as In Horizon Frontier addition operated JetExpress to nine in operatingrepresenting 70-seat an under approximately Bombardier agreement the 23% CRJ-700 with Horizon of aircraft Frontier brand, total under Airlines. 2006. Horizon the However, capacity Frontier in and JetExpress the approximately brand, third 8%Frontier quarter of and of total will 2006, Horizon take Horizon revenue back announced in Air the that Group nine it route CRJ-700s would structure. beginning be in terminating January the 2007 agreement and with will redeploy those aircraft into the passenger miles in 2006 werecompared flown to domestically, 95% primarily in in 2005. theto The states 5% Canada of in markets Washington, 2005. accounted Oregon Based for andSpokane. on 9% Idaho, Based passenger of on enplanements, revenue revenues Horizon’s passenger in leading milesOntario-Portland. 2006, airports in At the are 2006, December leading Seattle, compared 31, nonstop Portland, 2006, routes Boise,Except Horizon’s are and for operating Portland-Seattle, those fleet Spokane-Seattle, flights consisted and operating ofdesignator as 21 code Frontier jets in JetExpress, and airline Horizon 48 reservation flights turboprop systems. are aircraft. listed under the Alaska Airlines most points served by theirconnected systems. to In flights both operated 2006 by and Alaska. 2005, approximately 24% of Horizon’s passengers Industry Conditions primarily for wages, aircraft fuel,vary aircraft significantly ownership with costs the and number facilitiesor of rents. in passengers Because pricing carried, expenses has a of a relatively ashortfall disproportionate small flight in effect change do expected on in not revenue an the levels airline’s numberPassenger could operating of demand cause and passengers and a financial ticket disproportionately results. prices negative Accordingly,current are, impact a events to on minor and a our industry large results capacity. measure, of influenced operations. by the general state of the economy, industry experts and analysts toclimbed post higher a in net the profit wake incapacity of 2007. in strong In some demand the regions and past have a twoHorizon, allowed healthy years, have domestic economy. load raised carriers The factors ticket to strong and prices raise demandsince unit to ticket and early revenues help prices. a 2005. recapture Airlines, reduction The the including in industry’s significant Alaskaoperating total financial increase and costs, results in either have the through also price bankruptcy benefited of proceedings from jet or massive fuel, other reductions particularly cost-reduction in efforts. non-fuel to emerge sometime in 2007,carriers.” at Under which bankruptcy time reorganization, their carriers unitcosts gain costs almost a are immediately. competitive likely In advantage to addition, by be2001 so significantly among and called reducing the currently “Low-Cost their lowest carry Carriers” of more (LCCs)LCCs the than have and “legacy 30% grown traditional of significantly or total since legacy U.S.unit carriers domestic costs is passenger and becoming traffic. the more However, LCCs blurred thereorganized face as line airlines cost legacy between have pressures. carriers the and Because make continue of furtherBecause to their reductions of exert unit in the downward cost relatively pressure advantage, low on thelow-cost barriers ticket LCCs and to prices and low-fare entry compared recently carriers and to to financial historicalwith continue. success levels. new We of entrants compete LCCs, in with we the many expect future. of the these expansion carriers of now, and expect to compete US Airways Group announced a bid for Delta, United and Continental were rumored to be discussing a merger, Annual Report L ...... YsN Yes No Qantas Airlines Northwest Yes Chile Lan KLM ...... Airlines *** Frontier Connection** Delta/Delta Airlines Continental Airways Pacific Cathay Airways British France Air Eagle Airlines/American American Airlines International or U.S. Major 2006. below 31, table December The of risk. as inventory airlines no other takes with but alliances inventory, marketing carrier’s our operating identifies the from agreements. flights these of carrier’s all operating or some likely, terminate not or although modify and, to bankruptcy seek in would currently that is and reorganization revenues Northwest of the agreements. impact plans in marketing adversely propose be could other could may it our more terminated, of or were costs one agreement the partners’ time, significant increase any our a in at If and credit renegotiation. dates, mileage of termination frequent earning process various partners’ while have alliance Horizon agreements and our marketing Alaska of on Our members programs. travel providing to by opportunity and us an airlines, giving programs other by by flyer opportunities, from revenues credit/redemption traffic our mileage connecting enhance better more Alliances and to below. destinations access forth travel set more as customers flights our certain offering on sharing code and privileges redemption Airlines Other with Alliances activities hedging our COMPETITION of AND MARKETING benefit respectively. the 2004, before and fourth gallon 2005, the per 2006, in cost in somewhat fuel 40% Fuel fall average and airlines. did our 34%, for prices 2007, 17%, costs oil early increased operating crude into total Although and of uncontrollable. 2006 30% largely of to are quarter 20% and represent volatile to be sharply can risen prices have costs fuel years, recent available-seat-mile processes. an our on in benefits efficiency and and wages productivity employee our increase improve reduce to to to underway continue and initiatives to pressure have need cost We upward the this basis. continued recognize mitigate some We to expect future. order benefits We the pilot in and benefits. in Alaska’s productivity wages and benefits in total wages and reduction services, on wages a ramp pressures on including Seattle similar pressure factors, Alaska’s faces of subcontracting Horizon number and 2006. reduce a 2005 in to of May increased able result in to was a effect ability Alaska as took the Although 2005 that have competition. in wages not new costs may to benefits they respond and and to wages forces, enough our work quickly work unionized downward have unionized without costs ours, with carriers labor including airlines than adjust airlines, Often, costs major agreements. labor Most bargaining higher costs. collective have operating by forces total covered airline’s are an who of groups 40% employee to 30% up make generally been has continues. Delta consolidation for industry bid of Airways’ talk US offer, Although AirTran’s Airlines. rejected Midwest Midwest for and bid withdrawn, takeover a announced AirTran and oto u oehr eainhp r resl oehrs hr h aktn are el et nthe on seats sells carrier marketing the where codeshares, free-sell are relationships codeshare our of Most and credit mileage flyer frequent reciprocal provide that airlines other with alliances marketing have We in However, costs. operating airline’s an of 15% to 10% represented generally have costs fuel Historically, costs Labor costs. operating reducing on focused be to continue Alaska, including carriers, U.S. major Most ...... e oYes No Yes ...... e oYes No Yes ...... YsYsYes Yes Yes ...... YsN No No Yes ...... YsYsYes Yes Yes ...... e e Yes Yes Yes ...... N oYes Yes No Yes No ...... Yes ...... YsN No No Yes ...... YsYsYes Yes Yes ...... YsYsYes Yes Yes ...... 6 Agreement Frequent Flyer nFihsOperated Flights on yOhrAirline Other by lsaFih # Flight Alaska Codeshare— te iln lgt# Flight Airline Other nFihsOperated Flights On yAlaska/Horizon by Codeshare— Annual Report Codeshare— by Alaska/Horizon On Flights Operated Other Airline Flight # Codeshare— Alaska Flight # by Other Airline on Flights Operated Yes*Yes*Yes* Yes Yes Yes No No No Flyer Frequent Agreement 7 ...... earn and redeem miles on this airline’s route system. agreement with Delta Air Lines. Competition in the airline industry is intense. We believe the principal competitive• factors in the industry safety record and• reputation; flight schedules; • fares; • customer service; • routes served; • frequent flyer programs; • on-time arrivals; • baggage handling; • on-board amenities; • type of aircraft;• and code-sharing relationships. Any domestic air carrier that is issued a certificate of public convenience and necessity by the Department PenAir Big Sky Airlines * This airline does not** have its own frequent Alaska flyer has program. codeshare However, agreements Alaska’s with Mileage the*** Plan Delta members Connection Capacity can carriers purchase Skywest arrangement and as ASA described as under part “Business of – its General InformationCompetition – Horizon.” that are important to customers are: of Transportation (DOT) and anto operating operate certificate scheduled from passenger the service Federal3.5% in Aviation of the Administration all United (FAA) U.S. States. is domestic Together, allowed airlines passenger Alaska on traffic. and most Alaska Horizon of and carry their Horizon approximately Airlines, routes, compete American including with Airlines, Southwest one Delta Airlines, or Airlines, United morecarriers. US Airlines, domestic Most Airways, Northwest or of and Airlines, foreign these regional Continental airlines affiliatesor are associated lower larger with operating and some costs have of than significantly these bankruptcy our greater will companies. financial likely In resources have addition, and lower competitors nameagreements. operating who recognition Some costs successfully of derived reorganize these from out competitors renegotiated of Continuing have labor, growth chosen supply of to and low-cost add financing carriers, service,jetBlue including reduce Airways, Southwest their and Airlines, fares, the AirTran or possible Airways, bothcompetitive emergence Frontier in pressures of Airlines, our on Virgin markets. our America airlines incharge and the a other United lower network States, fare carriers places for because significant we travel the may between low-cost be similar carriers unable cities have to and themarkets compete thus ability that effectively exert to we against downward serve. other pressure Due airlines ontransportation, to that ticket including its introduce prices. train, short-haul service As bus markets, or such, and Horizon discounted automobile also fares transportation. competes in in the many markets with ground Regional Airlines Era Aviation Annual Report moiino n ralo t rpsdaedet ntecletv agiigareet n/rtehrn of hiring the and/or agreements bargaining the collective including the is “self-help,” on action to amendments strikers. or resort proposed replace reached may its to is airline of workers agreement the all an and or unless strike any period, may of “cooling-off” “cooling-off” organization imposition another applicable labor by the the followed of Congress, is end by and the taken days At a 30 days. recommends for 30 and lasts of positions process period a parties’ Board period, the Emergency that examines Presidential If During which The arbitration. commences. established, solution. to period be submit “cooling-off” may to 30-day Board decline a Emergency National may party, Presidential the party either point Either by which parties. rejected in at the is reached exists, to arbitration is impasse arbitration party agreement an binding either no that offers reached, If declare Board is mediator. may Mediation agreement federal Board After no a Mediation agreement. if appoint National the and to the in negotiations, Board agreement, mediation, described direct Mediation such and/or for National any RLA meet the of the must request terms by parties may the prescribed the modify manner notice, to the such wishes in of party party receipt either other but If the expire date. notify the not stated must act, do a it this organizations of Under these as (RLA). and amendable Act airlines become Labor respective instead Railway the the between by agreements governed bargaining are collective organizations labor our with relations respectively. 2005, and 2006 pay) in incentive expenses variable operating (including total benefits and our salaries of Alaska Wages, 33% at 2005. and (9,866 31, 13,768 28% December to approximately of compared represented 2006, as 31, Horizon) December at at 3,902 employees and part-time and full-time active respectively) EMPLOYEES Distribution Ticket tDcme 1 06 ao nosrpeetd8%o lsasad4%o oio’ mlye.Our employees. Horizon’s of 49% and Alaska’s of 84% represented unions labor 2006, 31, December At 4,031, and 10,454 had Horizon and (Alaska 14,485 had We intensive. labor highly is business airline The below: presented is channel by sales Our • • channels: • primary three through distributed are tickets Airline eeal hrea$0fefrboigrsrain hog hs alcenters. call these through reservations booking for fee $10 a charge costs. generally distribution our ticket of lower centers Some them call the agencies. giving Reservation to these channel, charged use distribution is we this that that use fee,” require not “GDS customers do from the corporate competitors data fee, large inventory a our and in of fare result Many their agencies airline. typically obtain these agencies to through travel Sabre, made online as Bookings and such airlines. traditional (GDS), Both Systems increasing. Distribution is Global agencies use travel online of transitioning usage of while goal agents our travel toward online progress channel. and – of sales Traditional website sign direct our a this through is to sales that customers annual and our in of of billion proud more In $1 extremely accordingly. over are offers reaching we tailor in that and milestone something customer significant websites. standpoint the a our customer-relationship with passed to and communication we business branding ongoing 2006, more a establish drive from can to preferable we steps is that take channel in to this continue believe we we result, addition, a In as and, channels horizonair.com direct or these alaskaair.com as such websites Airline l te channels other All center call Reservations agencies travel online and Traditional Alaskaair.com/horizonair.com Total ...... 2 4% 2% ...... hs alcnesaelctdi hei,A;Kn,W;adBie D We ID. Boise, and WA; Kent, AZ; Phoenix, in located are centers call These ...... 2 14% 12% ...... 3%35% 39% ...... osmrrlac ntaiinltae gnisi shrinking, is agencies travel traditional on reliance Consumer ...... 4%47% 47% ...... 8 ti esepniefru osl through sell to us for expensive less is It . 2006 0%100% 100% 2005 Annual Report Contract Status Contract Status Amendable 7/17/10 Amendable 7/17/10 84 Amendable 2/14/07 673 689 Amendable 10/01/09 477 Amendable 11/30/08 3,159 Employees Employees Number of Number of 9 Station personnel in Vancouver and Victoria, BC, Canada Employee Group related classifications Employee Group Ramp service and stock clerks Clerical, office and passenger service Mechanics, inspectors and cleaners The Airline Deregulation Act of 1978, as amended, eliminated most domestic economic regulation of The FAA, through the promulgation of the Federal Aviation Regulations (FARs), generally regulates all Horizon’s union contracts at December 31, 2006 were as follows: Alaska’s union contracts at December 31, 2006 were as follows: REGULATION General passenger and freight transportation. However,Aviation the Administration Department (FAA) of still Transportation exercise (DOT)passenger significant and and regulatory the cargo authority Federal air over transportation airconvenience in carriers. and the In necessity U.S., order issued a to by domestic provide restrictions, the airline this DOT. is certificate Subject required permits to to an certain holdunlimited air individual a duration, carrier airport certificate but to capacity, of may operate noise public be between andthe revoked any other terms for two of failure points the to in certificate comply thecodeshare itself. with U.S. agreements, In federal A alliance addition, aviation certificate agreements the statutes, is between DOT regulations,certain of domestic maintains orders consumer major jurisdiction or protection airlines, over matters, international the such route approvalInternational as authorities of treaties advertising, and international may denied also boarding contain compensation restrictions and or baggage requirements liability. for flying outside of the U.S. aspects of airline operations, includingDomestic establishing airlines personnel, are maintenance required and to flightthese hold operation regulations, a standards. we valid have air established, carrier-operatingmaintenance and certificate program the issued for FAA by each has the type approved, FAA. of both Pursuant aircraft our to we operations operate. specifications The and maintenance a program provides for the ongoing TWUNational Automobile, Aerospace, Transportation and General Workers Dispatchers 21 Amendable 10/6/08 Union International Brotherhood of Teamsters (IBT)AFA PilotsAMFA 766 In Negotiations Flight attendants Mechanics and 614 Amendable 11/21/07 * Collective bargaining agreement contains interest arbitration provision. Air Line PilotsAssociation International (ALPA)Association of Flight Attendants (AFA)International Association of Machinists and Aerospace Workers (IAM/RSSA) Flight attendantsAircraft Mechanics Fraternal Association (AMFA) Mexico Workers Association of Air TransportTransport Workers Union of America Mexico (TWU) airport personnel Pilots 2,634 Dispatchers Amendable 4/27/10 69 Amendable 9/29/07 1,475 35 In Amendable Amendable Negotiations 5/01/07 7/01/10* Union Annual Report eurmns emiti u w otnigsft,hat n niomna rgasi re ome or meet to order in federal programs to environmental similar and are health requirements. which safety, these of continuing exceed some own adopted regulations, our delegated have and maintain been governments laws We have local health requirements. states and and various state safety activities, Many employee federal statutes. and these federal environmental regulations to aforementioned promulgate addition the to In under authorized operations. authorities been our certain have on Health agencies impact and Environmental federal an Safety U.S. other have Occupational The and that the matters. OSHA, of health EPA, oversight and or the safety Agency, to employee Protection subject concerning Compensation also OSHA, the Response, are as Act, Environmental We the known Recovery Comprehensive Act. include Administration, and the Superfund us Conservation and or on Resource Act, Act, effect the Water Liability particular Act, Drinking and a Air Safe have Clean the that the Act, laws 1990, Water federal of Clean U.S. Act countries. Capacity other and and Noise U.S. Airport the in health and safety Matters Environmental agents, travel and to file discounts markets. to and international required overrides many are commissions, characterize the carriers substantial wholesalers to air tariffs, and subject Although rate brokers also serve. and are we fare rates countries international and foreign to fares the adhere International of charges. governments international and the over rates of authority fares, jurisdiction maintains America) DOT North The of competition. outside price (generally vigorous by characterized is industry material. not was us Fares for Airline assessment assessment an higher additional of the The carriers with resolution. air disagrees a notified and on TSA opposed TSA the has the 2006, industry with $12.6 January The working paid In security. is We 2004. of and 2000. and cost in ,2005 the property security 2006 and for providing in passengers assessment charge of screening increased security cost for this the paid for cover In carriers TSA to measures. air to TSA security the million the enhanced amount to these the amount for to additional pay equal an to measures pay government to the required to are submitted carriers and addition, carriers air the by collected is on present be to marshals also air TSA federal The requires employees. and federal aircraft own of aboard its decks flights. carried with flight certain be functions on will these security and that of increased passengers articles most for of other performs provides screening and TSA the baggage, The for checked aircraft. provide and passenger shall carry-on a TSA cargo, responsible the mail, is that U.S. (TSA) mandates including Administration Act property, Security Security Transportation The the security. Act, aviation Security for the to Pursuant measures. agencies. security 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 representation in 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 not are our we impact time, or this position At financial ADs. our or affect FARs materially the either operate. of could to to requirements that authority time the proceedings from of enforcement actions, violations any enforcement alleged of routine for aware and to FAA program subject the maintenance are by the aircraft Horizon, brought time our and time, to into Alaska time incorporated including From be airlines, overhauls. must All major that operations. to (ADs) inspections directives routine airworthiness frequent issues from FAA ranging aircraft, such of maintenance eaesbett aiu asadgvrmn euain ocrigevrnetlmtesademployee and matters environmental concerning regulations government and laws various to subject are We the and regulation, governmental without fares domestic own their establish to permitted are Airlines which fee), 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 10 Annual Report 11 The Airport Noise and Capacity Act recognizes the rights of airport operators with noise problems to At December 31, 2006, 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 commitment plan to address a Our operations are significantly affected by the price and, potentially, the availability of jet fuel. Fuel costs, We almost exclusively use crude oil call options as hedges to decrease our exposure to the volatility of jet Due to the competitive nature of the airline industry, airlines often have been unable to immediately pass on Although we do not currently anticipate a significant reduction in jet fuel availability, dependency on 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,and special other noise airlines ordinances at restrict Burbank, theto Long timing capacity Beach, of restrictions, Orange flights Orange County, operated County, San by Reaganairports Diego, Alaska, National, restrict San Horizon Long the Jose, Beach, type and Chicago Sun of O’Hare, Valley. aircraft, and In number Vancouver, addition, of B.C. due flights, or the time of day thata airlines material can effect operate. on ourissues financial that condition, we results do of not operationsoperations currently or or anticipate cash cash could flows, flows have new in the regulations future potential or periods. to compliance harm our financial condition,Customer results Service of number of service goals, including,cancellations but and not diversions, limited baggage to, delivery goals and relating liability, to guaranteed lowest fares fare and availability, ticket delays, FUEL refunds. including hedging activity, were approximatelycosts, 27% restructuring of charges, our and total the operatingrefer 2005 expenses to navigation (excluding the fee fleet price refund) transition at inworld the 2006, oil airport 20% prices or in and “into-plane” 2005, refining price andsomewhat costs, as 17% higher which the in and can “raw” 2004. substantially vary fuel We more by price.Alaska volatile region Raw and than in fuel Horizon prices the prices at in U.S. are a the Generally,control, impacted competitive Gulf West and by disadvantage. Coast Coast can Both or jet have crude on fuel a and thein prices significant refining East the are and costs Coast, economic immediate are putting fuel impact volatile both price on andoperating per our outside fuel-efficient gallon operating of aircraft affects results. our helps annual Currently, to fuel a mitigate costs one-cent the by change effect approximately of $4.0 high million. fuel We prices. believe that fuel prices. Call options arelimiting intended our to exposure effectively to cap increasing ourin fuel pricing crude prices. on oil With the prices these crude as call oilWe there option component also is contracts, of use no we fuel collar downward still prices, structures exposure benefitpurchase in other from contracts limited than the that instances the decline fix for premiums the fuel we refining hedging pay margin purposes. to we Additionally, enter pay we into on enter the a into contracts. certain fuel percentage ofincreased our fuel fuel prices consumption. to customerscould by be increasing offset fares. by Conversely, increased anythe fare potential last competition benefit few and of years, lower lower our revenues. fuel“Management’s fuel-hedging Nevertheless, prices Discussion program because and has of Analysis benefited rising of us fueldiscussion Financial with prices of Condition significant over our and savings. fuel Results See hedging of Item activities. Operations,” 7, for a further foreign imports of crude oil and the possibility of changes in government policy on jet fuel production, Annual Report ntescn ure n yial ece t ihs ee uigtetidqatra euto aaintravel, vacation of result a as quarter increases third Alaska. generally the of traffic, during state lower level the the to highest in be principally its activity it due reaches increased if quarters typically including (or fourth and lowest and quarter generally first second is the the income during in operating greatest) Our the fluctuations. loss seasonal our to case, subject is business our because Factors Other and Seasonality INFORMATION 2005 OTHER 2006, in million $143.1 credits. and mileage million, of $180.2 sale million, the $194.2 respectively. million from was 2004, $545.6 revenue Plan and was deferred Mileage for airlines is the liability partner which to total to of attributable the payments majority Revenue and estimated the revenue for respectively, deferred and million, on the Horizon $471.7 provided 2005, and and is and Alaska transportation 2006 on award 31, travel when December free partners. revenue At providing non-airline recognizes airline. its and partner a to proceeds, another include credits sales as or not mileage the liability Alaska does sells of a Horizon also majority as or Alaska a accrued Alaska profit. defers and on or Alaska expense travel cost, selling award aircraft a providing overhead, as of to recognized cost contribution is incremental future The the accumulated. in are awards miles travel free providing of cost 212,000, partners. and airline 239,900, on 252,600, flown flown approximately and miles 2004, redeemed passenger and were total 2005, awards the 2006, flight of years round-trip respectively, the respectively, represent 2004, For awards and Horizon. Those 2005, and Horizon. 2006, Alaska and for on 631,000 Alaska 7.3% and on and 750,000, flown 7.9%, 850,000, and 9.7%, approximately redeemed approximately would 2004, were awards and respectively, those 2005, awards, of 2006, flight 88% years round-trip approximately the ticket that For domestic estimated redeemed. round-trip Alaska be free awards, ultimately by 20,000-mile eligible redemption the those for exceeding Of that eligible credits threshold. estimated were mileage award Alaska awards have 2005, flight who and round-trip members 2006 respectively, Plan 31, million, Mileage three December 3.0 after of and Alaska deleted As million on generally account. 3.2 awards are member’s approximately flight accounts a free Plan in the Mileage inactivity of seating. of 75% capacity-controlled years Over to selection. subject award are their Horizon of and Alaska notify members mileage, program. necessary the the change terminate to to ability or the levels has award Alaska and notice, credits, non-airline advance mileage by With partners, paid accounts. conditions, store is member terms, grocery Alaska to Plan a businesses. credits Mileage partner, other it card and miles credit agencies, the a rental for participating include car partners 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 affected. PROGRAM adversely PLAN were be MILEAGE there would If business business. our our fuel, affect jet and/or adversely of production could availability the which the of in increases, in event reductions price reductions the be resulting major In could and fuel. there oil jet areas, crude of oil-producing of availability in importation future conflicts the other predict or to hostilities impossible significant it make marketing and transportation h iigadaon fmitnneepniue bt lne n unplanned), and planned (both expenditures maintenance of amount and timing the costs, fuel • in changes competitors, our and include: us vary by • to initiatives results pricing operating quarterly our cause could • that factors loads, passenger to addition In year entire the for those of indicative necessarily not are period interim any for operations of results Our incremental estimated the partners, airline their and Horizon or Alaska on travel through earned miles For the accumulating Upon awards. other various 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 12 Annual Report 13 RISK FACTORS • increases or• decreases in passenger and volume-driven labor variable actions. costs, and In addition, seasonal variations in traffic, the timing of various expenditures and adverse weather conditions No material part of our business or that of our subsidiaries is dependent upon a single customer, or upon a We carry insurance for passenger liability and property and aircraft damage in amounts andAfter of September the 11, type 2001, aviation insurers significantly reduced the amount of insurance coverage for Pursuant to authority granted in the Air Transportation Safety and System Stabilization Act, the Homeland We have elected to participate in the Civil Reserve Air Fleet program, whereby we have agreed to make If any of the following occurs, our business, financial condition and results of operations could suffer. In The airline industry is highly competitive as to fares, flight frequency, frequent flyer benefits, routes and may affect our operating resultsweather from conditions quarter in to the quarter. winter, Manyaccommodating causing of displaced increased the passengers. costs markets Due associated we to with serveadverse our deicing experience weather geographic aircraft, inclement conditions area canceled (particularly of flights in operations, and competitors, the we who state can may of be be Alaska more better and susceptible able the to to Pacific spread Northwest) weather-related than risks some over of larger our route systems. few high-volume customers. Consequently, thenot loss have of a one material or adverse more effect of upon even our our financial largest condition, customers results wouldInsurance of likely operations or cash flows. generally consistent with industry practice. third-party liability for claims resultinginsurers from significantly acts increased of the terrorism, premiums warSince for or then, such similar however, coverage events. our as At insurance well theinsurance rates as same rates have for time, down been aviation the to declining insurance pre-2001 and inreductions levels. during general. achieved In 2006, in 2007, we late we were 2006. expect able a to further renegotiate decrease our in insurance costs as we annualize Security Act of 2002, asand amended we by have the accepted, Consolidated war Appropriations risk Act, insurance 2005, the to replace U.S. government commercial has war offered, riskOther insurance Government through Matters September 30, 2007. available to the federal governmentgovernment a would certain reimburse number us of for aircraft the in use the of event such of aircraft. a militaryITEM call-up. 1A. The such case, the trading priceWe of operate our in common a stock continually couldManagement changing also cannot business decline. predict environment, These such and risk developments, new factorsour nor risk may business can factors not or it emerge be events assess from exhaustive. described the time in impact, to any if time. forward-looking any, statements. of such newThe risk airline factors industry on is highlyeffectively competitive against and other subject airlines to with rapidenough greater change. in financial We the resources may event or be the lower unable nature operating to of costs, compete competition or in to our adjust markets rapidly changes. service. The industry is particularlyprovide susceptible service to to price passengers discounting occupying becausenumber otherwise airlines of unsold incur planes seats. only available, Recently, nominal which airlines costsIf has have to airlines resulted reduced decide in routes to reduced and increase industry the their capacity capacity and in a the trend future, towards this increased could fares. cause fares to decline, which may adversely Annual Report rmohrpoet.Dsnae mlye ol rvn sfo civn h prtoa mrvmnsin improvements seek. operational we the that achieving performance attention from on-time management’s us and divert prevent rate and could completion a business employees be our Disengaged could in projects. contracts engagement other open employee from our around reduce increase Uncertainty employees, would performance. many that financial to demands our distraction employee make affect represented could adversely our and and unions of agreement, expenses labor Each bargaining operating 2006, employees. collective 31, Horizon’s separate December of a of 49% has As and groups respectively. Alaska’s 2005, of and 84% 2006 approximately in represented expenses operating total our of business. leave our who harm personnel could business key individuals key and other these of results or of services operating management any the our replacing of lose case, difficulty loss we such have the if In also therefore, or business. may and, cost, our We reasonable sustain harmed. a or be at grow could employees to prospects qualified unable retain be and may train we hire, personnel, to unable are we If and business our affect adversely could personnel key in change operations. or of costs results labor in hedged increase are significant we A which at price the fuel and jet declines in hedged designated increases have at to we costs exposed consumption fuel increasingly fuel increases. our and of of substantially amount portion are the a we as cap hedges, costs to with designed Even are prices. that oil future. options per-barrel the call in purchase so we do increases, to price able offset be to not fares may increase we to and able recently been until generally fuel not of have price We the demand. in and increases supply and issues geopolitical on $4.0 approximately by expenses fuel a our that increases estimate fuel we of trends, gallon historical per annually. increases on price million Further Based economic operations. operations. our of of in results results increase in our and one-cent increases affected condition Significant negatively financial respectively. have our 2005, years harm and several would 2006 past 31, the December during ended costs years fuel the for expenses business. operating our total harm would 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 business, negatively Our potentially and competition add increase to will seek which likely serve, operations. will currently of airlines we results Other pairs our Mexico. city affect in the serve of we some cities to to service levels service authorized expand amendments automobiles. or trains buses, as such alternatives, transportation the in We fares markets. discounted key or our service in introduce steps, that competitive airlines such other serve. other such we take against that chosen or effectively markets have fares, compete competitors their to these reduce unable of service, be some add may past, to derived the time costs In to In operating agreements. time do. lower financing from we have and than could supply therefore, costs bankruptcy labor, and operating of renegotiated airlines lower out from our or reorganize than recognition successfully larger name who are and competitors competitors resources addition, our financial of greater Many significantly operations. have of may results and business our affect ao ot r infcn opnn forttlepne,acutn o prxmtl 7 n 32% and 27% approximately for accounting expenses, total our of component significant a are costs Labor positions. skilled highly many in labor for businesses other and airlines U.S. major the against compete We fuel of risk the manage To prices. fuel of volatility the against insurance of form a as hedges fuel utilize We based fluctuations price wide to subject and unpredictable been have availability and costs fuel Historically, of 20% and 26% for accounting expenses, operating total our of portion significant a constitute costs Fuel The service. air commercial to relating agreement bilateral their amended recently Mexico and U.S. The ground from competition faces also Horizon, like airlines regional particularly and industry, airline The 14 Annual Report 15 In 2005, Alaska and the Air Line Pilots Association (ALPA) were unable to reach a new agreement, and Our continuing obligation to fund our traditional defined-benefit pension plans could negatively affect our Finally, to the extent we are unable to maintain the outsourcing or subcontracting of certain services for our In 2006, Alaska announced a transition to an all-Boeing 737 fleet. As part of thisWe transition, recorded we an accelerated impairment charge on our owned MD-80s in 2006 to write the assets down to their In addition to the gains or losses that may result on the final disposal of these aircraft, our savings from a Alaska’s growth strategy involves operating additional Boeing 737-800 aircraft, increasing the frequency of We continue to strive toward aggressive cost-reduction goals that are an important part of our business therefore, pursuant to the termssubmitted of the the agreement collective to bargaining binding agreementresulted arbitration. that in That existed an arbitration at average decision, the pilot which time,already wage was the in reduction effective parties negotiations of May with 26%. 1, ALPA. That 2005, Teamsters Horizon contract on is is a also amendable new in on pilot negotiations MayFactoring agreement. with 1, in The the 2007, pay Horizon International although rates, pilot Brotherhood we productivity contract of pilot are measures, became unit and amendable costs pension in at and September both postretirement 2006. Alaska medical and benefits, Horizon we are believe among our the highest in the industryability for to the compete size in of theobligations aircraft marketplace. through operated. This bankruptcy, is or because have somedefined-benefit never of pension had our plans traditional competitors are pension either closed plans have to in eliminated new place. such entrants, Currently, with all the of exception our of the plan coveringbusiness, Alaska’s we pilots. would incur substantialperform costs, these including services costs in-house. associated with hiring new employees, in order to Alaska is transitioning to arealize single the fleet. savings This we transition hope may to be achieve. more costly than we expect, orthe we retirement may of not our MD-80 fleet so that these aircraft will be out of ourestimated operating fair fleet market by value. the Additionally,further end we impairment of bought charges. 2008. five We of likely ourremaining will leased leased incur MD-80s MD-80 additional from aircraft similar the as charges lessors,lease we in resulting termination expect the in dates. to future We cease related also operations toaircraft may of four if have those of the to aircraft our proceeds recognize earlier from additional thannegatively any charges their affect sale upon respective our are the financial less sale performance. than ofdependent The the any on market carrying of factors value value our beyond of of MD-80 our MD-80 theby control, aircraft aircraft. other including fluctuates These airlines, the and charges and number is would demand of highly return for aircraft or those available sublease aircraft in the by the leased other market, aircraft, carriers. fleet we If changes would we also are incur unable storage to charges. sell our ownedsingle MD-80s, fleet or type may notsupport be multiple as fleet large types as across we our expect operation. if we are unable to removeOur all failure of to the successfully structural implement costsour Alaska’s that business. growth strategy and related cost-reduction goals could harm flights to markets we currentlyIt serve, is expanding critical into that new we marketssustain achieve and or our increasing improve growth flight our strategy connection results in opportunities. required of order equipment operations. for and If our facilities, we business or are toour if unable attain business we to economies and are hire of operations not and scale could able retain and be to skilled to adversely otherwise personnel affected. successfully or implement to our secure growth the strategy, strategy of offering the bestacceptable value profit to margins passengers and through return competitive on fares capital. while We at believe the having same a time lower achieving cost structure better positions us to be Annual Report atr agl eodorcnrl including: control, our beyond largely factors operations. other of and results economic and changing condition including financial control, our our harm beyond could factors which by conditions, affected often are not operations will Our requirements these needs. that capital or or provisions operations or future covenants our these finance with to comply ability to our able limit harmed. be be will could Alaska business that our now so, do to fail we If due. become they as obligations fixed other and could: aircraft, they of delivery take to inability our or plans. a in fleet-simplification have delays or could in growth financing result our the or impair guarantee secure balances would no to cash which is inability our there Our on commitments, required. effect these when adverse of available material number be a will for financing financing additional secured that have we Although 2011. thereafter. through years the for $1.1 million approximately $680.6 were of year aggregate one an of and under excess 2011 payments in through lease terms 2007 minimum remaining for future or other billion 2006, initial space, 31, with have terminal December leases we airport of operating debt, aircraft, As noncancelable long-term our space. to to office addition related and In leases facilities property. operating airport real under $859 and obligations and equipment fixed billion flight other approximately $1.1 by significant had approximately secured we respectively, was a 2005, outstanding, which in and indebtedness of results 2006 of million revenues 31, billion in December $1.1 decrease both and a of billion service, As $1.2 debt earnings. and in commitments decrease lease greater aircraft disproportionately including costs, fixed high our restrict otherwise and earnings of volatility the increase could activities. obligations our fixed other therefore and results indebtedness financial Our our and plan reduce growth further our to achieve unable to are able we be If not opportunities. likely suffer. market likely may of we advantage costs, take unit and non-fuel strategy our growth our fund to able nrae euiymaue rbece nsecurity. in breaches or measures security increased problems; and control • conditions; traffic weather air adverse other or airports at • congestion traffic air terrorist conflicts, domestic or • international inflation, increases, rate interest recession, economic by caused conditions other and • economic in changes by affected are often operations our airlines, other Like certain be cannot We agreements. certain in covenants financial specific debt with our comply pay to to required operations is our Alaska from flow cash sufficient generate to able be changing will to we responding that in ensure flexibility cannot our We 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 aircraft additional 51 purchase to billion $1.2 totaling commitments had we 2006, 31, December of As to Due indebtedness. of amount significant a future, foreseeable the for have to continue will and have, We ciiy rohrcagsi cnmco uiesconditions; business or economic in changes other or activity, industry. 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, 16 Annual Report 17 travel; and perceived safety threats; and Delays and cancellations frustrate passengers, reduce aircraft utilization and increase costs, all of which Our strategy is to focus on serving a few key markets, including Seattle, Portland, Los Angeles and We believe that concentrating our service offerings in this way allows us to maximize our investment in The terrorist attacks of September 11, 2001 and their aftermath have negatively affected the airline industry, • significantly reduce passenger traffic and yields due• to a potentially dramatic drop significantly in increase demand• security for and air insurance costs; make war• risk or other insurance unavailable increase or fuel extremely• costs expensive; and the volatility of increase fuel costs prices; from airport shutdowns, flight cancellations• and delays resulting from security result breaches in a groundingThe of occurrence commercial of air any traffic of by these the events FAA. would harm our business, financial condition and results of Immediately following the September 11, 2001 terrorist attacks, aviation insurers dramatically increased affect our profitability. Due tooperation our is geographic more area susceptible of to operations,reduction adverse we in weather believe airline conditions a passenger than significant traffic that portionfinancial as of of condition a many our and result of results of our of any competitors. operations. of Any the general above-mentioned factors could harmWe our depend business, on a few key markets to be successful. Anchorage. A significant portion ofSeattle our accounted flights for occurs 63% to of and our from total our traffic. Seattle hub. In 2006, traffic to andpersonnel, from aircraft, and ground facilities,those as regions. well As as a to result, gainany we greater circumstances remain advantage causing highly from a dependent sales reduction on andcompetition in our marketing in demand key efforts our for markets. in key air Our markets transportation businessharm could in would our also our be business, cause key harmed financial us markets. by condition to An and reduce increase results fares in of or operations. take other competitiveThe measures airline that industry could continues to face potential security concerns and related costs. including our company. More recently,new the security foiled measures terror that plot also inother impacted the hostilities our United involving company. Kingdom the Additional in U.S. terrorist Augustincluding could attacks, 2006 us, have the resulted and a fear in could: further of significant such negative attacks effect or on the airline industry, operations. Increases in insurance costs orcondition reductions and in results insurance of coverage operations. would harm our business, financial airline insurance premiums and significantlyclaims reduced resulting the from insurance acts coverage of availablelight terrorism, to of war airlines this or for development, similar third-party under eventsSecurity the to Act Air $50 of Transportation million 2002, Safety per as and eventgovernment most System and continues recently Stabilization in to amended Act the offer by and aggregate. domestic the themillion, In airlines Consolidated Homeland or either Appropriations (ii) (i) Act in third-party of lieu liability 2006,coverage. of war the This commercial risk U.S. coverage war coverage provides risk above for insurance, $50 comprehensive the full insurance same hull, and limits comprehensive twice of and the war third-partySeptember limits and liability 11, of allied war 2001. third-party perils risk liability coverage insurance for carried hull by and the airline on Annual Report ytmt eal oise rc n cetteeeetoi ikt.I re o u prtost work to operations our for order In reservation tickets. computerized electronic our these on accept depend and We track tickets. issue, electronic to as able Substantially passengers be systems. to to other issued system and are systems, tickets maintenance our our of website, all our systems, telecommunication their our by system, or systems these of failure a and business business. our our operate harm to could systems operators equipment business. automated the our on or harm heavily airlines would rely our which We that alternatives, perception transportation public other a than and cause reliable insured could or fully airlines, safe if our less even of is would incident, one fly coverage or involve they insurance accident not losses related aircraft does substantial our any it bear of Moreover, if to excess results. even forced in financial be accident and may an business we from our and resulting harm practice. adequate claims industry be Substantial with not accident. also consistent may an we generally coverage from occur, type such nevertheless the of incident, of amount or and the highest accident amounts However, the an in maintain should insurance aircraft to that liability damaged strive believe maintain a we and currently of Although reliability from replacement service. and claims or from safety potential repair loss of significant the permanent standards 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 business. could our results harm financial would and which reputation and traffic, Our purchase passenger consumer in influence decline view will overall and price an fees ticket in additional total result these higher may airline impose a and of may that decisions cost makers believe travel the law we increase Although costs, significantly travel. “pass-through” airport could air as and that for them taxes time demand regulations, to the laws, time reduce Additional from or carriers. proposed operations air been to have charges charges and and rates rates their increased have airports many environment. to the subject protecting are laws operations local airline’s and an state of federal, aspects stringent safety many increasingly restrictions, Similarly, other environmental regulations. among abatement, maintenance covering, noise and regulations systems, procedures that issued avoidance airlines has collision of FAA measures, operation the security and example, things, maintenance For the expenditures. to significant U.S. relating required the Aviation regulations, have and Federal issued laws, the have passed and “FAA”) has Administration (the Congress Security Administration years, Transportation several the last Transportation, the of In Department costs. compliance significant involve that and delays service in result and costs operating on our or increase operations could our operate disruptions. on we restrictions which and at requirements airports additional the imposing regulation government in Changes operations. of certain would results of premiums and case insurance condition the in financial in increases business, or, Significant our more days termination). affect much 7 immediate adversely be (i.e. including will periods period, coverage cancellation lesser be the shorter providing a will and and stop events, coverage government limits government this the aggregate the for by smaller should insurers charged including that, aviation currently limited, expected by premiums is charged the It premiums than will last. the higher extension will industry, substantially any extension airline that the the certain long to be how coverage cannot for such we does, the coverage, it Although such if 2007. providing or 30, for occur, September deadline risk through the war mandated extend third-party currently may events and is government other comprehensive government or hull, the accidents full by airline the provided hijackings, Furthermore, insurance attacks, industry. terrorist airline additional the of affecting event adversely the in again premiums their lhuh n20,orisrnecsshv erae ope20 ees vainisrr ol increase could insurers aviation levels, pre-2001 to decreased have costs insurance our 2006, in Although, edpn natmtdssest prt u uies nldn u optrzdariereservation airline computerized our including business, our operate to systems automated on depend We a in result and life of loss significant a involve could aircraft our of one involving incident or accident An 2001, 11, September since airports by incurred costs other and security higher significantly of Because internationally, and domestically both requirements, legal and regulatory extensive to subject are Airlines 18 Annual Report 19 Alaska and Horizon are parties to marketing agreements with a number of domestic and international air We have historically relied on outside vendors for a variety of services and functions critical to our business, Our increased use of outside vendors increases our exposure to several risks. In the event that one or more Alaska is dependent on Boeing as its sole supplier for aircraft and many aircraft parts. Horizon is similarly efficiently, our website and reservationsecure system information, must and be deliver able important toor flight accommodate telecommunication information. a systems Substantial high failures or volume could repeated ofpurchase reduce website, traffic, tickets the reservations maintain from attractiveness system another of airline. ourdispatch, In services and addition, and other we cause operational rely our needs. on customersloss Disruption other to of in, automated important changes systems data, to, for increase or crew our a scheduling, expenses breach flight and of possibly these cause systems us could to resultWe temporarily in rely cease the on our partner operations. airlines for codeshare and frequent flyer marketing arrangements. carriers, 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 operated and the partner by agreements flights us generally are are provide held held that out outmiles members for as for of sale partner partner Alaska’s as flights Mileage Alaska and Plan codesharecodeshare vice program flights. arrangements. versa. can In In We earn addition, addition, receive miles we a onMileage believe significant or Plan that amount redeem program. the of The frequent revenue loss flyer fromour of arrangements flights revenues a are sold or significant an under the partner important attractiveness or partSeptember of certain of 2005, our partner our both Mileage flights Northwest Plan, could and which haveboth Delta we a plan filed believe negative to for is effect exit protection a on sometime under sourcetermination in Chapter of of 2007. 11 competitive our Although of advantage. codeshare Delta the In arrangement, has Bankruptcymodify Northwest already Code or could filed and terminate propose a some a reorganization or plan plan all of that of reorganization does these that not agreements. would include seek to We rely on third-party vendors for certain critical activities. including airframe and engine maintenance,software ground maintenance. handling, As fueling, part computer of reservationmay our system continue cost hosting to reduction and do efforts, so ourfleet in reliance service, the on facilities future. outside maintenance, In vendors and recent hasInternational ground years, increased Airport, handling Alaska and to services has outside at subcontracted vendors. certain its airports, heavy including aircraft Seattle-Tacoma maintenance, vendors goes into bankruptcy, ceasesreadily operation available or at fails competitive to rates, performis or as among at promised, the all. replacement best Although services in we maycosts, the believe not delays, industry, that be maintenance if our issues, one vendor safety of oversight2006, issues our and Alaska or vendors quality experienced negative fails control a public to number perception performCompany of of adequately has negative our we taken press airline. may steps reports In experience to following latefurther increased increase several 2005 incidents supervision aircraft and and and incidents early negative training in publicity. of Seattle.significant Vendor vendor The changes bankruptcies, personnel in unionization, in the regulatory order competitive compliance toforce marketplace issues reduce Alaska among or the to suppliers risk renegotiate could of existing adverselyin agreements affect Alaska’s on vendor operations less services or favorable or increases terms. in These its events cost could structure. result in disruptions We are dependent on a limited number of suppliers for aircrafts anddependent parts. on Bombardier. As athose result, aircraft we and are parts, more including vulnerablemanufacturers, design to or defects, any adverse mechanical problems perception problems, associated by contractual withFAA the performance the resulting public by supply in that the of an would inability resultpositioned to in than operate customer we our avoidance are aircraft. or to Carriers in manage that actions such operate by events. a the more diversified fleet are better Annual Report oio aeteoto oetn oto h essfradtoa eid,o h ih oprhs h icatat aircraft the aircraft. purchase the to of right value the then-fair-market or the periods, at and additional usually Alaska for term, respectively. leases lease 2020, the the and of of 2007 most end between extend the expiration and to have 2019, option aircraft and the 2018, CRJ-700 2018 have and and between Horizon 2015 Q400 2014, between Q200, and 2010, leased 2012 and Horizon’s between 2007 respectively. dates between 2012, as MD-80 2016, and serve and and 2007 aircraft 737-800 2007 between Alaska 737-700, between and owned 737-400, dates other leased expiration the Alaska’s lease of facility. have majority line-of-credit aircraft the million and $160 debt, our long-term for securing collateral liens to subject are Horizon aircraft. additional for options and orders future discusses of two aircraft, passenger/cargo combination into converted being currently are aircraft B737-400 our of Four * CRJ-700 Bombardier Q400 Bombardier Q200 Bombardier Air Horizon MD-80 Boeing 737-900 Boeing 737-800 Boeing 737-700 Boeing 737-400F Boeing 737-400* Boeing 737-200C Boeing Airlines Alaska Type Aircraft Aircraft 2. ITEM 1B. ITEM of results our affecting from adversely capacity thereby the revenues redeploy associated performance. to lose financial unable could and are we operations total we system, to Horizon’s If our returned of revenue. into be 23% passenger aircraft will approximately Horizon’s these aircraft represented of CRJ-700 service 8% Nine this approximately discontinued. 2006, and being In capacity of 2007. process in the fleet in operating currently Horizon’s is that but 2004, January manner, timely a in operations JetExpress performance. Frontier financial from our returning impact aircraft negatively redeploy could to which able be not may We hc eedlvrdi aur 07adtermiigtoaeepce ob opee ntesecond the in completed be to expected are two remaining the 2007. and of 2007 quarter January in delivered were which so eebr3,20,4 fte7 icatondb lsaadfv ftesvnarrf we by owned aircraft seven the of five and Alaska by owned aircraft 70 the of 42 2006, 31, December of As Operations,” of Results and Condition Financial of Analysis and Discussion “Management’s 7, Item II, Part 2006: 31, December at age average their and operate we aircraft the describe tables following The None in began that Airlines Frontier with JetExpress Frontier as branded service jet regional operates Horizon PROPERTIES COMMENTS STAFF UNRESOLVED ...... 101 23 5 18 140 ...... 7 2—1 4.4 0.7 5.8 12 15 22 — 3 5 12 12 172 17 157 ...... 124 ...... —1—17.8 1 — 39 1 31 8 — 144 ...... 451 05.1 8.8 20 15 28 28 5 — 74 37 ...... 2 — 2 111 ...... 021 14.5 21 19 2 70 ...... 20 Passenger Capacity Owned 04 1 9.1 114 44 70 26 6.4 69 62 7 Leased Total vrg Age Average nYears in 14.4 11.7 24.9 Annual Report 1 4 35 31-Dec-08 1 4 35 31-Dec-07 1 4 35 30-Sep-07 1 4 35 30-Jun-07 1 2 73 75 73 70 65 37 31-Mar-07 21 ...... 20 22 25 29 42 LEGAL PROCEEDINGS ...... 21 20 20 20 20 ...... 20...... 12 20 12 20 12 20 12 20 12 ...... 113 114 114 116 114 ...... 21 20 17 15 — ...... 26 26 23 32 20 33 17 33 12 33 Although the number of aircraft in our operating fleet at the end of each period presented remains relatively Alaska and Horizon lease ticket counters, gates, cargo and baggage space, office space, and otherAlaska support has areas 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 In March 2005, Alaska filed a lawsuit in federal district court in Seattle against the International Association In 2006, Alaska announced a plan to transition to an all-Boeing 737 fleet by the end of 2008, which includes secured a delivery position. * The total assumes Alaska will identify one airplane**F=Freighter; for C=Combination delivery freighter/passenger in 2008 for which the Company has not yet consistent, it is important toMD-80s note and that Q200s. the Therefore, larger our B737-800sremain total and consistent. available the capacity Q400s will are increase replacing even the though smaller the gauge number of aircraft Ground Facilities and Services at the majority of the airports they serve. Alaska also owns terminal buildings in variousAirport cities (Sea-Tac) in in the Seattle, state Washington. ofline These Alaska. maintenance), include a a flight five-bay operations hangarand and and mainframe training shops computer center, complex facility, an (used two air primarilystores office cargo for warehouse, buildings, facility, and and an office corporate information spaces headquarters technologyWA. for complex. office Alaska’s a Alaska major reservation also facilities facility leases outside and a a of for hangar/office Seattle various facility include administrative in a functions Anchorage, regional in as headquarters Kent, well building, as an leased air reservations cargo facilities facility in and Phoenix, AZmaintenance and facility Boise, in ID. Portland andown maintenance employees facilities for in ground Boise, handling Pasco,system, services Seattle those at and services airports Spokane. are in Alaska contracted the uses to state its various of third-party Alaska. vendors. At other airportsITEM throughout 3. our of Machinists (IAM) seeking to compel arbitration of a dispute regarding the permissibility, under the collective Totals Horizon Air Q200 Q400 CRJ-700 Alaska Airlines MD80 737-400 737-400F** 737-400C** 737-700 737-800* 737-900 the accelerated retirement of ourtable MD-80 displays fleet. the Giving currently consideration anticipated toand fleet this as counts fleet of for transition December Alaska plan, 31, and the 2008: Horizon following as of the end of each quarter on 2007 Annual Report TM4. ITEM costs juries. potential and the judges including of contingencies, actions various the to and subject litigation is with current it associated management’s facts; risks on and and based law is relevant statement the forward-looking of This understanding operations. of results or position the to appealed be could of Secretary Secretary the U.S. by D.C. the decision Washington, by adverse in resolved An Court be 2007. Circuit will of Federal federal question summer under this the discrimination statue, in of unreasonable By early changes constitute policies. Transportation disparate changes FAA and these such and 1 that of DOT Terminals alleging duration 4 and in (DOT) long and statutes airlines Transportation the 2 other of and Terminals with Department amounts in along the great operating We, with such airlines effect. complaint on in a imposed currently filed not leases have were long-term 3, all but their for LAX, of applicable at because made 3 8, were and through increases 1 These Terminals Airport and 2006. in International maintenance January operating Angeles Additionally, to airlines Los beyond. retroactively at and increased operations 2007 were our for fees to dramatically operations related increased charges unilaterally terminal be that would Angeles (LAX) Los of City the by in commenced 2007. matter April this in for resume Arbitration to the contract. scheduled when labor is Seattle acceptable and in an 2007 operation on January service agreement ramp reach the not subcontracting could things, parties other among by, agreement bargaining closed. are matters and these quo and status expired Act has Labor period also Railway appeal court the The the violated bargaining. time, Alaska faith same that bad the alleging in At IAM engaged Seattle. the in by the operation counterclaim regarding service a dispute ramp dismissed of Alaska’s arbitration of compel subcontracting to of seeking permissibility (IAM) Machinists of Association International counterclaim. IAM the employees dismiss 475 to subcontracted approximately motion Alaska of a 2005, reduction filed could 13, immediate Alaska it May the IAM. if On in the work contract. resulting by ramp labor Seattle, represented Seattle new in the acceptable operation engaged subcontract an service and would on ramp quo it IAM the status that the Act stating with Labor things, agreement Railway other reach IAM the among not the violated by, 2005, Alaska bargaining 10, that faith May alleging bad On Alaska in Seattle. against in claim operation counter service a ramp filed Alaska’s subcontracting of agreement, bargaining None financial our affect materially to likely not is business. matters our these to of incidental disposition litigation ultimate routine the to believes party Management a are we above, noted cases the to addition In notified were we 2006, December in agreement, mutual a reach to negotiations of year a than more Despite collective the violated Alaska that alleging Alaska against grievance a filed IAM the Additionally, the against lawsuit Alaska’s of dismissal voluntary granted Seattle in court district federal the 2006, April In UMSINO ATR OAVT FSCRT HOLDERS SECURITY OF VOTE A TO MATTERS OF SUBMISSION 22 Annual Report Air Group Officer Since or Subsidiary 52 1985 46 1994 50 1996 47 1998 50 1990 40 2003 Age oup, irlines, Inc. 59 2000 Position 23 Chairman, President and Chief ExecutiveAir Officer Group, of Inc. Alaska and Alaska Airlines, Inc. Executive Vice President/Finance and ChiefOfficer Financial of Alaska Air Group, Inc. and Alaska Airlines, Inc. Vice President/Legal and Corporate Affairs,Counsel General and Corporate Secretary ofand Alaska Alaska Air Airlines, Group, Inc. Inc. Executive Vice President/Marketing and PlanningAlaska of Airlines, Inc. President and Chief Executive OfficerIndustries, of Inc. Horizon Air Inc. and Alaska Airlines, Inc. (Principal Accounting Officer) ...... VicePresident,FinanceandControllerofAlaskaAirGr ...... joined Alaska Airlines in 2003 as Staff Vice President/Finance and Controller of Alaska Air became Corporate Secretary and Assistant General Counsel of Alaska Air Group and Alaska joined Alaska Airlines in March 1998 as Vice President/Marketing and Planning. In 2000 he ...... became Vice President/Passenger Service of Horizon Air Industries in 1990 following nine years joined Alaska Airlines in 1991, became controller of Alaska Airlines and Alaska Air Group in became Executive Vice President/Operations in January 2006 to fill the position held by George has been our President since February 2003 and became our Chairman and Chief Executive ...... ExecutiveVicePresident/OperationsofAlaskaA Mr. Ayer Mr. Tilden Mr. Finan Mr. Loveless Mr. Saretsky Mr. Pedersen The executive officers of Alaska Air Group, Inc. (including its subsidiaries Alaska and Horizon), their Mr. Pinneo Name William S. Ayer Bradley D. Tilden Kevin Finan Keith Loveless Gregg Saretsky Jeffrey D. Pinneo Brandon S. Pedersen Officer in May 2003. Mr.has Ayer served is as also Alaska Chairman, Airlines’ Presidentas Chairman and President since Chief since February Executive November 2003, Officer 1997. as ofPlanning Prior Chief Alaska of thereto, Executive Airlines. Alaska he Officer He Airlines was since from Sr. JanuaryPrior January Vice 2002 thereto, 1997, President/Customer and he and Service, served Vice Marketing as President/Marketing and the Sr. and boards Vice Planning of President/Operations from Alaska of August Airlines, Horizon 1995. and Puget Air the Sound from Museum Energy, January of the 1995. Flight. Alaska Mr. He Airlines Ayer also Foundation, serves serves Angel on on Flight the America, University Inc., of Washington Business1994, School CFO Advisory in Board. February 2000 and Executive Vice President/Finance in January 2002. Bagley upon his retirement. Priorheld to that his position appointment, since Mr. 2000. Finan was Vice President/Flight Operations and had Airlines in 1996. In 1999,Corporate he Secretary was of named Alaska Vice Air President/Legal Group and and Corporate Alaska Affairs, Airlines. General Counsel and at Alaska Airlines in various marketing roles. In January 2002 he was named President andGroup CEO and of Alaska Horizon Airlines Air. and was elected Vice President/Finance and Controller for both entities in 2006. EXECUTIVE OFFICERS OF THE REGISTRANT positions and their respective ages (as of February 1, 2007) are as follows: became Senior Vice President/Marketing andPresident/Marketing Planning, and and Planning in of January Alaska 2002 Airlines. was elected Executive Vice Annual Report ucae fEut euiisb h suradAflae Purchasers Affiliated and Issuer the by Securities Equity of Purchases Securities Non-Registered of Sales Exchange. New Stock the on listed is stock common $50.4 Our of 1992. cost since a stock ALK). at common (symbol: shares the Exchange treasury on Stock 2,207,474 dividends York held paid also not We have record. We of million. shareholders 3,707 and outstanding and 5. ITEM None None Quarter Fourth Quarter Third Quarter Second Quarter First York New the on stock common Inc. Group, Air Alaska of range trading the shows table following The issued Inc. Group, Air Alaska of stock common of shares 40,293,689 were there 2006, 31, December of As ATR,ADISE UCAE FEUT SECURITIES EQUITY OF PURCHASES STOCKHOLDER ISSUER RELATED AND EQUITY, MATTERS, COMMON REGISTRANT’S THE FOR MARKET ...... ATII PART 24 3.9$29.44 $36.19 58 37.50 33.60 45.85 33.86 41.09 40.54 High 2006 Low 3.0$27.45 $34.00 78 28.22 28.38 37.86 25.55 35.72 31.50 High 2005 Low Annual Report ., 12/06 (excluding Securities Remaining Available Number of Securities Reflected in Column (a)) for Future Issuanceunder Equity Compensation Plans 12/05 Dow Jones U.S. Airlines and Rights Outstanding Exercise Price of Weighted-Average Options, Warrants 12/04 (a) (b) (c) 538,020 33.99 — and Rights 25 2,468,4203,006,440 $25.93 $27.38 875,295 875,295 be Issued Upon S & P 500 Options, Warrants Number of Securities to Exercise of Outstanding 12/03 And The Dow Jones U.S. Airlines Index** And The Dow Jones 12/02 Among Alaska Air Group, Inc., The S & P 500 Index Among Alaska Air ...... COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN* OF 5-YEAR CUMULATIVE TOTAL COMPARISON Alaska Air Group, Inc...... 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 The following graph compares our cumulative total stockholder return since December 31, 2001 with the 12/01 $0 security holders security holders $80 $60 $40 $20 etBlue Airways Corp., Skywest Inc., Southwest Airlines Co., UAL Corp., and US Airways Group Inc. etBlue Airways Corp., Skywest Inc., Southwest $160 $140 $120 $100 J * $100 invested on 12/31/01 in stock or index, including reinvestment of dividends. Fiscal year ending December 31. * $100 invested on 12/31/01 in stock or index, AirTran Holdings Inc., Alaska Air Group Inc., AMR Corp., Continental Airlines Inc ** The Dow Jones U.S. Airlines Index includes Equity compensation plans approved by Equity Compensation Plan Information Board of Directors to makeand awards retain of key equity-based employees. compensation that we believe are important tools to attract securities authorized for issuance under current and former equity compensation plans. Equity compensation plans not approved by Total Plan Category Performance Graph S&P 500 Index and theour Dow common Jones stock U.S. and Airlines each Index. index The (including graph reinvestment assumes of that dividends) the was value $100 of on the December investment 31, in 2001. 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 made. value shares is in The above equal described stock payment common stock of the to shares date elect of same may number the director a on eligible instead reduction each receive the is addition, to of year In and amount coming $15,000. retainer the the of cash to for value annual director total her of a a or meeting as having his annual services stock reduce 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. described Plan terms 2004 the awards. the to stock addition, according or In members SARs Plan. board options, 2004 to stock the shares of administers of executive form Directors granting director, the of the board in Board authorizes 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 terms. their with accordance in outstanding remain date that before Plan”) “1997 (the Plan Equity Incentive stockholder Long-Term require 1997 not plan. did the and under 1997 allowed in were Directors officers of executive Board to the grants by no adopted because was approval plan This Plan. Equity Incentive h hrst eise ne ln o prvdb tchlesrlt oteCmays19 Long-Term 1997 Company’s the to relate stockholders by approved not plans under issued be to shares The ietr aetergtt oeadrciedvdnso hrsta aebe sududrte20 Plan. 2004 the under issued been have that shares on dividends receive and vote to right the have Directors its of any or Company the by employed not is who Company the of Directors of Board the of member Each otherwise unless 2014 18, May on terminate shall and 2004 18, May on effective became Plan 2004 The granted Awards made. be may awards further no and 2002 3, November on terminated Plan 1997 The 26 Annual Report 2002 2003 2004 72.8% 69.3% 63.9% 62.4% 84.5 (15.3) 13.5 (67.2) 2.65 (0.57) 0.51 (2.53) 1.78 0.89 1.2275.9% 72.9% 0.28 70.0% 68.1% (29.3) (26.3) 40.1 (19.3) (0.21) (0.57)(0.01) 0.51 (0.57) (4.47) 0.51 (4.47) 9,065 9,9686,4812,475 10,040 5,9303,400 10,142 2,155 4,934 3,10721.98¢ 1,64016.36¢ 22.61¢ 4,815 2,56915.50¢ 16.20¢ 1,514 26.96¢3,456 15.57¢ 2,428 18.06¢ 26.02¢ 17.75¢ 3,423 17.29¢ 17.78¢ 3,359 3,476 166.5137.2 5.7 (20.6) (11.1) 29.0 (82.5) (101.8) 969.1827.6 989.6 664.8 906.9 674.2 856.7 655.7 12.91¢10.84¢ 12.47¢10.21¢ 10.02¢ 12.65¢ 10.07¢ 12.65¢ 9.74¢ 9.81¢ 9.47¢ 9.82¢ 2005 27.60933.917 26.859 26.859 26.648 26.730 26.546 26.546 16,75916,915 16,29522,292 16,231 15,047 22,276 14,554 14,154 20,804 13,186 19,360 2,808.8 2,718.1 2,455.9 2,306.6 $2,975.3 $2,723.8 $2,444.8 $2,224.1 $ (5.9) $ (15.3) $$ 13.5 3.06 $ $ (118.6) (0.57) $ 0.51 $ (2.53) $3,792.0 $3,335.0 $3,259.2 $2,880.7 (0.5) 74.1% 0.42 76.6% (87.3) (87.8) (52.6) (1.39) (1.39) (1.39) 9,322 6,860 2,691 3,632 23.53¢ 17.73¢ 17.40¢ 3,611 885.5 13.76¢ 11.57¢ 11.98¢ 2006 37.939 37.939 17,165 17,822 23,278 3,421.7 1,031.7 $3,334.4 $ (52.6) $ (1.39) $4,077.1 .... 27 ...... 2006, 2005, 2004, 2003, and 2002, 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 in accountingand policy $99.5 for million, major respectively. airframe See and Exhibit 12.1 to this Form 10-K. amounts): change portion (a) Includes capitalized interest of $24.7 million,(b) $8.9 million, $1.7 For million, 2002, $2.3 basic million, and and diluted $2.7 earnings million(c) per for share include $(1.94) For per 2005, share basic for and the diluted $51.4 earnings million per cumulative share include $(3.27)(d) per share and $(2.66) For per 2006, share, 2004, respectively, and 2002 earnings(e) are inadequate to cover Includes fixed Horizon charges services by operated $107.7 as million, Frontier $17.4 JetExpress million, in 2006, 2005 and 2004. 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 Consolidated Financial Data: Year Ended December 31 (in millions, except per share Operating Revenues Operating Expenses Operating Income (Loss) Nonoperating income (expense), net (a) Income (loss) before income taxIncome and (loss) accounting before change accounting change Net Income (Loss) Average basic shares outstanding Average diluted shares outstanding Basic earnings (loss) per shareBasic before earnings accounting (loss) change per share .Diluted (b) . earnings (c . (loss) ) per share before accounting Diluted earnings (loss) per shareAt (b) End (c of ) Period (inTotal millions, assets except ratio): Long-term debt and capital lease obligations, net of current Shareholders’ equity Ratio of earnings to fixedAlaska charges Airlines (d) Operating Data: 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 ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA Annual Report a e oeAo ae30. page on A Note See (a) Meaningful Not = NM (000) passengers Revenue Statistics: Operating and Tax Income Before (Loss) Income income Interest (Loss) Income Operating Expenses Operating Total benefits and Wages Expenses: Operating Revenues Operating Total Passenger Revenues: Operating millions): (in Data Financial Ps(0,0)“traffic” (000,000) RPMs capitalized Interest expense Interest pay incentive Variable mail and Freight Ss(0,0)“capacity” (000,000) ASMs Other—net gains hedging including fuel, Aircraft Other—net asne odfactor load Passenger maintenance Aircraft il e asne mile passenger per Yield rent Aircraft prtn eeusprASM per revenues Operating rentals other and fees Landing prtn xessprAM(a) ASM per expenses Operating services Contracted prtn xes e S excluding ASM per expense Operating expenses Selling APfe otprglo (a) gallon per cost fuel GAAP amortization and Depreciation cnmcfe otprglo (a) gallon per cost fuel Economic service beverage and Food ulglos(000,000) gallons Fuel Other vrg ubro ultm equivalent full-time of number Average costs transition Fleet icatuiiain(l hrs/day) (blk utilization Aircraft spare related and aircraft of Impairment and charges Restructuring vrg icatsaelnt mls . period-end . at . fleet Operating (miles) length stage aircraft Average conigChange Accounting n losses and eud n maret(a) impairment and refund, fee navigation 2005 the adjustments, and charges restructuring costs, transition fleet fuel, employees parts adjustments ...... lsaArie iaca n ttsia Data Statistical and Financial Airlines Alaska ure ne eebr31 December Ended Quarter (12.1) $ $570.6 2.18 $ 1.98 $ 2006 4,107 645.8 190.4 632.2 4,243 5,755 189.8 13.45¢ 10.99¢ 11.22¢ 9,485 (13.6) (19.8) 15.1 10.4 21.6 40.0 73.7% 38.2 26.3 40.3 33.4 8.06¢ 31.5 38.2 12.2 87.1 42.7 10.6 (7.6) — — 914 114 6.0 0.2 1.5 4.)NM (46.3) $ 8.4 $526.4 .4(2.7) 2.24 $ .917.2 1.69 $ 2005 ,4 1.6 4,043 2.4 630.9 9.8 173.4 7.7 587.2 ,0 3.4 4,104 ,5 3.6 5,556 (1.4) 192.4 28¢4.8 12.83¢ 05¢4.0 10.57¢ 13¢(1.2) 11.36¢ ,3 6.1 8,937 4.)NM (43.7) (14.3) 19(1.4) 21.9 892.8 38.9 39 (0.2)pts 73.9% (8.4) 41.7 96(11.1) 29.6 903.3 39.0 291.5 32.9 .0 2.0 7.90¢ 3.6 30.4 2517.5 32.5 28(4.7) 12.8 571.6 85.7 10.3 38.7 08(1.9) 10.8 (1.3) 03 NM (0.3) (2.6) —NM 0 1.0 905 —NM 1 3.6 110 9.4 3.6 33.3 7.8 28 Change % (92.2) $ $2,453.1 2.14 $ 1.92 $ 2,788.7 2,692.5 17,165 17,822 23,278 2006 743.3 757.0 146.0 156.8 13.76¢ 110.9 11.57¢ 158.2 11.98¢ 131.8 141.5 137.8 354.3 161.1 9,322 189.5 (96.2) (73.3) 56.3 21.5 27.7 93.4 76.6% 7.81¢ 48.3 24.8 11.0 (0.5) 919 — 114 4.0 2. M$(70 NM (27.0) $ NM 124.2 $ 7.9 $2,023.6 12.4 $2,183.0 .75. .222.5 1.12 $ 56.2 1.37 $ .32. .621.4 1.26 $ 25.5 1.53 $ ,7. 2522311.5 2,243.1 22.5 2,276.3 8.2 2,233.0 11.4 2,416.1 679241,9 2.8 16,295 2.4 16,759 695541,3 4.2 16,231 5.4 16,915 222442,7 0.1 22,276 4.4 22,292 2005 erEddDcme 31 December Ended Year 3. M(01 NM (10.1) NM 139.8 2. . 9. (9.2) 795.3 2.9 722.1 7. 9036720.0 396.7 59.0 16.1 476.0 123.0 2.2 142.8 8. 1.)15827.0 145.8 (15.3) 185.2 29¢671.7 3.5 12.47¢ 6.7 12.91¢ 2.9 113.5 (5.1) 116.8 08¢671.2 8.2 10.02¢ 6.7 10.84¢ 14.6 136.3 1.3 156.2 02¢1. 00¢1.4 10.07¢ 17.3 10.21¢ 24.2 96.5 9.9 119.9 3. . 3. (3.8) 137.9 6.7 132.6 2. . 2. (2.1) 128.1 9.9 125.4 4. . 5. (2.3) 354.7 2.3 346.4 6.1 148.6 2.2 157.6 ,6 . ,6 (9.1) 9,968 2.8 9,065 5.)(44.1) (51.2) 1.)(16.9) (15.6) 2526.2 32.5 538. . 247.7 4.4 4.5 81.0 15.3 86.4 3.4 90.3 59 .ps7.%3.0pts 72.9% 0.7pts 75.9% .1 25 .2 1.1 7.92¢ (2.5) 8.01¢ 88(.)4. (2.0) 49.8 (1.0) 48.8 04N 34NM 53.4 NM 20.4 08191. (1.8) 11.0 1.9 10.8 50 (0.1) (5.0) —NM —NM 9 . 9 0.9 890 2.3 898 NM 36.8 NM — 1 . 0 1.9 108 3.6 110 . 1.1 8.1 Change % 2004 Change % Annual Report % Change 2004 % Change 65 6.2 65 — 1.6 1.1 8.7 1.1 8.3 4.8 3.88.6 2.6 (18.6) 12.0 3.94.7 (28.3) (2.6) 93.6 0.9 422.2 2.5 16.0 2.1 19.0 0.8 0.6 — 3.4— NM (0.2) (5.5)(3.1) (3.9) (2.4) 29.5 NM 19.5 NM 72.8% 1.3pts 69.3% 3.5pts 51.3 5.8 49.7 3.2 72.943.3 59.870.2 70.747.7 (1.3)23.8 58.5 (1.7)29.1 38.3 13.4 24.6 16.8 73.9 13.1 8.2 41.4 10.1 (5.0) 42.2 20.7 15.2 11.1 26.5 15.0 13.4 9.8 25.4 42.0 0.5 Year Ended December 31 2005 526.9 19.9 483.7 8.9 6,4812,4753,400 5.8 8.721.98¢ 6.8 5,93016.36¢ 2,155 7.015.50¢ 3,107 9.3 8.4 14.8 12.2 22.61¢ 9.4 16.20¢13.35¢ (2.8) 15.57¢ 1.0 6.3 (0.5) 13.58¢3,456 (1.7) 4.5 3,423 1.0 556.4 15.7173.7 503.2 9.0 10.6 162.6 6.8 $ 26.4 NM $ 17.1 NM $ 1.41$ 1.58 51.8 22.2 $ 1.18 $ 1.31 19.5 20.6 $544.0 16.4 $487.3 11.6 69 3.7 8.8 3.9 7.0 9.1 2.9 3.2 — — (7.4) (0.5) 12.2 74.1% 54.3 73.9 69.3 46.9 27.0 31.5 18.5 46.9 2006 631.8 6,860 2,691 3,632 23.53¢ 17.73¢ 17.40¢ 14.19¢ 3,611 644.0 189.3 116.5 $ 11.7 $ 2.14 $ 1.93 $633.1 % Change 29 65 6.2 0.6 8.7 (1.1) 0.91.8 0.0 61.1 1.7 35.3 6.17.0 13.1 4.8 (10.0) 0.6 2.1 16.7 0.4 632858 4.3 5.2 — (6.3) NM (1.2) (0.3) (0.1) 73.7% (0.7)pts 12.7 7.9 45.1 8.6 29.112.217.4 3.1 95.9 12.0 (0.6) (3.3) 11.2 (11.6) 2005 147.2 10.6 1,613 4.7 21.87¢16.42¢ 7.6 17.16¢ 7.1 5.1 13.76¢ 6.8 3,537 3.8 140.9 12.7 $ (6.6) NM $ 2.29$ 1.74 (4.4) 13.8 $138.2 12.2 69 1.0 0.5 8.6 0.9 2.9 2.3 6.9 6.3 4.9 0.7 9.9 1.1 659 903 — — (4.0) (1.6) 73.0% 13.7 49.0 30.0 23.9 17.3 11.6 2006 162.8 1,689 23.52¢ 17.59¢ 18.03¢ 14.71¢ 3,670 158.8 Quarter Ended December 31 $ (3.5) $ 2.19 $ 1.98 $155.0 Horizon Air Financial and Statistical Data ...... and Accounting Change excluding fuel and impairment (a)...... equivalent employees gains and losses spare parts NM = Not Meaningful (a) See Note A on page 30. Interest expense Income (Loss) Before Income Tax Operating Statistics: Revenue passengers (000) RPMs (000,000) “traffic” ASMs (000,000) “capacity” Passenger load factor Yield per passenger mile Operating revenues per ASM Operating expenses per ASM (a)Operating expenses . per . ASM . GAAP fuel cost per gallonEconomic (a) fuel cost per gallonFuel (a) gallons (000,000) .Average . number of full-time Aircraft utilization (blk hrs/day)Operating fleet . at . period-end . Total Operating Expenses Operating Income (Loss) Interest income Operating Expenses: Wages and benefits Financial Data (in millions): Operating Revenues: Passenger Freight and mail Other—net Total Operating Revenues Variable incentive pay Aircraft fuel, including hedging Aircraft maintenance Aircraft rent Landing fees and other rentals Contracted services Selling expenses Depreciation and amortization Food and beverage service Other Impairment of aircraft and related Interest capitalized Other—net Annual Report APicm ls)bfr ae n conigcag as change accounting and taxes before (loss) income received GAAP interest related and refund fee navigation Add: adjustments and charges restructuring Less: costs fuel transition aircraft fleet in Less: included (losses) gains hedging Mark-to-market excluding change, accounting and taxes before (loss) Income accounting and taxes before (loss) income GAAP to Reconciliation costs, transition fleet fuel, excluding ASM per expenses Operating (000,000) ASMs restructuring costs, transition fleet fuel, excluding expenses Operating refund fee navigation Add: adjustments and charges restructuring Less: costs transition fleet Less: fuel aircraft Less: expenses Operating ASM per expenses Operating (000,000) ASMs expenses Operating reconciliations: cost Unit millions) in ($ Inc.: Inc.: Industries, Airlines, Air Alaska Horizon and Inc. Airlines, Alaska both for measures financial airlines. network to major comparable other more by also Transportation are of measures Department financial the navigation non-GAAP to the these reported believe and Finally, is measures we charges, investors. it financial addition, restructuring to statement, In costs, useful income important. transition is our is fleet refund in fuel without fee portfolio without performance hedge performance financial factors our of of political of monitoring disclosure and value and the economic fair measurement many the the to in that subject changes view are record our fuel we navigation aircraft and hedging 2005 of control fuel a availability our our and and beyond with adjustments, cost associated and the losses charges Because and restructuring refund. gains costs, fee the transition both (including fleet 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 fee navigation 2005 the refund and adjustments, and costs, charges transition restructuring fleet (losses), gains hedging mark-to-market change: fee navigation 2005 the refund and adjustments, and charges restructuring refund fee navigation 2005 the and adjustments, and charges 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 ...... 30 ...... (12.1) $ (1.9) $ 463.6 $ 645.8 $ 645.8 $ ne eebr31 December Ended (189.8) 2006 5,755 11.22¢ 5,755 (17.8) he Months Three 8.06¢ — — — — 7.6 7.6 (46.3) $ 0.5 $ 438.8 $ 630.9 $ 630.9 $ (192.4) 2005 5,556 11.36¢ 5,556 (47.1) 7.90¢ — — — — 0.3 0.3 (92.2) $ 200.5 $ $1,817.4 $2,788.7 $2,788.7 wleMnh Ended Months Twelve 23,278 23,278 (757.0) (189.5) (189.5) 2006 11.98¢ (78.4) (24.8) (24.8) 7.81¢ eebr31 December — — 124.2 $ 85.8 $ $1,784.6 $2,276.3 $2,276.3 22,292 22,292 (476.0) 2005 10.21¢ (20.4) (20.4) 53.1 8.01¢ — — 5.7 4.7 Annual Report Cost/Gal Cost/Gal 2005 2005 47.1 0.55 85.7 (53.1) (0.16) (27.4) (0.33) 346.4 (108.8) (0.31) $ 145.3 $ 1.69 $ 192.4 $ 2.24 $ 637.9 $ 1.84 $ 529.1 $ 1.53 $ 476.0 $ 1.37 $ 172.7 $ 2.02 Cost/Gal 2006 2006 Three Months Ended December 31 Twelve Months Ended December 31 (8.0) (0.09) 17.8 0.20 87.1 78.4 0.22 (87.0) (0.24) 354.3 $172.0 $ 1.98 $189.8 $ 2.18 $765.6 $ 2.16 $678.6 $ 1.92 $757.0 $ 2.14 $180.0 $ 2.07 31 ...... gains and losses, in aircraft fuel expense. Prior year amounts have been reclassified for consistency. periods, including the reclassification ofmark-to-market previously gains recorded on settled hedges periods, including the reclassification ofmark-to-market previously gains recorded on settled hedges GAAP fuel expense* Fuel gallons (000,000) * Beginning in the first quarter of 2006, the Company records all fuel hedging activity, including mark-to-market Raw or “into-plane” fuel cost Economic fuel expense* Mark-to-market net (gains) losses related to hedges that settle in future GAAP fuel expense* Fuel gallons (000,000) Economic fuel expense* Add: mark-to-market net losses related to hedges that settle in future Less: gains on settled hedges ($ in millions except per gallon amounts)Aircraft fuel reconciliations:* Raw or “into-plane” fuel cost Cost/Gal Less: gains on settled hedges Annual Report einn ntefrtqatro 06 h opn eod l ulhdigatvt,icuigmark-to-market including activity, hedging fuel all records Company the 2006, of quarter first the in Beginning * (000,000) gallons Fuel expense* fuel GAAP future in settle that hedges Cost/Gal to related losses (gains) net Mark-to-market expense* fuel Economic hedges settled on gains Less: cost fuel “into-plane” or Raw (000,000) gallons Fuel expense* fuel GAAP future in settle that hedges to related losses net mark-to-market Add: expense* fuel Economic hedges settled on gains Less: cost fuel “into-plane” or Raw amounts) gallon per except millions in ($ reconciliations:* fuel Aircraft reported as change accounting and taxes before (loss) fuel income aircraft GAAP in included (losses) gains hedging Mark-to-market excluding change, accounting and taxes before (loss) Income accounting and taxes before (loss) income GAAP to Reconciliation fuel excluding ASM per expenses Operating (000,000) ASMs fuel excluding expenses Operating fuel aircraft Less: expenses Operating ASM per expenses Operating (000,000) ASMs expenses Operating reconciliations: cost Unit millions) in ($ Inc. Industries, Air Horizon akt-aktgiso ete hedges settled on recorded gains previously mark-to-market of reclassification the including periods, hedges settled on recorded gains previously mark-to-market of reclassification the including periods, (losses) gains hedging mark-to-market change: an n oss narrf ulepne ro eraonshv enrcasfe o consistency. for reclassified been have amounts year Prior expense. fuel aircraft in losses, and gains ...... $ ...... $ ...... $ ...... 3.0 ...... 32 ...... he otsEnded Months Three Ended Months Three 165$21 29$1.41 $ 72.9 $ 2.14 1.58 $ $ $116.5 81.5 1.90 $ $ 1.93 97.7 $ $ $105.0 2.19 $ $119.1 (3.5) $ (0.5) $ $132.8 $162.8 $162.8 14.71¢ 18.03¢ 2006 2006 1.)(.6 1.)(0.32) (16.2) (0.26) (14.1) (30.0) 4351.3 (0.17) (8.6) 54.3 0.21 11.5 12.7 2.29 $ 29.1 $ 2.19 1.74 $ 13.7 $ 30.0 22.1 2.06 $ $ 1.98 26.1 $ $ 27.0 2.07 $ 28.3 13 00)(.)(0.32) (4.0) (0.09) (1.3) (3.0) eebr31 December 31 December 903 903 wleMnh ne eebr31 December Ended Months Twelve he otsEddDcme 31 December Ended Months Three 2006 2006 Cost/Gal 66 17$26.4 $ 17.8 11.7 $ $ 23.2 (6.6) $ $ 0.4 $ $118.1 $147.2 $147.2 13.76¢ 17.16¢ 2005 2005 (29.1) .1700.55 7.0 0.21 70 1.)8.6 (11.5) (7.0) 858 858 wleMnh Ended Months Twelve Ended Months Twelve 515.3 $ 631.8 $ 631.8 $ (116.5) 2006 2006 14.19¢ 17.40¢ 3,632 3,632 eebr31 December 31 December 2005 2005 Cost/Gal Cost/Gal $454.0 $526.9 $526.9 13.35¢ 15.50¢ 3,400 3,400 2005 2005 (72.9) Annual Report 33 —an analysis of cash flows, sources and uses of cash, contractual —a discussion of our accounting estimates that involve significant —an in-depth analysis of the results of operations of Alaska and Horizon for the —highlights from 2006 outlining some of the major events that happened during the year —a brief general description of our airlines and the airline industry. MANAGEMENT’S DISCUSSION AND ANALYSIS OFRESULTS FINANCIAL OF CONDITION OPERATIONS AND Our Business Year in Review and how they affected our financial performance. Results of Operations three years presented in ourreader consolidated better financial understand statements. our We consolidated believelooking statements this statements of analysis regarding operations. will our This help view section the of also 2007. includesCritical forward- Accounting Estimates judgment and uncertainties. Liquidity and Capital Resources obligations, commitments and off-balance sheetimpact arrangements, of an inflation overview and of changing financial prices. position and the million in the prior year. The following Management’s Discussion and Analysis of Financial Condition and Results of Operations • • • • • Alaska and Horizon operate as airlines in a highly competitive and rapidly changing industry. However, Our goal is to use our people, our award-winning customer service, and our strong financial position to Although we reported a net loss in 2006, this year was a very successful year for the CompanyOperating in expenses many were up significantly from 2005,• primarily due to the following: another year• of record high fuel prices; $189.5 million• of fleet transition costs related a to $50.2 our• million MD-80 increase fleet; in wages and restructuring-related benefits, severance including charges incentive of pay; $24.8 and million in 2006, compared to similar charges of $20.4 ITEM 7. Overview (MD&A) is intended to helpenvironment. the MD&A reader is understand provided the as Company,financial a our statements supplement operations and to and the – our accompanying and presentfollowing notes. should business sections: This be overview read summarizes in the conjunction MD&A, with which – includes our the consolidated OUR BUSINESS their business plans, competition, andprincipally economic serves risks destinations differ in substantially. the Alaskawestern state is U.S., of a Canada Alaska major and and airline Mexico. provides and It Alaska north/south operates also service an provides between all-jet east/west cities fleet, service inserving and to the primarily its eight the average cities, Pacific passenger primarily Northwest, trip fromturboprop northern in Seattle. aircraft, California, 2006 and and was its western 1,038 average Canada. miles.and passenger It Horizon excellent trip operates is service in both a are 2006 jet regional regularly was and airline recognized 392 by miles. independent Both studies, airlines’ awards, outstanding and employees surveys of airbecome travelers. more competitive and gainNorthwest. market In share doing in so, our we primarystakeholders strive markets, – to specifically employees, grow in customers in and and such from shareholders. a the way Pacific that creates value forYEAR our IN REVIEW three most important respects. We saw strong 12%passenger revenue traffic growth and in record 2006, load benefiting factors from for industry-wide the fare full increases, year. growth in Annual Report es prto ftermiigfu esdarrf ro oterlaeeprto ae,wihwl ieyresult likely will to which expect dates, We expiration 2007. lease January their in to lessor prior the aircraft to leased returned four were remaining both the and of 2007, sale. operation January future cease in any one of and timing 2006 or December price sales the to as uncertain are we although MD-80s, owned 20 our of portion the aircraft. by acquired offset the was with the charge associated and The rent impairment aircraft. deferred the those of including to million quarter, related $7.5 third improvements of we the leasehold reduction Therefore, in of recoverable. tax) million we not after $1.8 aircraft, was million of the value ($36.5 lessors write-off of carrying charge the purchase the million from upon that $58.4 MD-80s Immediately concluded a leased million. and recorded the $11.6 impairment of of for five debt aircraft third purchased assumed the the we and have evaluated During as million would aircraft. charge $69.3 we MD-80 expected of that leased that cash estimated 11 of for also our portion tax) we on a after time, taken realized million that actions we ($82.0 At any quarter, million aircraft. from $131.1 MD-80 resulting of owned charges training charge 15 additional and impairment to significant maintenance, an related fuel, recognized quarter will lower we first completed, of decision, the when way this during transition, by of this savings result believe operating a We annual As fleet. in costs. 737 million all-Boeing $130 an than to more move provide Alaska’s of part as 2008 Transition Fleet Accomplishments by used commonly useful measure is a watchers. items, is industry noted and by warranty other competitiveness and the and our airlines off fuel and other come excluding costs at to mile, structural management began seat assess aircraft available us primarily Q400 per helps 6.3% the costs it by of unit because increased many at however, as looking fuel, costs believe per excluding maintenance We cents costs in period. 8.01 unit increase fuel, from Horizon’s 70.7% excluding declined 2006. a Alaska 2005 in to at in cents due mile refund 7.81 seat fee to well available navigation 2005 was per the in increase cost and ASM This Unit charges 2005. year. restructuring over the costs, million for transition $89.7 revenue fleet of in increase improvement an the 2006, by in outpaced million $2,333.9 were costs operating xldn ul h le rniincss h etutrn hre,ada20 aiainferefund, fee navigation 2005 a and charges, restructuring the costs, transition fleet the fuel, Excluding so eebr3,20,w a i esdM-0.Oeo hs icatwsdcmisoe in decommissioned was aircraft those of One MD-80s. leased six had we a 2006, or 31, all December for of buyers As potential with negotiating and from bids reviewing and receiving of process the in are We of end the by fleet MD-80 entire our retire to plan our announced we year, this of quarter first the During 737-400 four have to expect We 2006. in delivered aircraft full-freighter 737-400 its pension had defined-benefit Alaska our into million $121.9 contributed • we position, cash strong our of Because • stating and refund, fee navigation 2005 a and charges, restructuring payout costs, largest transition the fleet is the which Excluding 2006, in pay incentive variable • in million $36.8 earned employees Group Air horizonair.com— and websites—alaskaair.com our through • sales history. annual our ever, in time time first first the the For for mark billion $3 the • exceeded revenues Total • include: 2006 from Accomplishments obnto asne n ag icatdlvrdi 07 w fwihwr eiee nJanuary. in delivered were which of two 2007, in delivered aircraft cargo basis. and obligation passenger benefit combination projected a on 80% nearly to up status funded the bringing plans, pages on presented are amounts these and results 32. equivalent GAAP through taxes over our 30 before improvements between income significant Reconciliations 2006 both 2005. reported respectively, in Horizon million, measures and $23.2 Alaska and below, million described $200.5 as of basis economic an on fuel websites. our history. through our sales in total our of 40% almost processed we 2006, In billion. $1 exceeded 34 Annual Report 35 new four-year contract for theincluded airline’s an approximately immediate 2,500 3% flight pay attendants.Alaska increase The offered and new a an agreement voluntary aggregate severance signingother package bonus things, to of a a $2.7 lump-sum number million. payment of Additionally, continuing of flight travel $2,000 attendants benefits. per that The year includes, total of among ($2.4 charge service million in up after 2006 to tax) related a and to maximumstatements is the of of included severance 25 operations. in package years restructuring was and charges $3.8 and million adjustments in the consolidated office and passenger service employeesrepresented and by ramp the service International agents Association andin of stock aggregate, Machinists. clerks of These at $1.9 agreements Alaska, million included all agreements in a included July signing a 2006 bonus, severance and package anincludes offered immediate cash to 2% payments employees wage based in increase. on the Additionally,date, years top the and of four continued service, wage-scale travel one steps privileges year that severance for of package a medical was period coverage $21.0 of after million time. theand ($13.1 The severance adjustments million total in after charge the tax) in consolidated and 2006 statements is related of included to operations. in the restructuring charges We reached new four-year agreements with Alaska’s flight attendants, clerical, office and passenger service • During the second quarter, Alaska reached an agreement with the Association of Flight Attendants on a • During the third quarter, we reached new four-year agreements with the approximately 3,700 clerical, We are pleased with the long-term contracts that have been reached with the majority of our labor groups. In 2006, we entered into a purchase-and-sale agreement to sell six B737-200 aircraft to a third party. Our During the third quarter, Horizon signed a letter of intent with another carrier to sublease up to 16 of its Labor Costs and Negotiations personnel, and ramp service agents and store clerks in 2006, as further described below: We are now in theAlaska’s process pilots of becomes negotiating amendable new May contractsSeptember 1, with 12, 2007 pilots 2006. and at We the both do contract Alaskapresent not with and time, know Horizon’s Horizon. none what pilots The of the became contract the final amendable required with contract outcome under negotiations of the is these Railway at negotiations Labor an willwork Act impasse be. stoppage that or However, is would has at low. trigger reached the self-help. the Therefore, 30-day we cooling currently off believe period the risk of a in a charge in ourfrom consolidated operation, statements we of will operations. dispose Weof of anticipate the the that aircraft, aircraft once or through the storing lease aircraft the buy-outs, have aircraft lease been at agreement removed a restructuring, long-term subleasing storage facility. seventh (and remaining) B737-200 aircraftbe will sold be and donated delivered to at anbuyer various aviation during intervals museum the through in year April Alaska. and 2007. The there Two six were of aircraft nominal the will gains six on aircraft the were sales. transferred to the Bombardier Q200 aircraft. Each aircraftHorizon’s will operating be fleet subject beginning to in ain January separate a 2007 sublease loss through agreement for mid-2008. and Horizon It willon approximating is leave each the expected aircraft difference that will between the be the subleasebegins. recorded lease will The when payments result first the and of specific the the aircraft subleaseother Q200s leave receipts. related were Horizon’s The exit transferred fleet loss costs to and of the the$2 approximately sublessee sublease million $2 in arrangement on million. January each We 2007, of expect resulting the the in 16 charge a aircraft. to sublease be loss approximately and $1.5 million to Annual Report u ulcnupin hl hylmtorepsr hnolpie nrae hs ye fcnrcsas allow also contracts of of types prices. component these oil price increase, in oil prices reduction crude oil a the when from cap exposure benefit effectively our to which limit us vast options, they The call While of 2005. are consumption. value 31, portfolio fuel the December our our including at in 2006, million contracts 31, $153.3 the period. December to of the at compared majority during million counterparties, settled $68.6 to hedges worth paid aggregate in-the-money was premiums the our contracts capitalized However, of hedge portfolio. many fuel our as of of significantly portfolio value declined Our most the portfolio for to hedge in high changes our reported remained market-based of as prices nominal value expense fuel in fuel 2006, resulting our In year, in (GAAP). the reduction Principles of resulting Accounting a Accepted and Generally gain with mark-to-market accordance large a in resulting significantly, current-year the statements. accompanying to financial the conform consolidated in to our expense reclassified to fuel been 4 aircraft have Note in amounts See losses period format. and Prior gains operations. these of report statements we consolidated however, 2006, of quarter first the period. though future even a earnings, in through place period take each will value settlement market cash to related portfolio and hedge consumption entire actual our mark we as volatile Losses and Gains Hedging Fuel Mark-to-Market ended year the for and of as accruals cost millions): related in and ($ severance 2006 the 31, of December balance and activity the displays • table following the efforts, restructuring prior and above noted packages severance two the to relation In • below: described fully more as • expense fuel of measures three uses Management increased contracts hedge fuel our of value the 2005, in prices fuel jet in rise sharp the of Because the in Beginning expense. and income nonoperating other in losses and gains these reported we Historically, more are earnings our result, a As portfolio. fuel-hedging our for accounting hedge use not do currently We nld noricm ttmn stevleo u ulhdigprfloicessaddcess By decreases. and increases portfolio fuel-hedging our of value the as statement income our in include our will compare and us expense been, helps fuel have measure GAAP we this that and competitors. believe industry, our We the of years. in those significantly two airlines to be last best-hedged costs will the the hedges for among settled been be from have to gains they continue strike that than higher expect future have we the $125.0 positions 2006, in and hedge in lower million our existed $101.1 because that totaling and those hedges prices than fuel oil prices settled current from on gains Based recorded respectively. Group million, Air 2005, the plans. and is pay 2006 it incentive In and and measure, reporting our this management business for using internal our fuel results most on purchasing our for having with evaluate basis currently associated analysts are outflow industry prices cash many fuel net Accordingly, recognize. that the operation. we effect approximates that the closely expense of most premium measure it the best because by the offset is period, this the believe during We settle that hedges for counterparties a ulpie r matdb ol i rcsadrfnn ot,wihcnvr yrgo nthe in region by vary expense can fuel which Economic costs, refining and prices oil world by U.S. impacted are prices fuel Raw expense fuel Raw aac tDcme 1 2006 31, December at Balance ahpayments Cash adjustments and charges Restructuring 2005 31, December at Costs Balance Related and Severance for Accrual a ulexpense fuel Raw ...... dfnda h rc htw eeal a ttearot rte“nopae price. “into-plane” the or airport, the at pay generally we that price the as —defined dfndas —defined prxmtscs adt suppliers. to paid cash approximates dfndas —defined ...... a ulexpense fuel raw a ulexpense fuel raw ...... 36 lsteefc fmr-omre dutet htwe that adjustments mark-to-market of effect the plus iu h ahw eev rmhedge from receive we cash the minus $19.9 3.1 $ 24.8 (8.0) Annual Report is GAAP fuel economic fuel expense , we only include gains and and per-gallon costs on pages 31 and 32. economic fuel expense GAAP fuel expense 37 economic fuel expense is very volatile, even between quarters, because it includes these GAAP fuel expense , those gains are recognized when the underlying instrument increases in value, which in the past the timing of gain or loss recognition. When we refer to definition, our mark-to-market adjustments. A key difference between when they are realized throughexpense a cash receipt from our hedge contract counterparties. Under has occurred in an earlier reporting period. We continue to believe that our fuel hedge program is an important part of our strategy to reduce our In the third quarter of 2006, we announced that Horizon would discontinue its contract flying with Frontier Subsequent to year-end, Horizon was named “2007 Regional Airline of the Year” by Air Transport World. For 2007, Alaska and Horizon expect capacity increases of between 4.0% and 4.5% and approximately For much of 2005 and 2006, our operational performance (particularly at Alaska) has fallen short of our Our consolidated net loss for 2006 was $52.6 million, or $1.39 per share, compared to a net loss of $5.9 We have provided information about our For more discussion, see Note 4 to our consolidated financial statements. exposure to volatile fuel prices.several We quarters began of entering no into activity. hedgealthough We contracts significant expect again changes to in in continue the market to third conditions enter quarter could into of affect these 2006 our types after decisions. of contractsFrontier prospectively, JetExpress Airlines as Frontier JetExpress. Weto have Horizon’s nine operating CRJ-700 fleet aircraft in dedicatedscheduled 2007. to to Two this come of program, back these all in were ofand the returned which strategic third in will redeployments and January return throughout fourth and Horizon’s quarters the network of remaining and 2007. seven for We are harmonization expect flying to with useOther Alaska. these Events aircraft for productive The publication cited, among otherservice, positive and items, positive an financial exemplary results safety during record, challenging superior industry commitment times. to customer Outlook 10.5%, respectively, as measured byincrease available of seat 2%—3% miles. industry-wide. This The isof expected compared 14 capacity to new increase an B737-800 at expected aircraft Alaska domesticaircraft in is capacity delivered 2007 due in and primarily 2006, the to offset annualization theother by of introduction aircraft. the capacity On early additions a retirement that net of resulted737-800 basis, several from aircraft we MD-80 12 are expect aircraft B737-800 larger that and than Alaska’s scheduledexpected the fleet retirement capacity MD-80s, size of increase allowing will is for increase due the byincrease largely capacity only in to growth two the the mentioned aircraft, number 13 above. although of new Horizon’s 11 the seats Q400 Q200 in aircraft aircraft the that to existing will another fleet bereplace carrier. of delivered outgoing The Q400s in aircraft, aircraft from 2007 increase deliveries 74 and frequency in seats an in 2007 to our at 76 existing both seats, markets Alaska offset and, and by to Horizon the a will subleasing lesser be of degree, usedgoals serve to and new our markets. customers’ expectations.on-time We performance, currently completion have rates, several baggage initiativesmeasures. handling, underway Delivering and to on other help these important improve core customer-driven our operational operational promises is one of ourRESULTS highest-priority OF internal OPERATIONS goals for 2007. 2006 Compared With 2005 million, or $0.01 per diluted share, in 2005. Annual Report 65.W urnl xetfrtqatr20 odfco ilb oncmae otefrtqatro 2006. of quarter first the to to 2006 compared January down from be points will 2.5 factor those down load of was 2007 effect 2007 quarter weather financial January first severe full in expect the the factor currently to but load We due December, The 66.5%. primarily and determine. is November to decline of difficult year- the months is in believe the storms decline We during slight 2006. Northwest a of Pacific experienced quarter the We fourth in capacity. the in in increase factor 4.4% load the over-year outpacing traffic passenger in what increase to known adds not industry is the it As but yields. yields, ticket on in pressure increase downward 2.8% some primarily a experience 2006 by may extent. in offset we time factor, 2007, same load in the in not capacity from decline do domestic January 0.8% point we to down 2.5 Although compared was a year. 2007 RASM of last January passenger to because to in 2007 compared compared 1.3% January 2006 year up our 31, this was However, December length RASM 2006. at stage year-over-year aircraft average forecasts, increase operating longer revenue The 114 a specific prices. of and provide ticket fleet 2005 higher a 31, was from having December RASM largely of at in resulting result 110 increase yields the The ticket primarily capacity. in is in increase capacity increase 6.7% in 4.4% a a by and entirely (RASM) almost mile driven seat available per revenue operating Revenues Airlines Alaska financial non-GAAP measures. reported financial of GAAP reconciliation comparable a directly included most have the we to 32, measures through 30 pages On respectively. of because: presentation readers believe other We and 2005. investors in to million information $55.0 useful to provides compared measure 2006 financial for non-GAAP million this $137.7 been have would income xldn hs tm,adwt ulsae na cnmcbssa xlie bv,orcnoiae net consolidated our above, explained as basis economic of an million on $1.0 stated including fuel refund, with tax) and after items, these million ($3.6 Excluding million $5.7 a include also results 2005 Our charge tax) after million • ($90.4 pre-tax million $144.7 a includes of loss tax) net after consolidated million 2005 ($56.3 Our million $89.9 totaling basis economic • an on fuel our state to Adjustments • the with associated 2006 in tax) after million ($15.5 million $24.8 of charges associated restructuring tax) recorded after We million ($118.5 million $189.5 of • charges includes years: loss the net of consolidated comparability 2006 the Our affect that items significant certain • include results 2005 and 2006 the Both odfco nrae lgtyb . ecnaepit o7.%drn 06depiaiyt 5.4% a to primarily due 2006 during 76.6% to points percentage 0.7 by slightly increased factor Load in increase 6.7% a to primarily due 2006 during 11.4%, or million, $276.4 increased revenues Operating 29, and 28 pages on shown analysts. are industry Horizon by and evaluated Alaska are for we comparisons which data by statistical basis and the Financial is it decision believe and we reporting Board and management internal • in used frequently better is to measure investors financial allowing this thus plans, incentive various our • for compare basis to the ability is our measure improves financial it this as items these without performance • monitor to useful is it believe we • eae neeticm,frnvgto espi nMexico. in paid fees navigation for income, interest related as overhauls and engine statements; and financial airframe consolidated major the for to accounting 17 of Note method in the discussed in change respectively; the 2005, from and resulting 2006 in gains of tax) after million ($38.6 million $61.7 and our losses at lease the of of termination subcontracting the the with from associated base; resulting costs maintenance costs and heavy severance Seattle Oakland $20.4 to in to related operation compared 2005 services year in ramp this tax) the contracts of new net by million, affected ($12.7 employees million eligible to offered packages statements); severance financial consolidated the to 2 Note (See plan transition fleet our with nesadtecagsi aibeicniepyepnei u osldtdsaeet foperations; and of making; statements consolidated our in expense pay incentive variable in changes the understand carriers; other to results our 38 Annual Report 2004 2005 vs. CASM Change 2005 2006 vs. 2004 2005 0.70 0.61 (0.02) 0.09 0.52 0.51 (0.04) 0.01 0.83 0.65 (0.16) 0.18 2.14 1.78 1.11 0.36 0.07 0.02 0.05 0.05 3.24 3.57 (0.05) (0.33) 2006 0.68 0.48 0.67 3.25 0.12 3.19 Years Ended December 31, 39 ...... Freight and mail revenues increased $3.1 million, or 3.4%, compared to 2005 primarily resulting from Other-net revenues increased only slightly by $3.2 million, or 2.2%. Mileage Plan revenues were slightly Total operating expenses increased $512.4 million, or 22.5%, as compared to 2005. This increase is largely Operating costs per ASM (“CASM”) is an important metric in the industry and we use it to gauge the Landing fees and other rentals Aircraft rent Aircraft maintenance Aircraft fuel, including hedging gains and losses Variable incentive pay Wages and benefits higher mail and freight yieldsquarter and of fuel 2005, surcharges offset that by wefor lower added 2006 freight to due volumes. our to Revenues freight the from servicesdelivered delay our beginning in in cargo in 2006, the operations the although delivery were third later of lowerbeen than our than delayed originally modified expected in planned, 737-400 production. and cargo Three the aircraft.actually of four Our delivered the combination full- during four passenger/cargo freighter the were aircraft aircraft year. originally have second was Two scheduled quarter were for of delivered delivery 2007. in in These January 2006,volume delays and but of constrained the none cargo the remaining were shipped. cargo two As operations areslightly we from expected compared add increasing in to more capacity the 2006. capacity and in thereby 2007, the we expect freight and mail revenues to increase lower than in 2006, primarily2006, as the a rate result at of which lowerthose we commissions cash defer recognized receipts the for recorded revenue sold as related miles.associated commission to As with revenue sold yields sold during miles increased miles the increased, in was period. resultingairlines. partially The in offset decline a by in smaller higher commission percentage net revenue of revenues from award redemption on our partner Alaska Airlines Expenses due to fleet transition costsand in increases 2006, in a wages significant and increaseand benefits, in amortization, variable aircraft and incentive fuel restructuring pay, (including charges, contracted hedgingOperating offset services, gains expenses by selling and per a expenses, losses), ASM decline depreciation increased inexpense 17.3% aircraft per to maintenance ASM 11.98 and excluding cents aircraft fuel, in rent. decreased fleet 2006 2.5% transition from as costs, 10.21 compared restructuring cents to charges inmainline 2005. and 2005. flying Our a Operating for current navigation the estimates fee first for refundcents quarter operating in and and costs 2005 7.6 full per cents, year ASM, respectively. of excludingproduction. Achieving 2007 fuel, In our are for the cost between past targets 8.0 two is centsoperational years, dependent and results. we on 8.1 When have both cents that made actual and occurs, temporary spendinga between it reductions and result, 7.5 is to ASM our difficult our unit to schedule costs remove tolikely increase all help would disproportionately. of improve increase. If the our we associated reduce costs our from ASM our plan system again and, in as 2007, theneffectiveness our of unit our costs cost-reduction efforts.actual Our dollars effort we to spend, reduce but unitwas also cost the on focuses case increasing not in our only 2006, capacity onwith our without controlling the goal adding the introduction for a of the commensurate the next amountoperating new, two of aircraft larger years cost. in 737-800s is As our and to fleet the growdata will retirement capacity on not of primarily page change the through 28, significantly MD-80 larger-gauge we through aircraft.information aircraft are 2008. The is presenting Along total useful here with number to our our of investors line-item financialmore because expenses and or it on statistical less highlights a than areas per-ASM capacity: in basis which (in costs cents). have We increased believe or this decreased either Annual Report xetto secuieo n oeta hnei io ae htmyrsl rmorcretcnrc negotiations. contract current our from result may that wages pilot in change potential any of exclusive is expectation ht oalreetn,aebsdo eti nulfnniltargets. financial annual certain metrics on for performance based alignment financial are create and extent, and operational large employees both a our include to an of plans that, on all These stated cover shareholders. fuel collectively and with that customers , and plans employees, charges documents incentive restructuring plan several costs, incentive maintains transition various Group our fleet the Air of excluding in purposes results specified For as amounts agreements. defined other incentive generally and the is in profit determined plans, as pay profit, incentive Group’s Air 2006 in improvement Pay Incentive Variable following: Benefits and Wages follows: as are ASM per Expenses Operating Total parts spare related and aircraft of Impairment adjustments and charges Restructuring costs transition Fleet Other service beverage and Food amortization and Depreciation expenses Selling services Contracted aibeicniepyicesd$24mlin r8.% vr20,piaiydet significant a to due primarily 2005, over 81.0%, or million, $12.4 increased pay incentive Variable This basis. per-ASM a on decline but 2007, 2005. in of slightly increase quarter to second benefits the and in and wages Seattle 2005; expect in May currently operation in We services effect ramp took our that of contract subcontracting pilot the the from resulting wages pilot • in reduction the following: the by • offset partially was year and prior 2005; from of increase quarter The costs. fourth pension the and in medical ratified postretirement contract increased the from resulting wages mechanics in • in increase increase an an and 2006 of spring the • in personnel non-union our for adjustments pay market-based with contract four-year new • the from resulting wages in increase an and bonus with signing contract million four-year $1.9 new the the from resulting wages in • increase an and bonus signing million $2.7 the the to due primarily 2005 • to compared 2006 during 2.9%, or million, $21.2 by increased benefits and Wages terms dollar in expenses operating of components the in changes year-over-year significant of Explanations ...... tc-ae opnainepnefloigteaoto fSA 123R; SFAS of adoption the following expense compensation stock-based was that agents stores and 2006; service of ramp quarter our third and the employees during service ratified passenger and office clerical, our 2006; of quarter second the during ratified was that attendants flight our ...... 40 er ne eebr31, December Ended Years 11.98 2006 0.11 0.81 0.69 0.21 0.59 0.61 0.57 — 02 00 .70.14 1.77 10.07 10.21 2005 .902 .2(0.15) 0.02 0.04 0.24 — (0.02) 0.09 (0.02) (0.01) 0.67 (0.03) 0.03 0.11 0.22 0.71 0.02 0.58 0.22 0.03 0.62 0.56 0.43 0.59 0.54 .7—(0.17) — — 0.17 0.81 — — — 2004 cnmcbasis economic 06vs. 2006 2005 AMChange CASM 05vs. 2005 2004 . Annual Report increased $127.7 raw fuel expense 41 In addition to our fuel-hedging program, we have entered into fuel contracts whereby the spread between See page 31 for a table summarizing fuel cost per gallon realized by Alaska (the economic cost per gallon) Aircraft maintenance decreased by $28.4 million, or 15.3%, mostly as a result of fewer high-dollar engine Aircraft rent decreased by $5.9 million, or 5.1%, primarily as a result of the buyout of five MD-80 aircraft Landing fees and other rentals increased slightly by $2.0 million, or 1.3%, as a result of slightly higher Contracted services increased $11.9 million, or 9.9%, primarily resulting from the subcontracting of the Selling expenses increased $8.9 million, or 6.7%, primarily as a result of an increase in revenue-related Aircraft fuel increased $281.0 million, or 59.0%, primarily due to the significant mark-to-market gains million to $765.6 million, drivenper by gallon. a We 2.3% realized increase gains inresulting of gallons in $87.0 consumed economic million and fuel from a expense settled 17.4%gallon of hedge increase increased $678.6 contracts, in 25.5% million, compared raw from a to fuel $1.53 28.3% $108.8gallon cost in increase million in 2005 over in 2007 to 2005. 2005, to $1.92 Our be in economicmaterially. slightly 2006. fuel lower We cost than currently per in expect 2006 our based economic on fuel prevailing cost prices, per although this can changecrude rapidly oil and prices and jetquarter fuel of prices 2007. was The fixed savings for from approximately these 50% contracts of was our not expected material consumption during in 2006. theand first the cost per gallon on a GAAP basis (includingAircraft all Maintenance hedging gains and losses). maintenance events, a decline into the renegotiated number contracts and with change our inthat outside the maintenance vendors, mix expense and of will savings airframe decline from events,continuing in process lower retirement 2007 improvement per-event of in initiatives. costs the both We due MD-80 dollars expect of aircraft, and new the on B737-800s full a that retirement per-unit will of basis. require our This relatively B737-200C is very aircraft, primarily little and due maintenance the toAircraft in introduction the Rent the near-term. from leases during the thirdfourth quarter quarter of of 2006, 2006. offset We byreturned expect two to aircraft new the rent B737-800 lessor. to operating decline leases modestly entered in into 2007 in as the twoLanding additional Fees leased and MD-80s Other are Rentals airport and security costs, specificallythe at beginning Los of Angeles 2006 International was Airportapproximately imposed (LAX) $1.5 on where million. certain a We carriers retroactive expect late increasemillion that in to per the the year. rate year. We, hike The along will increasediscussion with increase for under other our Alaska “Legal affected costs was Proceedings” carriers, at on are LAX page disputing by 21). the approximately Our rate $7 costs increase at atContracted Sea-Tac LAX Services are (see also further expected to increase in 2007. Company’s Seattle ramp operations inreceived May in 2005. 2005, Additionally, which a reduced $4.7 our million 2005 navigation expenses. fee We refund expect was Selling contracted Expenses services in 2007 to increase slightly. expenses such as credit cardand and an codeshare increase commissions in resulting incentive from2007 payments the in to rise dollar Horizon in terms for revenues and certain overand in flying. the GDS terms We prior vendors. of expect period unit selling costs expenses as to a decline result in of new agreements we have in place with credit card Aircraft Fuel recorded in 2005 that followed the sharp increases in world oil prices. Our Annual Report u otesgiiatcssascae ihtesbes osadrltdmitnnecssta ilb recorded be is will ASM that year. per costs the costs maintenance throughout in related carrier increase and another The loss to the respectively. sublease Q200s for cents, the sublease fuel 14.2 with we excluding and associated as ASM, cents costs per 15.7 significant costs are the for 2007 to to estimates of due 6.3% current year increased Our full fuel 2005. and excluding in quarter ASM cents first per 13.35 expenses to Operating compared 2005. cents, to 14.19 compared as 12.2% increased ASM Expenses Air Horizon increased yield Passenger increases. demand. fare in industry-wide increase from factor continued benefiting load of largely to Passenger result cents, correspond added. a 23.53 not is as to do capacity 74.1% of 7.0% that more to function measures as points a certain diluted percentage is on become 1.3 decline based revenues increased Frontier arrangement per-unit The fee the flying. a such, contract with As Frontier coupled capacity. the capacity from in RASM increase in 5.7% decline a 1.4% a by offset 2007. of flying, quarter first mentioned the As in year. flying prior contract the Frontier to the similar of 2006, represented out in flying transitioning quarter capacity begin third contract of the will Frontier 23% in Horizon the and previously, Q400s from revenues our capacity passenger to and of seats Revenue 8% Frontier. more approximately for four flying adding increased from and capacity 2005, increased of 2006, August and June in operating capacity. in increase 6.8% a and (RASM) revenues unit per in increase 8.4% conform. to reclassified be Revenues revenues will Air these periods Horizon of prior all the 2007, and In flying services.” incentive-market “Contracted the in with in been presented presented have be been costs will between has associated costs flying arrangement the and for this and carrier from net” third-party revenue – a the revenue with Historically, “Other place Alaska. “Regional in Harbor, be as arrangement Dutch will identified similar and markets be a Anchorage incentive will has the costs also from associated Alaska revenue the costs.” The and flying will operations. affiliates” agreement of revenue—regional This statement “Passenger agreement. Alaska’s as the in identified by presentation specified new markets”) a (“incentive in routes result certain in capacity Horizon from year. the during aircraft B737-800 new 14 Information of quarter Other delivery first take the we in fleet, as taken the 2007 charge of in impairment out increase the come similar following they a fleet as MD-80 expect value the We depreciation realizable on 2006. of estimated base of acceleration to the depreciable the value 2006, and lower carrying in 2006, the the aircraft by of reduce B737-800 offset quarter to owned third fleet new the MD-80 ten during owned and lessors our 2005 from on in aircraft aircraft MD-80 B737-800 five owned of new two purchase of delivery the to due Amortization and Depreciation prtn xessfr20 nrae 149mlin r1.% oprdt 05 prtn xessper expenses Operating 2005. to compared 19.9%, or million, $104.9 increased 2006 for expenses Operating network native our in increase RASM 9.1% a from resulted period prior-year the from increase RASM The began that Q400s two 2006, January in CRJ-700 one of addition the to due primarily is increase capacity an The reflects increase This 2005. to compared 2006 in 15.7%, or million, $87.6 increased revenues Operating purchase will Alaska whereby 2007, 1, January effective agreement an into entered Horizon and Alaska primarily is increase This 2005. to compared 9.9%, or million, $12.4 increased amortization and Depreciation 42 Annual Report 2004 2005 vs. CASM Change 2005 2006 vs. raw fuel 2004 — 0.12 — (0.12) 5.110.14 5.232.15 0.03 0.101.27 1.88 0.11 (0.12) 2.07 1.23 1.061.40 2.38 0.11 0.760.70 1.33 0.27 (0.16)0.86 0.67 0.04 (0.11) (0.31) 0.49 0.85 0.04 0.07 0.07 0.43 0.011.24 0.07 0.03 0.02 1.35 0.01 0.01 0.06 0.06 — (0.11) 2005 15.50 15.57 1.90 (0.07) Years Ended December 31, — 5.21 0.25 3.21 2.03 1.91 1.29 0.74 0.87 0.51 0.08 1.30 2006 17.40 43 ...... increased $21.4 million to $119.1 million, driven by a 5.8% increase in gallons consumed and a 15.3% ...... Explanations of significant year-over-year changes in the components of operating expenses in dollar terms Wages and benefits increased $15.6 million, or 9.0%, over 2005 reflecting a 4.5% increase in the average Variable incentive pay increased $4.4 million, or 93.6%, over 2005, as a result of the same reasons noted Aircraft fuel increased $43.6 million, or 59.8%, over 2005 primarily as a result of the significant See page 32 for a table summarizing fuel cost per gallon realized by Horizon (the economic cost per gallon) Along with our financial and statistical data on page 29, we are presenting here our line item expenses on a Total Operating Expenses per ASM are as follows: Wages and Benefits number of full-time equivalent employeesto and increase an slightly increase in in 2007, wagesefficiencies. but per decline employee. on We a expect per-unit wages basis and in benefits 2007 as we work toward higherVariable productivity Incentive and Pay above in the Alaska discussion. Aircraft Fuel mark-to-market gains recorded in 2005 that followed the sharp increases in world oil prices. Our Wages and benefits Variable incentive pay Aircraft fuel, including hedging gainsAircraft and maintenance losses Aircraft rent Landing fees and other rentals Contracted services Selling expenses Depreciation and amortization Food and beverage service Other Impairment of aircraft and related spare parts expense increase in raw fuel cost$16.2 per million gallon. in We 2005, realized resulting gainseconomic in of fuel economic $14.1 cost fuel million per expense from gallon of settledexpect increased $105.0 hedge Horizon’s 22.2% million, contracts, economic from a compared fuel $1.58 28.8% to cost in increasethis per 2005 over can gallon to 2005. change in $1.93 Our rapidly 2007 in and to 2006.as materially. be Like we We slightly Alaska, replace also lower we some expect based currently of our on our fuel prevailing older consumption prices, Q200s on although with a new per-ASM Q400 to aircraft, improve which in are 2007 moreand fuel the efficient. cost per gallon on a GAAP basis (including all hedging gains and losses). per-ASM basis (in cents): Annual Report oprblt fteyas hs tm r icse nte“eut fOeain:20 oprdWt 2005” With Compared the 2006 impact Operations: that of items “Results certain the include in results discussed 2005 are The items million. These $20.6 years. of the 2004 of in comparability loss pre-tax a to compared 2004. in share, per $0.57 or million, $15.3 of loss 2004 With Compared effect 2005 cumulative significant. the not to are 37.5% accruals of contingency rate tax marginal remaining compensation 2005 Our primarily stock-based our change. is and applied accounting difference costs We the The per-diem awards. of 37.4%. employee stock 2006 of as certain for rate such for rate tax expenses, recorded benefit 2006 nondeductible expense tax marginal of effective our magnitude our from the periods benefit, different to for this is also due accruals Excluding which year contingency 2006. 33.8%, 2006 tax in been The certain expired have 2005. of limitations would in reduction of 38.4% the statute of with the rate associated which tax benefits for income tax effective of an million to $5.5 compared includes 40.1% was 2006 for change (Benefit) Expense Tax Income stable Consolidated a maintaining time same the finance at to while continue balance, portfolio. we debt securities as average marketable and 2007 higher and B737-800 in a cash for increase in orders will resulting our expense deliveries This with nonoperating aircraft 2006. connection that new during in expect million deposits We $24.7 pre-delivery aircraft. those to in Q400 on 2005 increase Bombardier expense in significant interest million the further $8.9 to our eliminated from due of which million is conversion 2006, $15.8 our the April increased of by in interest some offset equity Capitalized to was to notes. changes increase notes the This convertible and rates. senior 2006, fixed million in higher $150 arrangements slightly from debt to higher resulting new arrangements a primarily debt, debt and million variable-rate variable-rate returns $15.0 our portfolio increased on average expense increases higher Interest rate of balance. interest result securities a marketable as and primarily cash 2005, average to compared million $23.4 increased (Expense Income Nonoperating Consolidated costs. remuneration passenger to expected aircraft. are Expenses per 11 Operating million which Other $1.5 of of Q200s, average, 16 on to charge, up a increase on anticipate will loss We rent sublease 2007. aircraft the in that recognize fleet expect to our We begin leave engines. we leased as fewer 2007 and in leases significantly extended on rates lower of Rent Aircraft maintenance planned of rate We higher warranty. a under anticipate covered we aircraft as fewer 2007 with in fleets again activity. Q400 increase and to Q200 expense the maintenance for expect overhauls engine and checks heavy Maintenance Aircraft u osldtdicm eoeicm a n h conigcag o 05ws$3. million $137.2 was 2005 for change accounting the and tax income before net income consolidated consolidated a Our versus share, diluted per $0.01 or million, $5.9 was 2005 for loss net consolidated Our accounting the of effect cumulative the before income pre-tax on rate tax income effective consolidated Our income Interest 2005. in million $29.3 to compared 2006 in million $0.5 was expense nonoperating Net and expenses crew higher of result a largely 11.1%, or million, $4.7 by increased expenses operating Other annualization the from resulting primarily 2006 in 1.3%, or million, $0.9 by slightly declined rent Aircraft scheduled more of result a as primarily 70.7%, or million, $30.6 increased expense maintenance Aircraft ) 44 Annual Report 45 Financial and statistical data comparisons for Alaska and Horizon are shown on pages 28 and 29, Operating revenues increased $183.1 million, or 8.2%, during 2005 as compared to 2004 as a result of an Load factor increased 3.0 percentage points to a record 75.9% for 2005, primarily asFreight a and result mail of revenues an increased increase by $3.9 million, or 4.5%, compared to 2004 as a result of a mail Other-net revenues increased $19.8 million, or 16.1%, largely a result of an increase in Mileage Plan In 2005, total operating expenses increased $33.2 million, or 1.5%, compared to 2004. Operating expenses Wages and benefits decreased $73.2 million, or 9.2%, during 2005 compared to• 2004. Wages were restructuring initiatives• announced in late 2004; the reduction• in pilot wages resulting from the the subcontracting new• of pilot our contract ramp that services took operation effect the in in reduction Seattle May• of beginning 2005; 903 in full-time the equivalents second (FTEs) quarter a during of reduction 2005 2005; in to benefits 9,065; cost and due to the reduction in FTEs and pension expense. section beginning on page 37.severance Our charges 2004 of results $53.4 also million, include737-200C an certain fleet, impairment items mark-to-market charge that adjustments of impact on $40.2 comparability,Excluding our million including those hedge related items, portfolio, primarily the and to year-over-year a ourslightly improvement navigation Boeing higher can fee non-fuel be refund operating characterized of costs by $11.0 and higher million. significantly revenues, higher offset fuel by costs. respectively. On pages 30 throughmeasures 32, to we the have most included directly a comparable reconciliation GAAP of financial reported measures. non-GAAP financial Alaska Airlines Revenues 8.2% increase in operating revenueRASM per was available driven seat by mile a (RASM)offset 3.5% on higher increase relatively fuel in flat prices, ticket capacity. higher yields Theprimarily load that increase a factors, resulted in direct and from result higher an of freight, increaseby the mail in the reduction and ticket addition in other prices of our revenues. designed three summer The to B737-800 flight flat aircraft schedule capacity during that is the was year. announced in June 2005, offset in passenger traffic. contract we have in thefreight state services of during Alaska the that third began quarter in of the 2005, third offset quarter by of lower 2004 freight and volumes. fuel surchargesrevenues, added derived to from our higher awardassociated redemption with on sold our mileage partner credits airlinesoperated and and by an an a increase increase third in in party. our commission revenues revenue from service to Dutch Harbor,Alaska which Airlines is Expenses per ASM increased 1.4% fromdue 10.07 largely cents to in the 2004 significant toservices, increase 10.21 landing in cents fees raw in and fuel 2005. other expense Thewages rentals, and increase and and increases in benefits, other, in operating food offset aircraft expenses and by maintenance,charges, is beverage larger contracted and service, gains the selling on impairment expenses, our charge depreciation fuelexcluding in and hedge fuel, 2004 amortization, portfolio, the related restructuring declines navigation to in fee our2004. refund, Boeing restructuring 737-200C and fleet. impairment Operating charges expenses increased per 1.1% ASM compared to Wages and Benefits favorably impacted by the following: Annual Report hr ee$. ilo nlse ndsoa fast oprdt 30mlini 2005. in million $3.0 to 2004 compared in assets Additionally, of premiums. disposal insurance on lower losses by in offset million partly $2.0 costs, were settlement there legal and supplies, costs, crew Expenses Other was services 2004. contracted in in million the recorded $7.7 and refund to 2004, fee compared of navigation 2005 quarter the in fourth Additionally, million the 2005. $4.7 in May functions in maintenance operations facility ramp and Seattle equipment support ground and service departures. fewer by offset Services Angeles, Contracted Los and Portland Seattle, in primarily costs, rental increased and rates Rentals Other and Fees Landing decks flight and our systems to interiors, 17 aircraft improvement. aircraft Note to reliability into (see enhancements with benefits overhauls certain assist and airframe as to wages and well from engine as costs regarding statements); of of policy financial out shift accounting consolidated contracting a our the in in period; resulted change the which the during parties, maintenance; performed third actually to a was maintenance increase on work heavy the maintenance the related causing engine whether factors B737-400 of Other expense regardless 2004. we basis, in whereby flight-hour performed agreement were maintenance than power-by-the-hour 2005 our in were overhauls engine and work airframe losses). and gains Maintenance hedging Aircraft all (including basis GAAP a on gallon per cost the and contract This 2006. 2005. April during through Alaska consumption for fuel savings our in of million one-third $10 approximately approximately for in fixed resulted is 2005. prices in fuel $1.53 jet to and 2004 in $1.26 from 18.4% 21.4% a increased million, gallon hedge $529.1 per settled of cost from expense fuel million fuel economic $108.8 economic Our of in 2004. gains resulting realized over 2004, We increase in consumed. million gallons $39.8 fuel to in compared decline contracts, 2.3% a by offset gallon, Our Fuel Aircraft plans incentive the in defined Pay Incentive operations. Variable certain of subcontracting the of result a as expense maintenance and compensation. workers for estimates loss ultimate the to related 2004 in a ulexpense fuel raw h eroe-erdciei ae n eeiswsprilyofe yafvrbe$. ilo adjustment million $6.6 favorable a by offset partially was benefits and wages in decline year-over-year The te xessicesd$. ilo,o .% rmrl elcigicessi asne remuneration, passenger in increases reflecting primarily 6.1%, or million, $9.0 increased expenses Other fleet our of subcontracting the from resulting largely 24.2%, or million, $23.4 increased services Contracted fee landing higher reflects increase The 14.6%. or million, $19.9 increased rentals other and fees Landing more of performance the from resulting largely 27.0%, or million, $39.4 increased maintenance Aircraft gallon) per cost economic (the Alaska by realized gallon per cost fuel summarizing table a for 31 page See prices oil crude between spread the whereby contract fuel a into entered we 2005, of quarter second the In prices. oil world in increases sharp the of result a as primarily 20.0%, or million, $79.3 increased fuel Aircraft as performance, financial improved Group’s Air to due million $10.9 increased pay incentive Variable services contracted in increases by offset partially were costs benefits and wages in reduction the Overall, nrae 113mlint 679mlin rvnb 43 nraei a ulcs per cost fuel raw in increase 34.3% a by driven million, $637.9 to million $151.3 increased 46 Annual Report 47 increased $27.0 million to $97.7 million, driven by a 3.2% increase in gallons raw fuel expense 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, primarily as a result of the 14.8% increase in Operating expenses for 2005 increased $43.2 million, or 8.9%, compared to 2004. Operating expenses per Wages and benefits increased $11.1 million, or 6.8%, reflecting a slight increase in the average number of Variable incentive pay increased $3.8 million reflecting the improved financial performance and a new Aircraft fuel costs increased $14.4 million, or 24.6%, primarily resulting from the sharp increases in world See page 32 for a table summarizing fuel cost per gallon realized by Horizon (the economic cost per gallon) Aircraft maintenance expense increased $5.0 million, or 13.1%, primarily due to a higher number of engine Landing fees and other rentals increased $6.3 million, or 15.2%. Higher landing fees are a result of 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 due operating Airlines, yields. primarily 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 to in increased capacity. contract The flying increasesCRJ-700 with in in Frontier, passenger 2005 the traffic and harmonization and four flying capacityapproximately additional with are 9% seats Alaska, due of on the passenger each addition revenues of ofrespectively, and our one in 23% Q400s. 2004. of Contract capacity, flying during with 2005 Frontier compared represented to 9% and 21%, Horizon Air Expenses ASM decreased 0.5% compared todecreased 2004. 1.7% Operating compared expenses to per 2004. ASM excluding fuel and impairment charges Wages and Benefits employees and wages per employeerelated and to the the move transition. to a new paid-time-off program resulting in a one-timeVariable charge Incentive Pay operationally-based incentive program for all employees. Aircraft Fuel oil prices. Our consumed and a 33.8% increasehedge in contracts, raw compared fuel to cost $5.4 perincrease million gallon. over in We 2004. 2004, realized Our resulting gains economic in of fuel economic $16.2 cost fuel million per expense from gallon of settled increased $81.5 20.6% million, from a $1.31 24.8% in 2004and to the $1.58 cost in per 2005. gallon on a GAAP basis (including all hedging gainsAircraft and Maintenance losses). overhauls and propeller work for the Q400 fleet and to fewer aircraft beingLanding covered Fees by and warranty. Other Rentals significant rate increases at several of our key airports, and to increased departures and new markets served. Annual Report orsodn eln xes o hsftr biain o ie odt hr ate,temjrt ftesales the of majority the the parties, and third liability to awards a sold For recognize miles travel. we For future partners, obligation. this travel future provide our this partners. to or for alliance obligation Horizon expense our an Alaska, selling of have on In corresponding any we fly cash. or existence, who for Horizon, in passengers partner, Alaska, is by card on Plan earned credit travel Mileage our for the as redeemed as such be long parties, may As third miles to outstanding miles the sell case, we either Additionally, partners. travel many our Plan Mileage audit our with policies these of disclosure and critical selection following development, materially the the committee. in identified discussed result has has may Management and potentially conditions. estimates that and as accounting and assumptions defined uncertainties, varying financial are and under consolidated estimates judgment results the accounting significant different to Critical of 1 policies. reflective Note accounting are See significant that operations. our those estimates of of make results description to and a us position for requires financial statements statements our financial affect these that of judgments preparation and The statements. financial consolidated our 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 change. We Accounting accounting rate. in the Change tax of effective effect the cumulative in the change to to or significant 37.5% Due profit a of 2004. pre-tax cause rate in marginal may marginal loss a results 2005 pre-tax to pre-tax our a relative in applied on costs, change 25.7% per-diem small of employee relatively rate as a tax such loss, income expense, effective nondeductible an of to magnitude compared the 38.4% was 2005 for change (Benefit) Expense Tax Income from Consolidated resulting equipment flight future for aircraft. deposits Q400 in Bombardier increase and our significant 737-800 of million the Boeing some $7.2 to for to increased due orders changes interest is the Capitalized increase and agreements. This expense debt fixed-rate 2005. Interest variable-rate higher in refund. our slightly fee on to navigation increases agreements portfolio the rate debt securities with interest variable-rate marketable associated to average 2004 due larger in million slightly income $11.1 a interest increased and the returns by improved offset of 2005, result in a as million $6.4 increased (Expense) Income Nonoperating Consolidated ietexpense direct u ieg lnlylypormaad ie omme asneswofyo lsao oio and Horizon or Alaska on fly who passengers member to miles awards program loyalty Plan Mileage Our upon based is MD&A this in 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 accounting the of effect cumulative the before income pre-tax on rate tax income effective consolidated Our income Interest 2004. in million $26.3 to compared 2005 in million $29.3 was expense nonoperating Net aiaieadamortize and capitalize 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, 48 ehdo e noefr20 rvdsmeaningful provides 2005 for income net on method ehd ne h omrmto,teecosts these method, former the Under method. Annual Report 49 We defer an amount that represents our estimate of the fair value of a free travel award by looking to the Members may not reach the mileage threshold necessary for a free ticket, and outstanding miles may We estimate how many miles will be used per award. For example, our members may redeem credit for The cost for Alaska or Horizon to carry an award passenger is typically lower than the cost we will pay When a frequent flyer travels on his or her award ticket on Alaska or Horizon, incremental costs such At December 31, 2006, we had approximately 103 billion miles outstanding, resulting in an aggregate The rate at which we defer sales proceeds from sold miles: sales prices of comparable paid travel.recognition As of fare a levels higher change, or ourany lower deferral given portion quarter. rate of For changes, the example, which cash due maydeferral proceeds result to rate from the in increased the year-over-year the in sale increases 2006, of in resultingrevenue miles average in deferred as industry lower for commission ticket commission miles revenue prices, revenue sold. in our and Holdingdeferral an all rate increase other would in have assumptions the reduced constant, amount an our of additional 2006 1% commission revenue increase by in approximately the $2.1 million. not always be redeemed forin travel. the Therefore, accounts, based we on estimate thefor how number those many of miles. miles Mileage Our will Plan estimates never accountsand of be and other breakage used the factors. consider (“breakage”), miles We activity and believe in dofuture our our not expectations. breakage members’ record A assumptions accounts, a hypothetical are account liability 1.0% reasonable balances, aggregate) change in has in light approximately our of a estimate historical $6.0 of experiencefrom million breakage and our effect (currently estimates. on 12% the in liability. the Actual breakage could differ significantly free travel to various locationsactual or miles choose used between are a more highlyexpense. or restricted Our less award estimates than and are estimated, an based we unrestrictedredemptions on may award. on the need If Alaska, current to Horizon requirements adjust or in the other our liability airlines. Mileage and Plan corresponding program and historical The number of awards redeemed for travel on Alaska or Horizon versusto other other airlines: airlines. We estimateother the airlines number and of accrue awards the thatawards costs will redeemed based be on on redeemed other our on airlines estimate Alaskacorresponding is of or expense. higher historical Horizon or redemption versus lower patterns. on than If estimated, the we number may of need to adjustThe our costs liability that and will be incurred to provide award travel: as food, fuel and insurance are incurred to carry that passenger. We estimate what these costs will be 1. 2. The number of miles that will not be redeemed for travel (breakage): 3. The number of miles used per award (i.e., free ticket): 4. 5. proceeds are recorded as deferredcommission revenue component and of recognized these when sales thecredits proceeds award minus (defined transportation the as is amount the provided. we proceeds The revenue defer) we is is receive recognized recorded from as as the passenger other-net saleother-net revenue revenue of revenue when when mileage for awards the awards are cash issued issued is and and received. flown flown The on on deferred partner Alaska airlines. or Horizon, and as liability and deferred revenue balancedetermined of based $545.6 on million. several Both assumptions theformulate. that liability There require and are significant the uncertainties management deferred inherent judgment revenuethe in to are amount estimates; estimate and/or therefore, and timing an of incorrectaccounting revenue assumption for recognition could the or greatly Mileage Mileage affect Plan Plan are expenses. described The below. most significant assumptions in Annual Report nacutn o hs oglvdast,w aeetmtsaotteepce sfllvso h assets, the of lives useful expected the about estimates make we assets, long-lived these for accounting In what Assets predict Long-lived cannot We liabilities. and future. expense the pension in future be our will impact factors will these plans pension our in participants entrants. new to by million. 2006 $9.0 31, approximately December by at expense obligation pension benefit 2007 discount projected estimated the our increase Decreasing increase and discount bonds. would million The long-term 5.25%) $74.9 respectively. high-quality to approximately 2005, on 5.75% and earned (from 2006 rates 0.5% 31, current by December the rate at on 5.50% based and determined 5.75% is of rate rate a using million. obligations $4.2 pension approximately by 0.5% expense and by pension U.S. return 2007 of of estimated allocation rate our an long-term increase on expected would based the 7.25%) is Decreasing to 2006 securities. 7.75% 31, income (from December fixed at U.S. This assets and appropriate. plan equities regularly considered on non-U.S. We as return 7.75%. assumptions. investments of of inflation rebalance rate return long-term periodically long-term of as and expected rate well allocation long-term as asset a consultants actual generate from the will input review assets with plan developed pension was the rate that This estimate we 2006, 31, December a making anticipate and 2006 in 2007. pension plan during defined-benefit the million qualified to $50 our million approximately of $121.9 of value contributed contribution experience fair We cash actual the million. future 2006, $835.9 and 31, totaled amounts, December assets rate. liability At plan discount and assumptions. assumed expense these the different from and in differ assets result can plan can on assumptions return these of in rate Changes long-term expected the including assumptions, respectively. 2004, and 2005, of 2006, plans in pension million defined-benefit $78.3 of qualified and independent our million, generally for $71.7 is expense million, is and recognized $78.3 expense periods We pension service requirements. 158, approximate or requires No. employees’ decisions and SFAS over funding statements Under basis financial income. accrual the comprehensive an in other on defined- liability in recognized entity’s or status an asset funded of an the 132(R) status as of and underfunded plan recognition 106 or postretirement 88, overfunded other 87, the and No. of pension Statements recognition benefit FASB requires of 158 amendment SFAS an 158). Plans, (SFAS Postretirement Other and Pension Benefit our on Plans effect Pension significant a have could assumptions operations. in of change results such and Any position necessary. financial is change a that indicate erve ieg lnetmtsec ure,adcag u supin ffcsadcircumstances and facts if assumptions our change and expense. estimated quarter, corresponding were each a that estimates recognize costs Plan and the Mileage liability than review our lower We adjust or to higher need be may may we on costs airlines therefore based The other and awards accordingly. to accrued, travel liability paid and future a or for accrue us to airlines and by incur other carriers incurred would to other actually we pay with airline costs will settlements other the we and The than much redemptions passenger. higher how historical the substantially estimate carrying often We for are passenger. another airline and that on other agreements carry travels the negotiated passenger pay on the must based If often are liability. we costs a ticket, accrue award and an profit) on and airline overhead to contribution any (excluding so eebr3,20,w a prxmtl 24blino rpryadeupetadrltdassets. related and equipment and property of billion $2.4 approximately had we 2006, 31, December of As the to related factors other various and rates discount assumed returns, closed asset are plan plans in pension changes defined-benefit Future our of all pilots, Alaska’s covering plan the of exception the With future discounted We reduced. is rate discount the as increase expense pension future and liability Pension of As decreases. assets plan pension on return of rate expected the as increases expense Pension important of number a of use the requires liability corresponding the and expense pension of calculation The 158, No. SFAS using plans pension defined-benefit the for account We 50 mlyr’Acutn o Defined for Accounting Employers’ Annual Report and concluded that the carrying value of the we have evaluated whether it is more likely than 51 Accounting for Income Taxes, There is inherent risk in estimating the fair value of our aircraft and their salvage values at the time of an We use a combination of insurance and self-insurance mechanisms to provide for workers’ compensation The Company has a net deferred tax asset of $19.6 million at December 31, 2006, which includes gross In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin In March 2006, our Board approved a plan to accelerate the retirement of our MD-80 fleet (15 owned and MD-80 fleet was no longerAccordingly, recoverable during when the compared first to quarter themillion of estimated to 2006, remaining write the future down Company cash the recorded flows. we fleet an bought to impairment five its charge MD-80 estimated totaling aircraft fair $131.1 price from market for lessors value. the and Additionally, five terminated during aircraft the thepurchase was leases third of $80.9 for quarter the million, those of aircraft, including five 2006, we assumed aircraft.a evaluated debt The result, impairment of total we and $11.6 purchase recorded concluded million. an that ImmediatelyConsolidated additional the upon Financial $58.4 carrying Statements million value for charge was further in notimpairment discussion the recoverable. to about third As our the quarter Boeing impairment for 737-200 of the aircraft the impairment. recorded MD-80s See in and Note 2004. a 2 similar in the impairment. Actual proceeds upon dispositionadditional of loss. the Our aircraft estimate could of bethe salvage materially depreciation value less expense at than on the expected, the time resulting affected of in aircraft. disposal could also change, requiringWorkers’ us Compensation to and increase Employee Health-Care Accruals claims and employee health-care benefits.estimated, Liabilities in associated part, with by these considering risksactuarial historical are assumptions. claims not The experience discounted estimated and and accruals outside are occurrences for expertise, and these severity claims liabilities factors differ could and from be other employee these significantly health assumptions affected care and if accruals historical future totaled trends.December $35.7 Our 31, million workers’ 2005. at compensation December and 31, 2006, compared to $34.4 million at Realizability of Deferred Tax Assets deferred tax assets of $504.2accordance million, with partially SFAS offset No. by 109, grossnot deferred that tax the liabilities deferred of tax $484.6more assets million. likely will In than be not realized. that Basedof those on December assets the 31, would available 2006. be evidence, Our realizable wedifferences conclusion and have and is thus concluded does based no that not on valuation it rely the allowanceto is on expected has realize future future been the taxable reversals recorded net income. of as operating Should existing loss we taxable carryforwards incur temporary may additional be losses subject in to theNew greater future, Accounting uncertainty. our Standards ability No. 108 (SAB 108). SABfinancial 108 statements expresses are SEC evaluated staff for viewsfinancial purposes regarding statements. of the SAB determining process 108 whether by is those which108 effective misstatements misstatements effective for are in January fiscal material 1, years to 2006. ending our See after Note November 16 15, to 2006. the We consolidated adopted financial SAB statements for further discussion. changes in fleet plans, thefair expected value residual of values the of assets thenot and assets, limited the and to, cash the significant flows potential decreases they forthe in generate. impairment future the Factors based use market indicating on of value potential the the of impairmentassociated assets, the include, with a long-lived but the significant assets, are use change management of in decisions the the regarding long-lived long-lived asset. assets condition, and operating cash flow losses 11 leased aircraft at theoriginal time) retirement and schedule. remove As those a aircraftAccounting result from for of service the this by Impairment decision, the or we end Disposal evaluated of of impairment 2008, Long-Lived as which Assets, required is by earlier SFAS than No. the 144, Annual Report 1039mlin h olwn icsinsmaie h rmr rvr fteices n u xetto of expectation our and increase the of drivers primary requirements. the cash summarizes future discussion following The million. $1,013.9 with connection in debt outstanding our in increase 2006. upon an in equity and arrangements to 108, debt adjustment No. $52.6 aircraft-secured after-tax Bulletin a new and million Accounting by pension $18.6 Staff offset for an of partially income tax, adoption 2006, comprehensive after our April other million in accumulated $61.4 notes to totaling convertible adjustments obligations senior unfavorable postretirement our 2006, of for equity loss to net conversion million the of result a as are leases operating aircraft assuming debt-to-capital Long-term debt-to-capital Long-term share common per value Book equity portion Shareholders’ current of net debt, Long-term capital Working securities marketable and Cash RESOURCES CAPITAL AND of position. LIQUIDITY adoption financial the or such, operations As from policy. results accounting our have this on and modifying effect are of an fees, intention have other no not and have will Taxes fees We 06-03 2006. security basis. EITF 31, and net EITF December airport a disclosure. after taxes, on requires beginning sales recorded that period include been decision reporting which policy annual passengers, accounting or our an interim from is first collected basis the net for or effective gross is a 06-03 Presentation) either Net on Versus taxes Gross of is, presentation (that Statement Income the in 06-03, No. or operations from results our on impact adopting significant of a is impact have statement the to The evaluating statement value. currently the position. fair are expect financial at We not carried 2007. do is 15, but instrument November 157, an after SFAS not beginning or years whether fiscal 157 to for SFAS as effective pronouncements. guidance accounting existing other change under not required does measurements fair-value about disclosure expands Measurements position. financial or operations from not results do our tax We on income 2006. impact for 15, material accounting December a to after have related beginning will measurement years interpretation purpose and fiscal this The recognition for believe statement. the effective that of is in aspects interpretation defined certain This as clarify uncertainties. which positions, to 48), tax is (FIN in 48 109 uncertainty FIN No. for of Statement disclosure FASB and of accounting interpretation the Taxes—an clarifies Income in Uncertainty for Accounting aiaie tsvntmsanaie rent annualized times seven at capitalized u ett-aia ai,icuigarrf prtn ess erae rmDcme 1 05primarily 2005 31, December from decreased leases, operating aircraft including ratio, debt-to-capital Our 48, No. Interpretation FASB issued (FASB) Board Standards Accounting Financial the 2006, July In uigteya ne eebr3,20,orcs n aktbescrte nrae 3. ilo to million $31.3 increased securities marketable and cash our 2006, 31, December ended year the During liquidity. and condition financial of indicators major the presents below table The Issue (EITF) Force Task Issues Emerging on reached consensus the ratified FASB the 2006, June In 157, No. Standards Accounting Financial of Statement issued FASB the 2006, September In o ae olce rmCsoesadRmte oGvrmna uhrte hudB Presented Be Should Authorities Governmental to Remitted and Customers from Collected Sales How SA 5) hc eie arvle salse rmwr o esrn arvleand value fair measuring for framework a establishes value, fair defines which 157), (SFAS ...... 52 h IFrahdacnessta the that consensus a reached EITF The . eebr31, December 21.97 $ 1,013.9 $ 2:28% 72%: 46% 54%: 1,031.7 2006 I ilos xetprsaeand per-share except millions, (In 885.5 335.6 ett-aia amounts) debt-to-capital eebr31, December 47 $2.77) ($ 24.74 $ 31.3 $ 982.6 $ 3:7 NA 73%:27% NA 54%:46% 2005 2. 57.9 62.6 (39.1) 827.6 969.1 374.7 arValue Fair Change Annual Report 53 During 2006, net cash provided by operating activities was $449.8 million, compared to $270.1 million Cash used in investing activities was $533.0 million during 2006, compared to $481.1 million in 2005. We Net cash provided by financing activities was $240.3 million during 2006 compared to $256.6 million We plan to meet our capital and operating commitments through internally generated funds from operations In the second quarter of 2006, we called for redemption all of our $150 million senior convertible notes, and Alaska has a $160 million variable-rate credit facility that expires in March 2008. As of December 31, 2006, Alaska’s $172 million variable-rate revolving loan facility is available to provide a portion of the Analysis of Cash Flows Cash Provided by Operating Activities during 2005. The improvement waspayments driven made by for significantly severance higher compared operatingmillion to revenues in the and cash prior a contributions year, decline to offset inthe our by cash same defined-benefit continued period pension increases in plans in 2005. during fuelsubstantially We 2006 costs all typically compared and of generate to $121.9 that positive $69.3 cash cash million for flows during capital from expenditures operations, and but debt anticipate payments consuming inCash the Used next in several Investing years. Activities had net sales of $129.4additions, million net of of marketable proceeds securities from andThe asset spent increase dispositions, $678.5 in resulting million capital in for expenditures an propertyaircraft is increase and deliveries primarily of equipment and due $268.1 the to million purchase the comparedCRJ-700, in increase to compared 2006 in 2005. to of pre-delivery three ten payments B737-800s B737-800s, mademillion in five for (of 2005. MD-80s future which We out $605 expect of million capital leases,B737-800 is expenditures two and expected to Q400s 13 to be and new be approximately one Bombardier aircraft-related) $680 Q400 in aircraft. 2007Cash as Provided we by take (Used delivery in) of Financing 14 Activities new during 2005. We obtained debtWe financing had for $30.4 nine million new in B737-800employee proceeds aircraft stock from and purchase the one plan, issuance CRJ-700 compared of purchasedlong-term to our in debt $15.2 common 2006. payments million stock of during through $62.0 2005. stockmillion million Offsetting option in and these exercises 2006. debt increases and In payments were our the on normal $200.0 fourth our million, quarter pre-delivery net of payment of 2005, facility underwriting we of discounts issued $140.6 and 5.7 professional million fees. shares of common stock for proceedsand of cash and marketable securitiespre-delivery on payment hand, facility. additional We debt have financing,800s debt and and financing availability are arranged of currently for credit negotiating 10 under financing of our for our the 14 Q400s. firm 2007 deliveriesSupplemental of Disclosure B737- of Noncash Investing and Financing Activities all of the notes weretotaling converted $11.6 by million the in holders connection intoduring with shares the the of third purchase our quarter of common of one stock. 2006. of Additionally, the we MD-80 assumed aircraft debt purchased fromBank lessors Line-of-Credit Facility there are no outstanding borrowingsusing on this this credit credit facility. facility See and Note the 7 Company in has the no Consolidated immediate Financial plans StatementsPre-delivery to for Payment borrow further Facility discussion. pre-delivery funding requirements of Alaska’spurchase purchase agreement. of The new facility Boeing expires 737-800 on aircraft August under 31, the 2009. current The aircraft interest rate is based on one-month LIBOR Annual Report biain,cptllaeolgtos prtn es omtet,arrf ucaecmimnsadother and commitments purchase aircraft commitments, lease operating obligations, lease capital obligations, capital in resulting orders, firm into rights purchase and . options spending additional expenditure convert to continue will is Horizon Company The hand. on cash has with 2007 for in paid deliveries. deliveries be Q400 the aircraft to the in B737-800 expected for delivered 11 are options be remaining deliveries financing will the four evaluating Q400s of other are 13 seven The 2007 the for arranged. in of Financing been delivery majority year. already for The the scheduled year. of aircraft the months B737-800 of six have remaining rest first agreements The the no report. throughout with but this spread for Q400s, of evenly paid the date generally were for the Q400s alternatives of The financing as debt-financed. reviewing executed subsequently currently been and is hand Management on hand. cash on with cash for paid were B737-800 two (Millions) Payments Total Q400 Bombardier 737-800 Boeing Aircraft of all year, 2006: the of end the April to in subsequent fleet sold transactions. our were the leave two on to and gains the expected 2006 nominal of aircraft during in each last sold resulted as the were which transferred with aircraft be months, these will several of aircraft next Two each the 2007. Alaska to over on 2006, Title fleet cash During aircraft. our with arrangement. B737-200 leaves fixed- for debt six with aircraft paid variable-rate sell financed were a to subsequently which with arrangement then of financed an and both was executed cash Q400s, which with used CRJ-700, for two one paid of and were delivery hand, nine took and Horizon hand, arrangements. on debt cash rate with for paid was one generated internally or the debt finance long-term to leases, expect with Horizon aircraft 27 and option for Alaska the rights CRJ-700s. exercised, purchase 15 extent cash. and and the B737s Q400s to additional 19 and, 24 acquire orders acquire to firm to options options has has Horizon Alaska and below. more, forth set as billion, $1.2 Commitments Purchase Aircraft Arrangements Sheet payments. Off-Balance pre-delivery and additional Commitments fund Obligations, to borrowed Contractual future been the have in amounts facility financing No the debt outstanding. use long-term was may from million we proceeds $39.2 although the using 2006, year-end, at likely 31, to repaid sooner, December subsequent be not of will if As and aircraft, aircraft. aircraft the those purchase specified of on Boeing to delivery the relate takes under facility Alaska rights the that Alaska’s on time by outstanding secured amounts be principal will The borrowings agreement. Any margin. specified a plus otata Obligations Contractual h olwn al rvdsasmayo u rnia amnsudrcretadln-emdebt long-term and current under payments principal our of summary a provides table following The and Alaska strategy, growth our implement and profitability targeted achieve successfully to able are we If The 2006. 31, December to subsequent delivered were Q400s the of four and aircraft B737-800 the of Two 31, December of as year, by payments and commitments purchase aircraft summarizes table following The agreements, lease operating under are which of two B737-800s, 12 of delivery took Alaska 2006, During approximately of payments aggregate requiring aircraft 51 for orders firm had we 2006, 31, December At ...... 2 1463—51 — 3 6 4 11 27 ...... 41 38 — 3 6 4 11 14 ...... 1 13 — — — — — 13 ...... 566$7. 199$4. 4. $1,157.7 — $44.9 $146.0 $159.9 $270.3 $536.6 2007 54 2008 eieyPro imOrders Firm - Period Delivery 2009 2010 2011 Beyond 2011 Total Annual Report 39.2 Total 2011 Beyond 2011 2010 2009 ———— — 2008 55 79.9 $ 83.739.2 $ 88.1 $ 94.2 $122.475.1 $29.4 643.3 70.5 $1,111.6 29.7 63.0 30.0 56.8 30.3 50.2 30.6 143.2 93.6 458.8 243.6 246.8536.6 237.3 270.3 218.2 159.9 207.7 146.0 177.4 44.9 680.6 1,768.0 — 1,157.7 $1,007.0 $691.5 $559.2 $535.0 $425.5 $1,560.7 $4,778.9 ...... $ QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK ...... office space, and other equipmentleased leases. MD-80 The aircraft, aircraft four operating of leasestransition which include plan. we lease intend obligations to for retire six earlier than expected in connection2006. with our fleet Inflation and price changes other than for aircraft fuel do not have a significant effect on our operating We have interest-rate risk on our floating-rate debt obligations and our available-for-sale marketable Currently, our fuel-hedging portfolio consists almost exclusively of crude oil call options. We utilize the Additionally, we have entered into fuel purchase contracts that fix the refining marginPlease we refer pay to for pages 30 through 32, as well as to Note 4 in the consolidated financial statements, for Market Risk – Aircraft Fuel (excluding the pre- delivery payment facility) pre-delivery payment facility Total (1) Operating lease commitments generally include aircraft operating leases, airport property and hangar leases, (2) For variable-rate debt, future obligations are shown(3) above using interest Includes rates minimum in obligations effect under as our of long-term December power-by-the-hourEffect 31, maintenance of agreement. Inflation and Price Changes revenues, operating expenses and operating income. ITEM 7A. investment portfolio, and commodity-price riskmajority in of jet our fuel jet required fuel todocumented at operate hedging prevailing our strategy market aircraft and prices, fleet. other and Wedebt means. seek purchase instruments We to the and have manage financial market-sensitive market derivative instruments riskdo instruments in through not used the execution purchase to form of or hedge of a hold our fixed-rate any exposure derivative to financial jet-fuel instruments price for increases. trading We purposes. contracts in our portfolio as hedgesdesigned to to decrease effectively cap our our exposure cost toincreasing the of fuel volatility the prices. of With crude jet these oil call fuelno component option downward prices. of contracts, exposure Call fuel we other options prices still than are allowing benefit thewe us from premiums also to use that the limit collar decline we our in structures pay exposure crude topossibility for to oil enter of fuel prices into fuel hedging the as price purposes. contracts. there We increases. Although is positions. believe See to We there Note a estimate is 4 lesser that in risk the extent, in a notor Consolidated 10% Financial hedging decrease increase against Statements the or for the fair decrease a value in summary crude of of oil our our prices hedge hedge as portfolio of by approximately December $23.6 31, million 2006 and wouldapproximately $20.5 increase 50% million, of respectively. Alaska’s fuel consumption in the first quarter of 2007. company-specific data on the results of our fuel-hedging program. Current and long-term debt obligations Current and long-term portions of the Operating lease commitments(1) Aircraft purchase commitments Interest obligations (2) Other purchase obligations (3) obligations as of December 31,expect 2006. to This be table approximately excludes $50 contributions million to to our $80 various million pension per plans, year which through(in we millions) 2010. 2007 Annual Report o annsprsae h u fteqatr ilnteultettlfrtefl year. full the for total the equal not will quarters the of sum the share, per earnings For * * (loss) income Net accounting before (loss) Income share: per (loss) earnings Diluted (loss)* income Net accounting before (loss) Income share: per (loss) earnings Basic (loss) income Net accounting before (loss) Income (loss) income Operating revenues Operating (Unaudited) Information Financial Consolidated Quarterly Selected ended years the for Accounts, Qualifying and Valuation II, Schedule Statement Firm Financial Accounting Consolidated 2004 Public and Registered 2005 Independent 2006, of 31, Reports December Statements ended Financial years Consolidated the to for Notes Flows and Cash 2005 of 2006, Statements 31, Consolidated December 2004 ended and years 2005 the 2006, for 31, Equity December Shareholders’ ended of years Statements the Consolidated 2005 for and Operations 2006 of 31, Statements December Consolidated of as Sheets Balance (Unaudited) Consolidated Information Financial Consolidated Quarterly Selected interest 2006, 8. in ITEM did they than more points. 1% basis average 41 to approximately were by rates increase interest would short-term income If rates. interest in changes at debt long-term total our 2005. of 31, 37% December approximately at is 44% notes debt to senior variable-rate compared million our 2006 debt $150 result, 31, new variable-rate a December our our As of converted 2006. interest several we in the Additionally, and equity fixed 2006. arrangements to we and fixed-rate fluctuations, 2005 were rate in 2006 interest agreements in by of debt arrangements items risk variable-rate these the existing with mitigate certain associated help on flows to rates debt cash order variable-rate and In on earnings million. incurred net $2.6 rates our approximately variable-rate interest change our average correspondingly through the would mitigated in 2006 somewhat change during is 10% exposure hypothetical This A which rates. portfolio. instruments, interest investment variable-rate in include changes obligations to debt exposure Our have portfolio. investment short-term and obligations Risk Market Financial change* change* change 2004 and 2005, 2006, 31, December 2004 eas aeivsmnsi aktbescrte,wihaeepsdt aktrs soitdwith associated risk market to exposed are which securities, marketable in investments have also We debt our to primarily related rates interest in changes with associated risk market to exposure have We ...... OSLDTDFNNILSAEET N UPEETR DATA SUPPLEMENTARY AND STATEMENTS FINANCIAL CONSOLIDATED ...... 98 ...... 735.4 $ (125.2) 2006 (2.36) (2.36) (2.36) (2.36) (79.1) (79.1) AL FCONTENTS OF TABLE s Quarter 1st ...... $642.5 2005 (2.39) (2.97) (80.5) 0.34 0.36 27.3 9.9 56 $873.0 ...... 2006 1.38 1.38 1.46 1.46 55.5 55.5 80.1 n Quarter 2nd i ilos xetprshare) per except millions, (in ...... $756.5 ...... 56 ...... 2005 0.56 0.56 0.64 0.64 17.4 17.4 36.6 $935.7 2006 (0.44) (0.44) (0.44) (0.44) (17.4) (17.4) (24.0) r Quarter 3rd $845.7 153.1 2005 2.71 2.71 3.28 3.28 90.2 90.2 ... 62 ...... 59 ...... $790.3 2006 (0.29) (0.29) (0.29) (0.29) (11.6) (11.6) (18.2) t Quarter 4th $730.6 Page(s) 96-97 63-95 60-61 57-58 2005 (1.15) (1.15) (1.15) (1.15) (33.0) (33.0) (50.5) Annual Report 33.6 51.9 44.0 91.8 84.3 134.0 909.0 982.6 112.0 124.2 101.4 481.0 305.3 2005 3,069.4 1,037.2 2,032.2 1,540.3 2,283.1 $3,792.0 $ 73.6 — 22.7 44.7 45.9 88.1 906.1 123.1 783.2 111.3 134.2 134.2 530.7 437.8 2006 3,265.1 2,359.0 1,013.9 1,572.3 2,296.6 $4,077.1 $ 230.7 ...... 57 ...... Alaska Air Group, Inc...... CONSOLIDATED BALANCE SHEETS ...... See accompanying notes to consolidated financial statements...... Less accumulated depreciation and amortization Total Assets Total Property and Equipment—Net Intangible Asset Related to Additional Minimum PensionFuel Liability Hedge Contracts Other Assets Property and Equipment Aircraft and other flight equipment Total Current Assets ASSETS Current Assets Cash and cash equivalents Marketable securities (including securities loaned of $108.4Total and cash $110.0) and marketable securities Securities lending collateral Receivables—less allowance for doubtful accountsInventories of and $2.9 supplies—net and $2.7 Deferred income taxes Fuel hedge contracts Prepaid expenses and other current assets Other property and equipment Deposits for future flight equipment As of December 31 (In Millions) Annual Report oa iblte n hrhles Equity Shareholders’ and Liabilities Total earnings Retained loss comprehensive other Accumulated compensation stock-based Deferred shares 2006—2,207,474 cost: at (common), stock value Treasury par of excess in Capital shares 2006—42,501,163 Issued: shares 100,000,000 Authorized: value par $1 outstanding stock, or Common issued none shares, 5,000,000 Authorized: value par $1 stock, Preferred Equity Shareholders’ Contingencies and Commitments liabilities Other revenue Deferred taxes income Deferred Credits and Liabilities Other Portion Current of Net Debt, Long-Term Liabilities Current Total debt long-term of portion Current obligation lending Securities liability traffic Air liabilities accrued taxes Other payroll and vacation wages, Accrued rent aircraft Accrued payable Accounts Liabilities Current EQUITY SHAREHOLDERS’ AND LIABILITIES Amounts) Share Except Millions (In 31 December of As 05 59295shares 35,932,925 2005— 0524879shares 2005—2,478,779 ...... e copnigntst osldtdfnnilstatements. financial consolidated to notes accompanying See ...... OSLDTDBLNESHEETS BALANCE CONSOLIDATED ...... lsaArGop Inc. Group, Air Alaska ...... 58 ...... $4,077.1 90.0 $ 1,031.7 1,236.7 (191.4) 2006 885.5 206.9 877.9 923.2 475.6 333.0 114.6 119.1 111.3 311.2 404.3 144.0 (50.4) 42.5 56.8 — — $3,792.0 86.9 $ 1,165.6 (132.0) 2005 827.6 278.1 710.3 829.7 382.2 291.1 156.4 969.1 113.5 112.0 291.8 383.7 105.9 (56.6) 35.9 71.8 (8.1) — Annual Report 2004 8.9 1.7 NANA $ (11.2) NA $ (0.42) $ (0.42) —— — 40.2 (6.1) (0.6) 94.1 90.3 30.9 24.5 20.0 5.3 51.3 51.9 52.7 (5.3) 84.5 (15.3) 20.4 53.4 (2.66) — (3.27) — (29.3) (26.3) (63.0) (51.9) (90.4) — 152.5 138.9 903.6548.9 962.2 228.5187.0 455.2 202.7 184.1 132.4 187.4 163.4 179.4 143.4 108.4 150.6 142.6 166.5 5.7 137.2 (20.6) 207.2 197.4 2005 27.60933.917 26.859 26.859 2,975.3 2,723.8 2,808.8 2,718.1 $ (5.9) $ (15.3) $ (0.21) $ (0.57) $ 2.65 $$ (0.57) (0.01) $ (0.57) $2,728.7 $2,494.6 $ 3.06 $ (0.57) NA NA NA NA NA — — (0.5) (1.5) 97.3 54.3 36.8 51.2 24.7 24.8 (87.3) (78.0) (87.8) (35.2) (52.6) 154.1 937.0 873.5 230.7 180.2 204.0 153.2 169.3 157.5 214.0 189.5 2006 37.939 37.939 3,334.4 3,421.7 $ (52.6) $ (1.39) $ (1.39) $ (1.39) $3,083.0 $ (1.39) 59 ...... Alaska Air Group, Inc...... (assuming change in method of accounting was ...... CONSOLIDATED STATEMENTS OF OPERATIONS ...... See accompanying notes to consolidated financial statements...... Cumulative effect of accounting change Cumulative effect of accounting change Pro forma net loss Basic Net Loss Per Share Income (loss) before accounting change Net Loss Per Share Income (loss) before accounting change Pro Forma Basic Loss PerPro Share Forma Diluted Loss Per Share Diluted applied retrospectively): Freight and mail Other—net Unaudited Pro Forma Results Shares used for computation: Diluted Earnings (Loss) Per Share: Interest expense Income (loss) before income tax and accounting change Net Loss Basic Earnings (Loss) Per Share: Operating Income (Loss) Nonoperating Income (Expense) Interest income Total Operating Expenses Operating Revenues Passenger Total Operating Revenues Operating Expenses Wages and benefits Variable incentive pay Aircraft fuel, including hedging gainsAircraft and maintenance losses Aircraft rent Landing fees and other rentals Contracted services Selling expenses Depreciation and amortization Food and beverage service Other Interest capitalized Other—net Income tax expense (benefit) Income (loss) before accounting change Year Ended December 31 (In Millions Except Per Share Amounts) Fleet transition costs Cumulative effect of accounting change, net of tax Restructuring charges and adjustments Impairment of aircraft and related spare parts Annual Report aacsa eebr3,2005 31, December at Balances loss comprehensive Total (loss): income comprehensive Other loss net 2005 2004 31, December at Balances loss comprehensive Total (loss): income comprehensive Other loss net 2004 2003 31, December at Balances Millions) (In rauysoksales stock Treasury stock-based deferred of Amortization compensation stock-based Deferred sales stock Treasury stock-based deferred of Amortization compensation stock-based Deferred tc sudi qiyofrn,nto $0.4 of net offering, equity in issued Stock including plans, stock under issued Stock purchase stock employee for issued Stock including plans, stock under issued Stock purchase stock employee for issued Stock compensation compensation fees benefit tax $1.8 plan benefit tax $0.6 plan iiu eso liability pension Minimum hedges: fuel to Related securities: marketable to Related plan retirement supplemental Officers 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 benefit tax $1.2 of net adjustment expense tax $1.0 of net noetxeffect tax Income earnings to Reclassification effect tax Income earnings to Reclassification elsiiaint earnings to Reclassification noetxeffect tax Income earnings to Reclassification value fair in Change effect tax Income value fair in Change value fair in Change ...... 2.1 2.1 — 0.1 ...... 0.1 — ...... OSLDTDSAEET FSAEODR’EQUITY SHAREHOLDERS’ OF STATEMENTS CONSOLIDATED ...... 0.0 ...... 1.6 ...... 4.7 ...... 151.5 ...... 1.5 ...... e copnigntst osldtdfnnilstatements. financial consolidated to notes accompanying See .. 6.8 ..... 3.5 ...... 3.5 .... 0.9 ...... Outstanding Common Shares 33.454 27.126 26.762 0.172 0.062 5.700 0.342 0.114 0.165 0.137 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 $674.2 $299.3 (79.0) $ 0.0 $ $(61.9) $486.3 $29.5 . 3.9 3.9 — — 1.4 1.4 — — . 9. 200.0 10.7 2.4 — 194.3 — 10.4 5.7 2.3 0.3 0.1 4.5 2.5 — — 4.3 2.4 0.2 0.1 a Value Par aia in Capital xesof Excess 60 Treasury tCost at Stock, Compensation Stock-Based Deferred 68 0.0 (6.8) 0.0 (3.5) Comprehensive Accumulated Other Loss (12.8) (16.5) 4.)(41.2) (41.2) 27 (2.7) (2.7) 81 (8.1) (8.1) 17.9 11 (1.1) (3.5) (1.1) (2.3) (2.3) (0.5) (5.2) . 0.9 0.9 . 0.0 0.0 Earnings Retained 1.)(15.3) (15.3) 59 (5.9) (5.9) Total (56.3) (17.9) Annual Report (112.0) Total (18.6) (18.6) (52.6) (52.6) Retained Earnings 2.3 2.3 (1.3) (0.6) (0.3) (0.3) (43.1)(18.7) (43.1) (18.7) Loss Other Accumulated Comprehensive Deferred Stock-Based Compensation Cost Stock, at Treasury (8.1) 8.1 0.0 61 Excess of Capital in Par Value Stock Common Alaska Air Group, Inc. 0.2720.093 —0.706 0.1 — 0.75.769 2.4 6.2 25.3 5.8 — — 139.8 6.2 2.5 26.0 145.6 40.294 $42.5 $877.9 $(50.4) $ 0.0 $(191.4) $206.9 $ 885.5 33.454 $35.9 $710.333.454 $(56.6) $35.9 $(8.1) $710.3 $(56.6) $(132.0) $(8.1) $278.1 $ 827.6 $(132.0) $259.5 $ 809.0 Shares Common Outstanding ...... 0.4 0.4 ...... See accompanying notes to consolidated financial statements...... 4.0 ...... — — — — — — ...... 8.2 8.2 ...... 0.3 ...... CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY—(Continued) ...... Change in fair value Reclassification to earnings . .Income . tax effect (0.4) ...... plan net of $0.2 tax effect adjustment, net of $11.1 tax benefit $25.2 tax benefit Related to fuel hedges: Officers supplemental retirement Related to marketable securities: Postretirement medical liability Pension liability adjustment, net of plans purchase plan $4.1 tax benefit convertible notes, net of $4.4 million of unamortized issuance costs 108, net of $11.1 tax effect 2005 Balances at December 31, 2006 Income tax effect Implementation of SFAS 123R Stock-based compensation Treasury stock issued under stock Stock issued for employee stock Stock issued under stock plans, including Stock issued upon conversion of senior Reclassification to earnings Total comprehensive loss (In Millions) Balances at December 31, 2005 Cumulative effect of adoption of SAB Adjusted balances at December 31, 2006 net loss Other comprehensive income (loss): Annual Report e ahue nivsigactivities investing in used cash Net other and deposits Restricted icatdpst returned deposits Aircraft rpryadeupetadditions: equipment and Property obligation lending Securities a eei rmsokoto exercises option stock from benefit Tax collateral lending Securities ocs netn n iacn activities: financing and investing Noncash fees related of net stock, common of issuance from Proceeds securities marketable of maturities and Sales ahadcs qiaet tbgnigo year of beginning at equivalents cash and Cash payments lease capital and debt Long-term securities marketable of Purchases activities: operating by provided cash net to (loss) income net reconcile to Adjustments upeetldslsr fcs ad(eudd uigteya for: year the during (refunded) paid cash of disclosure Supplemental year of end at equivalents cash and Cash equivalents cash and cash in change activities Net financing in) (used by provided cash Net net debt, long-term of issuance from Proceeds activities: financing from flows Cash assets of disposition from Proceeds activities: investing from flows Cash activities operating by provided cash Net loss Net activities: operating from flows Cash Millions) (In 31 December Ended Year nraei eerdrvneadother-net and revenue deferred in Increase nrae(erae nohrcretliabilities current other in (decrease) Increase nraei i rfi liability traffic air in Increase nraei rpi xessadohrcretassets current other and expenses prepaid in Increase Ices)dces nreceivables—net in decrease (Increase) os(an nsl fassets of sale on (gain) Loss a eei rmsokoto exercises option stock from benefit Tax taxes income deferred in Changes hne nfi auso pnfe eg contracts hedge fuel open of values fair in Changes te rpryadequipment and property Other tc-ae compensation Stock-based te lgtequipment flight Other mriaino ifaeadegn overhauls engine and airframe of Amortization aiaie overhauls Capitalized rdtrcie o lgtdpst eerdi te liabilities other in deferred deposits flight for received Credit amortization and Depreciation icatadarrf ucaedeposits purchase aircraft and Aircraft sesaqie ne ogtr etadcptlleases capital and debt long-term under acquired Assets parts spare related and aircraft of Impairment etasmdi ucaeo D8 aircraft MD-80 of purchase in assumed Debt adjustments and charges Restructuring ovrino eircnetbentst equity to notes convertible senior of Conversion le rniincosts transition Fleet noetaxes Income tax of net change, accounting of effect Cumulative neet(e faon capitalized) amount of (net Interest ...... e copnigntst osldtdfnnilstatements. financial consolidated to notes accompanying See ...... OSLDTDSAEET FCS FLOWS CASH OF STATEMENTS CONSOLIDATED ...... lsaArGop Inc. Group, Air Alaska ...... 62 ...... 9.7 ...... 150.0 $ 48.2 $ 230.7 $ (52.6) $ (533.0) (591.8) (806.5) (202.6) 2006 157.5 935.9 189.5 157.1 240.3 408.4 449.8 (11.3) (10.0) (34.0) (52.5) (37.8) 44.0 34.7 19.4 16.1 84.1 11.6 24.8 30.4 73.6 (0.4) (4.1) (0.7) — — — — — 8.2 0.7 4.1 9.5 3.6 $—$— 17$49.7 $ 51.7 $ 36$28.0 $ 73.6 $ (15.3) $ (5.9) $ 1145 (976.1) (1,184.5) ,2. 745.3 1,121.4 2005 411 (392.0) (481.1) 350 (60.8) (345.0) 120 — (112.0) 4. 142.6 143.4 1. — 112.0 1. 8.4 215.2 5. (106.3) 256.6 333.4 270.1 1.)81.0 (11.5) 1.)(21.0) (13.4) 2.)21.3 (24.8) 7.)(55.4) (70.1) 3.)(35.2) (32.9) 4.)(26.9) (46.6) 5.)(209.9) (54.2) 6513.5 46.5 1612.5 41.6 16(2.5) 51.6 0453.4 20.4 80192.9 28.0 — 90.4 56(164.9) 45.6 94.6 93.8 18 (0.6) (1.8) 76 (6.1) (7.6) 62.6 — (63.8) — 40.2 — —— . 19.2 7.6 . 1.0 1.6 . 0.1 2.1 . 0.6 1.8 . (39.8) 1.5 . 12.4 6.5 2004 44.7 Annual Report 63 The consolidated financial statements include the accounts of Alaska Air Group, Inc. (Air Group or the Alaska and Horizon operate as airlines. However, their business plans, competition, and economic risks West Coast passenger traffic accounted for 45% of Alaska’s 2006 revenue passenger miles, passenger traffic Approximately 91% of Horizon’s revenue passenger miles are flown domestically, primarily in the states of On January 1, 2004, Horizon began operating regional jet service branded as Frontier JetExpress under a The Company’s operations and financial results are subject to various uncertainties, such as industry Approximately 84% and 49% of Alaska and Horizon employees, respectively, are covered by collective NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Alaska Air Group, Inc. December 31, 2006 Note 1. General and Summary of Significant AccountingOrganization Policies and Basis of Presentation Company) and its subsidiaries, theIndustries, principal Inc. subsidiaries (Horizon), being through Alaska which Airlines,intercompany the Inc. balances Company (Alaska) and conducts and transactions substantially Horizon have all Air conformity been of with eliminated. its accounting These operations. principles financial All generally statements significant requires accepted have the in been use the prepared of United in management’s States estimates. of Actual America results and may their differ preparation from theseNature estimates. of Operations differ substantially. Alaska is aprovides major north/south airline service and between principally cities serveseast/west in destinations service the in to western the eight U.S., state cities, Canada of2006 primarily and Alaska was from Mexico. and 1,038 Seattle. Alaska miles. It also Horizon operates provides and is an western a all-jet Canada. regional fleet Horizon airline and serves serving itsHorizon its primarily average operates own the passenger both native Pacific trip jet markets Northwest, and in and northern turboprop provides California, aircraft, certain and contract its flying average for passenger Alaska. trip in 2006 waswithin 392 Alaska miles. and between Alaska11%, and the the Canada U.S. markets mainland accounted accountedenplanements, for for Alaska’s 4%, 20%, leading and the airports other Mexico are markets marketsrevenues, Seattle, accounted accounted its Los for for leading Angeles, 20%. nonstop Anchorage, Based routes and on are Portland. passenger Anchorage-Seattle, Based Los on Angeles-Seattle, 2006 and San Diego-Seattle. Washington, Oregon and Idaho. TheBased Canada on markets passenger accounted enplanements, for Horizon’s 9%on leading of revenues airports revenue in are passenger 2006, Seattle, miles its Portland, in leading Boise, 2006. nonstop and routes Spokane. are Based Portland-Seattle, Spokane-Seattle, and Ontario-Portland. 12-year agreement with Frontier Airlines.JetExpress Horizon brand operated in nine 2005 regional and jetof 2006. aircraft passenger Flying under revenues under the in this Frontier 2006 agreement2006, and represented Horizon 23% 23% announced of of that capacity Horizon’s it and capacityof would 9% and 2007, discontinue of 8% with the passenger a Frontier revenues full JetExpress inredeployed exit program 2005. throughout from beginning In its the in the network. program the third by first quarter the quarter of end of 2007. The Company anticipates that theseinstability, aircraft which will has be lead tointense bankruptcy competition, filings volatile by fuel some prices, ofexpenditures, a the government largely major regulation, unionized carriers, and work general potential force, economic aircraft the conditions, incidents. need to finance large capital bargaining agreements. Approximately 15% andcovered 36% under of agreements Alaska that and are Horizon currently employees, in respectively, negotiations are or become amendable prior to December 31, 2007. Annual Report 05 epciey earbeadrtbearrf at netr r nlddi lgtequipment. and flight 2006 in 31, included December are at inventory million parts $4.4 aircraft and respectively. rotable million 2005, and $7.2 and Repairable of 2006 all respectively. inventory 31, for 2005, fuel December allowance includes at The also million value. supplies-net $20.7 realizable and and net Inventory million their corresponding $20.5 at the was carried of inventories are lives expendable inventories estimated non-surplus Surplus on values. based salvage accrued and is type parts fleet expendable for allowance obsolescence An supplies-net. Supplies—net and Inventories accounts. on of based aging accounts an doubtful to for applied are allowance experience and the historical Company, determines and the Management accounts to accounts. troubled due doubtful known amounts for miscellaneous allowance other an and of authorities, net tax government partners, plan mileage Receivables marketable as included million are $108.4 securities had affected Company These sheets. the program. balance 2005, the consolidated and under the 2006 loan in 31, on securities continues December securities with and of of accordance loaned As million in securities them. $110.0 agent the on and that to appreciation by rights and This invested ownership interest securities. and full earn loaned agent maintains to the lending Company third of a The the value with guidelines. to market deposited Company’s loaned daily is the are the and securities of restricted these 102% is which for collateral in collateral cash period cash time requires the Company During the income. parties, investment enhance to year one Lending payable. Securities accounts in included $29.7 is was and balance respectively, cash 2005, negative and the 2006 cash of 31, its amount December in The at balance liability. million negative current $34.4 a and a to maintains million as normally Due reported Company disbursed. is the are which banks, checks accounts, the when disbursement clearing balances checks cash in reduces delay Company time The the market. approximates which cost, at carried Equivalents Cash and Cash format. current the to data year’s prior the conform to made been have reclassifications other (expense) 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 prices) ticket ilnsaecaatrzdb ihfxdcss ml lcutosi odfcosadyed( esr of measure (a yield and factors load in fluctuations Small costs. fixed high by characterized are Airlines xedbearrf at,mtrasadsple r ttda vrg otadaeicue nivnoisand inventories in included are and cost average at stated are supplies and materials parts, aircraft Expendable customers, from amounts receivables, card) credit (including traffic airline of primarily consist Receivables than less of period a for parties third to securities marketable certain lends Company the time, to time From are They less. or months three of maturities original with investments liquid highly of consist equivalents Cash from losses and gains fuel-hedging its of all reclassified has Company The operating for 14 Note See States. United the in occur sales Horizon’s and Alaska’s of all Substantially to icatfe,icuighdiggisadlosses, and gains hedging including fuel, aircraft 64 o l eid rsne seNt ) Certain 4). Note (see presented periods all for te ooeaigincome nonoperating other Annual Report years years years years years 5-10 years 25-30 years Shorter of lease term or estimated useful life 65 ..... 10 ...... 15 ...... 20 ...... 3-5 ...... 10 ...... Deferred revenue results primarily from the sale of mileage credits. This revenue is rotable spares Boeing 737-400/700/800/900 Bombardier Q400 and CRJ-700 Bombardier Q200, Q400 and CRJ-700 Buildings improvements Minor building and land improvements Capitalized leases and leasehold Computer hardware and software Other furniture and equipment Aircraft and related flight equipment: As a result of the expected early retirement of the B737-200C and MD-80 fleets, all aircraft and related “Related flight equipment” includes rotable and repairable spare inventory, which are depreciated over the Maintenance and repairs are expensed when incurred. Major modifications that extend the life orThe improve Company evaluates long-lived assets to be held and used for impairment whenever events or changes in The Company capitalizes costs to develop internal-use software that are incurred in the application The Company uses a combination of self-insurance and insurance mechanisms to provide for workers Deferred Revenue flight equipment are being depreciatedretirement through dates. 2007 and 2008, respectively, depending on the scheduled associated fleet life unless otherwise noted. the usefulness of aircraft are capitalized and depreciated over their estimated period of use. circumstances indicate that the totalCompany carrying groups amount assets of for an purposes assetasset of or group such asset are reviews group largely at may independent the notis of lowest be recognized the level recoverable. when cash for The estimated flows which future of identifiablegroup undiscounted other cash and cash groups flows its flows of of eventual expected assets the disposition to andrecoverable, are result liabilities. a less from An write-down than the impairment equal its use loss to carrying of the amount. the excess If asset of the or the asset asset carrying or amount assetInternally over group Used the is Software fair not Costs value considered will be recorded. development stage. Amortization commences whenamortization the period software is is the ready estimated forprimarily useful its include life intended contract of use labor the and and software, the software. payroll generally The costs three Company of to capitalized the five software individuals years.during development dedicated Capitalized the costs to costs years of the ended $9.9 development December million, of 31, $2.3 internal-use 2006, million, 2005, and and $6.8 2004, million respectively. Workers Compensation and Employee Health-Care Accruals compensation claims and employee health careCompany benefits. are Liabilities not associated discounted with and the areexpertise, risks estimated, severity that in factors are part, and retained by other by considering actuarialsignificantly the historical assumptions. affected claims The if experience estimated future and accruals occurrences outside for and claims these differ liabilities could from be these assumptions and historical trends. recognized when award transportation is provided or over the term of the applicable agreements. Property, Equipment and Depreciation Property and equipment are recordeduseful at lives, cost which and are depreciated as using follows: the straight-line method over their estimated Annual Report eerdrvneadlaiiisaeicue ne h olwn aac he atosa eebr3 (in 31 December at captions sheet Plan balance Mileage following commission Alaska’s the as operations. under recognized of included millions): is statements are deferred consolidated liabilities not the and awards proceeds in revenue for sales revenue-net deferred revenue the other other-net of in as portion included and The and as Horizon, airlines. income recognized or other are Alaska on proceeds on flown recognizes deferred flown and and The and redeemed transportation provided. redeemed award is awards the the transportation for defers of award revenue Company value the passenger The fair when cards. estimated revenue credit the as affinity represents amount a Airlines that and that agencies, Alaska proceeds earned rental offers sales are car that the miles hotels, bank of as as major portion liability such a a partners and as non-airline chain, of accrued to store cost and credits grocery estimated expense mileage the selling sells partners, a also airline as Alaska through recognized accumulated. and is Alaska awards on travel flying free by providing earned miles For mileage. accumulated below. paragraph Plan” “Mileage Plan the Mileage in described as recognized are they and Plan Mileage the data. to historical Company’s the on the based and generally recognition are revenue estimates the These of recognized. timing be the to both certain revenue regarding airlines, of estimates to other amount using Due with revenue expense. agreements as prepaid interline recognized a and are as policies, amounts included exchange recognized. are and is recognized refund revenue yet structures, related not pricing the complex fees when related expensed and are commissions fees traffic related Passenger and commissions traffic Passenger liability. traffic and 2006 Recognition 31, Revenue December of as million $9.9 and million $9.2 respectively. was 2005, and 31, liabilities, December long-term and current other termination. of lease until amount certainty actual with the known on although be remaining agreement, not time lease will the the return on in upon based included lessor is provisions any accrual the to This and due date. usage return aircraft aircraft planned scheduled lease, the the 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 Leases Operating te iblte n Credits: and Liabilities Other Liabilities: Current Captions Sheet Balance on based members to awards travel provides that Plan”) (“Mileage program flyer frequent a operates Alaska related primarily are revenues Other-net provided. is service when recognized are revenues mail and Freight air as reported are used yet not but sold Tickets travels. passenger the when recognized is revenue Passenger part is accrual The accrual. established the against charged are payments any returned, are aircraft leased As 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 Total liabilities Other revenue Deferred liabilities accrued Other ...... 66 $545.6 $196.6 328.3 2006 20.7 $471.7 $165.0 285.8 2005 20.9 Annual Report 2004 98.9 77.8 2005 $ 81.3 $ 65.3 $180.2 $143.1 Share-Based Payment: 98.7 2006 $ 95.5 $194.2 67 , as of January 1, 2006. This new standard requires companies to ...... Total Mileage Plan revenues Interest is capitalized on flight equipment purchase deposits as a cost of the related asset, and is depreciated over the The Company accounts for financial derivative instruments utilizing Statement of Financial Accounting The Company uses the asset and liability approach for accounting and reporting income taxes. Deferred tax The Company adopted Statement of Financial Accounting Standards (SFAS) 123R, Aircraft fuel includes raw jet fuel and associated “into-plane” costs, fuel taxes, oil, and all of the gains and Contracted services includes expenses for ground handling, security, navigation fees, temporary employees, Selling expenses include credit card fees, global distribution systems charges, the estimated cost of Mileage Passenger revenues Other-net revenues 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 Derivative Financial Instruments Standards No. 133 (SFAS 133),Note Accounting 4 for for Derivative further Instruments discussion. and Hedging Activities, as amended. See Income Taxes assets and liabilities are recognizedstatement for carrying future amounts tax of consequences existing attributableand assets to tax and differences credit liabilities between carryforwards. and the Deferred their financial apply tax respective to assets tax taxable and bases, income liabilities and in are forThe the measured operating effect years using loss on in enacted deferred which tax tax those ratesthe assets temporary expected enactment and differences to date. liabilities are A of expected valuation a tothat, allowance change be based would in recovered on be tax or available established, rates settled. evidence, if is are necessary, recognized not for in expected the the to amount period be of that realized. Stock-Based any includes Compensation tax benefits An Amendment of SFAS Nos. 123 and 95 Aircraft Fuel losses associated with fuel hedge contracts. Contracted Services data processing fees, and other similar services. Selling Expenses Plan free travel awards, advertising,costs promotional are costs, expensed commissions the and first incentives.million, time Advertising and the production $16.7 advertising million takes during place. the Advertising years expense ended was December $14.2 31, million, 2006,Capitalized $14.0 2005, Interest and 2004, respectively. realized within one year, includingassociated $32.7 with million Mileage and Plan $25.1 awards million issued at but December not 31, yet 2006 flown. and 2005, respectively, years ended December 31 (in millions): estimated useful life of the asset. The capitalized interest is based on the Company’s weighted-average borrowing rate. Annual Report au fteeaad.Frteasmtosue nteyaspeetd e oe10. Note fair see the presented, of years estimate the the in affect used materially assumptions can the risk-free assumptions For the the these awards. term”), (“volatility”) in these (“expected term Changes of them expected yield. value exercising the dividend to over the prior price and options stock rate vested common interest estimated their Company’s the to the including on of over assumptions hold volatility ratably subjective will estimated amortized of employees grant then input that option and the time stock model requires of each option-pricing model length of Black-Scholes Black-Scholes value the The fair using period. The grant vesting stock 2004. of the Company’s and date the 2005 the for in on cost method estimated compensation fair-value is had the (EPS) using share determined per been (loss) options earnings pro-forma and (loss) income amounts): share per except millions (in 2006 31, December grants option for recognized 2006. was to cost prior compensation periods no in such, awards As ESPP options. or stock for accounting 25, in No. interpretations Opinion (APB) Board Principles Accounting cash flows. as cash reported operating be as gains purposes than exercise statement rather award financial activities stock for financing stock- from recognized from for realized expense flows 123(R) benefits compensation FAS tax stock-based in that of described requires excess method also in the standard from The pool) awards. APIC compensation (the based benefits Awards tax Payment excess 123(R)-3, Share-Based historical No. of calculating elected FSP Effects also Position Tax Company Staff the The FASB for of periods. under Accounting use between available limited comparability method relatively the the the on use to impact to previously due immaterial values method the fair this and in grant-date selected awards recognized the Company stock-based expense using The with 2006 disclosures. basis, 1, pro-forma prospective January for a beginning calculated the on operations method, awards of this these statements Under of consolidated used. portion the was unvested 123R the SFAS for by accounts permitted Company transition for method” prospective “modified operations. expense of compensation statements stock-based consolidated All the standard. in the benefits Company’s of and the adoption wages for the in Accounting with recorded ESPP. change is Company’s not the did for awards accounting stock the restricted changes and plans equity incentive prospective “modified the using is Company to and The below. grants provision discount. explained Company look-back 15% is the a a which that features at method,” units which stock stock (ESPP), purchase restricted Plan to as and Purchase employees employees options Stock allows to stock Employee issued both Company’s compensation to the equity-based applies and other standard employees and The options date. stock grant of the value of fair the expense as recognize h olwn al ersnstepofranticm ls)bfr conigcag,pofranet pro-forma change, accounting before (loss) income net pro-forma the represents table following The activities financing from flows Cash activities operating from flows Cash share: per loss Net e loss Net taxes income before Loss ended year the for 123R SFAS of adoption Company’s the of impact the identifies table following The of provisions the with accordance in method value intrinsic the applied Company the Previously, the complete, not is period vesting the which for 2006, 1, January to prior granted options stock For long-term Company’s the under options stock for accounting the changes 123R SFAS of adoption The ai n diluted and Basic ...... $ ...... $ ...... conigfrSokIse oEmployees to Issued Stock for Accounting 68 hc rvdsa lentv ehdfor method alternative an provides which , rniinEeto eae to Related Election Transition Reported 203$3. 4.1 $ (4.1) $ $236.2 $(0.09) $453.9 $240.3 (1.30) $ $449.8 $(1.39) 5.)$(92 (3.4) $ (49.2) $ (52.6) 8.)$(35 (4.3) $ (83.5) $ (87.8) As Pro-forma P 25 APB using n related and , Impact Annual Report — — (4.5) (4.5) (0.74) (0.74) (0.74) (0.74) 2004 $(0.57) $(0.57) $(0.57) $(19.8) $(15.3) $(19.8) $(0.57) $(15.3) 1.3 1.3 (4.8) (4.8) 2.55 2.93 (0.11) (0.34) 2005 $(0.01) $ 2.65 $(0.21) $ 81.0 $ (5.9) $ (9.4) $ 3.06 $ 84.5 ...... 69 ...... , (FIN 46) because the Company is not the primary beneficiary of the ...... Pro-forma As reported Pro-forma As reported Pro-forma As reported In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 108 Pro-forma The Company is the lessee in a series of operating leases covering our leased aircraft. In many instances, the As reported for all awards, net of related tax for all awards, net of related tax convertible notes. See Note 13 for further discussion. method, net of related tax Diluted EPS*: Diluted EPS before accounting change*: Deduct: Total stock-based compensation expense determined under fair value- based methods Basic EPS: Deduct: Total stock-based compensation expense determined under fair value- based methods recognized under the intrinsic value-based method, net of related tax * Diluted EPS calculations for 2005 include the add-back of interest expense, net of tax, onVariable the Interest Company’s Entities lessors are trusts established byThese a leasing third entities party meet specifically the torequirements criteria purchase, of for finance Financial variable and Accounting interest lease Standards entities. aircraftConsolidation Board However, to of (FASB) they the Variable issued do Company. Interest Interpretation not Entities No. meet 46 the (FIN consolidation 46), entity’s expected gains or losses.involved The contain Company’s terms conclusions which are are basedresidual consistent on value with the guarantees market fact made terms that by at theobligate the the leasing the Company, inception arrangements Company fixed-price of to purchase the absorb obligations leasemaximum the or and exposure majority similar do under of features not these expected that include types lossesin of of future lease the lease arrangements variable commitments is interest in the entities.physical Note remaining The condition 8 lease Company’s required (plus payments, for the which return). cost, are if reflected any, of bringing the equipment intoNew compliance Accounting with Standards the Pro-forma net income (loss) Basic EPS before accounting change: Add: Total stock-based compensation expense recognized under the intrinsic value-based Pro-forma net income (loss) before accounting change Net income (loss) as reported Income (loss) before accounting changeAs (in reported millions): (SAB 108). SAB 108 expressesstatements SEC are staff evaluated views for regarding purposes thefinancial of process statements. determining by SAB whether which 108 those misstatements was misstatements inSAB effective are financial 108 for material in fiscal to the years the fourth ending Company’s quarter after of November 2006 15, with 2006. an The effective Company date adopted of January 1, 2006. See Note 16 for further discussion. Annual Report t xsigodro 7780arrf orpaetecpct otfo h al eieeto h MD-80s. the of retirement early the the than from earlier under lost is rights capacity which purchase the 2008, additional replace of and to end options aircraft the orders, B737-800 by firm of service use order from to existing aircraft expects its those Company remove The and schedule. time) retirement the original at aircraft leased 11 and opldb hr-at oslat dutdfrcranfcosdee prpit ymngmn,sc sthe as such management, cycle. by maintenance appropriate its deemed in factors aircraft certain each for of adjusted position consultant, third-party a by value. compiled market fair estimated charge its impairment to an fleet remaining recorded the estimated Company down the the write to 2006, to compared of (pretax) when quarter million recoverable first $131.1 longer the totaling no during was Accordingly, fleet flows. MD-80 cash the future of value carrying the that Fleet Impairment 737 and All-Boeing Transition to Fleet Transition includes also 2. 2004 fleet. Note of F-28 quarter retired fourth Horizon’s The to million. related $53.4 million was $0.6 2004 of in charge charge impairment total an The 2004. in earlier incurred. announced costs actual on based employees affected for costs medical post-employment for estimate the adjust for 3 Note See program. severance the in participation their withdrew that discussion. employees further of number the for adjust position. financial or Adjustments operations adoption Quarter from the Fourth results such, Company’s As the policy. on accounting effect this been an modifying have have and of not intention are will no fees, 06-03 has other from EITF Company and collected of The fees Taxes basis. security is 2006. and net 06-03 15, EITF a airport December disclosure. on taxes, after requires recorded sales beginning that include period decision which reporting policy passengers, annual accounting Company’s or an the is interim basis first net the or for gross effective a Presentation) either Net on Versus taxes Gross of is, (that Statement Income the 06-03, No. results Company’s the on impact significant a of have is impact to position. statement the statement financial The evaluating the or value. currently expect operations fair is not from at Management does carried 2007. but is 15, 157, instrument November SFAS an after adopting not beginning or years whether fiscal 157 to for SFAS as effective pronouncements. guidance accounting existing other change under not required does measurements fair-value about disclosure expands position. financial or operations Measurements from results its on Company impact tax The material income 2006. a for 15, have accounting December will to after interpretation related beginning this measurement years believe purpose and fiscal not The recognition for does statement. the effective that of is in aspects interpretation defined certain This as clarify uncertainties. which positions, to 48), tax is (FIN in 48 109 uncertainty FIN No. for of Statement disclosure FASB and of accounting interpretation the Taxes—an clarifies Income in Uncertainty for Accounting nJl 06 h iaca conigSadrsBad(AB sudFS nepeainN.48, No. Interpretation FASB issued (FASB) Board Standards Accounting Financial the 2006, July In h siae arvleo h opn’ icatwsdrvduigtidpryapasl n aktdata market and appraisals third-party using derived was aircraft Company’s the of value fair estimated The concluded and 144 No. SFAS by required as impairment evaluated Company the decision, this of result a As owned (15 fleet MD-80 its of retirement the accelerate to plan a approved Board Company’s the 2006, March In initiatives restructuring to related million $25.9 of charge a include adjustments 2004 quarter Fourth to charges restructuring to adjustment million $0.3 favorable a include adjustments 2005 quarter Fourth to charges restructuring to adjustment million $7.6 favorable a include adjustments 2006 quarter Fourth Issue (EITF) Force Task Issues Emerging on reached consensus the ratified FASB the 2006, June In 157, No. Standards Accounting Financial of Statement issued FASB the 2006, September In o ae olce rmCsoesadRmte oGvrmna uhrte hudB rsne in Presented Be Should Authorities Governmental to Remitted and Customers from Collected Sales How SA 5) hc eie arvle salse rmwr o esrn arvleand value fair measuring for framework a establishes value, fair defines which 157), (SFAS 70 h IFrahdacnessta h presentation the that consensus a reached EITF The . arValue Fair Annual Report 71 During the third quarter of 2006, the Company purchased five MD-80 aircraft from lessors and, in In conjunction with the fair value determination, the Company reassessed the useful lives and residual During 2006, the Company signed a letter of intent with a prospective buyer for its 20 owned MD-80s The Company leases six additional MD-80 aircraft, only five of which were in the operating fleet as of In the second quarter of 2004, the Company announced its intention to accelerate the retirement of Alaska’s On July 7, 2006, the Company entered into a purchase and sale agreement to sell six B737-200 aircraft to a During the third quarter of 2006, Horizon signed a letter of intent with another carrier to sublease up to 16 of conjunction with the purchases, terminatedaircraft the was leases $80.9 for million, those including fivethe assumed aircraft. Company debt The evaluated of total impairment $11.6 purchase and million. priceCompany concluded Immediately for recorded that upon the a the purchase five $58.4 carrying of million value themillion charge was aircraft, of in not leasehold the recoverable. improvements third As related quarter amillion to for result, of those the the deferred aircraft. impairment, rent The including associated charge thethe with was write-off five the offset of purchased acquired by $1.8 aircraft aircraft. the using The reductionand a Company of other letter derived $7.5 market of the data. intent estimated from fair a value third-party of to purchase the aircraft, third-party appraisals values of the fleet andis related expected spare to equipment be and retired ison from depreciating the the each estimated fleet. aircraft market The through price estimate thefor of of estimated where the salvage date the aircraft value that Company at is it expects the highly each date judgmental aircraft of and to retirement is be using primarily in current based its market maintenance information cycle. adjusted (including the five purchased frombetter lessors to described not above), proceed although with theparties that Company interested particular determined in transaction. that the As it other such, would MD-80s, the be but Company the continues timing to or have completion discussions of with any sale isDecember uncertain 31, at 2006. this The time. currentCompany expiration expects dates to on cease these operation leasesbuy-outs, of range lease four from agreement of January restructuring, these 2007 subleasing aircraft tofacility. of prior October At the to 2013. such aircraft, the The time or lease as storing expirationcharge one the date that of aircraft through will these at lease be actions a recorded is long-term in taken storage the on consolidated the statements aircraft, of the operations. Company expects toEarly have Retirement an of associated 737-200C Aircraft B737-200 fleet and remove thosedown aircraft the from fleet service. to This its resultedexisting estimated in 737-400 fair a aircraft market $36.8 into value. million four The pre-taxall-cargo combination Company charge aircraft passenger/cargo is to was aircraft replacing write placed (combis) these into and aircraft2007 service one by and in all-cargo modifying the 2006. aircraft. five remaining Two The two of are the expected four to combis begin were operations placed in into the service second in quarter January ofthird 2007. party. The Company’s seventhAlaska. (and The remaining) six B737-200 aircraft aircraft will willwere be be transferred sold donated to and to the delivered an buyer at aviationexpects in various museum to the intervals in record third through similar quarter April gains of 2007.remaining as 2006 Two four the and of aircraft remaining there the exceeded aircraft were six their are nominal aircraft aggregate transferred. gains net The on book total the value purchase sale. as price The of for Company December the 31,Sublease 2006. of Q200 Aircraft its Bombardier Q200 aircraft. EachHorizon’s aircraft operating will fleet be beginning subject in toin January a a 2007 separate loss through sublease for mid-2008. agreement Horizon It andother approximating is will related the expected leave exit difference that costs. between the The the sublease charge lease will for payments result each and aircraft the will sublease be receipts recorded and when the specific aircraft leave Horizon’s Annual Report rlwrta u siae h opn xet orcr diinlajsmnsi 07 stenme of number the as 2007, higher in are adjustments that additional period record one-year to the expects no during Company and claims The employers submit estimate. other simply our with or than positions Alaska lower accept by or employees provided liability. if coverage corresponding estimate the a the need the recorded from longer coverage, and differ medical employees likely employee affected will for for costs self-insures cost Actual Alaska claims Since projected date. the severance estimated after Company coverage medical of year one and third the during recorded was million $25.9 and respectively. were million 2004, restructuring $27.5 of a 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 2005. Seattle. estimated of in originally quarter employees were second 475 restructuring approximately this of with reduction associated a costs in resulted event This Airport. the in paid was recorded which Company of the majority result, the a amounts, As severance privileges. the per travel to $2,000 continuing related quarter. of and million third payment years $3.8 lump-sum 25 of a of charge things, maximum restructuring other a new a among to The severance included, up operations. voluntary that service of a attendants of statement offered flight year the Alaska of in Additionally, number aggregate, benefits increase. a in and pay to bonus, wages 3% package signing in immediate a included an paid is included Company which also the 2006, agreement agreement, May this in Under million 2006. $2.7 26, of April on ratified was attendants number a of result a as program. quarter the fourth in the participate of in to million number election $7.6 the $28.6 original by in was their reduced change quarter withdrawing was expected third employees charge the the of The from in plan. resulting recorded pension loss charge continued the curtailment the and in pension of date, participants million amount severance $0.3 the original a The after includes time. coverage which includes of medical million, that period of steps a year wage-scale for one four privileges service, top Additionally, travel of increase. the in years wage on employees 2% is based to immediate which offered payments an 2006, cash package and July severance operations, in a of paid included statement million agreements $1.9 the the in Association of benefits aggregate, International and in the bonus, wages by signing in represented included a all included agents, agreements stores These and Machinists. service of ramp the and employees service passenger Charges Restructuring 2006. to prior 3. sold Note were based aircraft value these realizable of net All estimated buyers. their prospective to from assets intent these of of letters value and/or carrying offers the recent lower on to engines spare and aircraft Engines Spare Related and Aircraft F-28 sublessee. of the Impairment to to aircraft delivered the been of has one aircraft deliver the did of Horizon none year-end, 2006, to 31, subsequent December although, of carrier; As other begins. the arrangement sublease the and fleet h eeac akg fee oafce mlye nlddcs amnsbsdo er fsrieand service of years on based payments cash included employees affected to offered package severance The 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 flight 2,500 approximately Alaska’s for Attendants Flight of Association the with contract four-year new A and office clerical, 3,700 approximately with agreements four-year new reached Alaska 2006, July In F-28 held-for-sale its with associated million $3.4 of charge impairment an recorded Horizon 2004, In 72 Annual Report 2004 2004 aircraft fuel, (3.7) — 16.1 53.4 (48.0) (14.7) 2005 $ 38.7 $ — $ 3.1 $ 38.7 2005 (186.7) (102.1) $ 735.6 $ 557.3 $ 548.9 $ 455.2 (7.6) (8.0) 32.4 2006 $ 3.1 $19.9 (11.2) 2006 $884.7 $873.5 ...... 73 The prior period presentation has been conformed to the ...... Prior to January 1, 2006, the majority of these fuel hedging gains and losses ...... other nonoperating income (expense). The Company realized gains of $101.1 million, $125.0 million, and $45.2 million in 2006, 2005, and 2004, Raw or “into-plane” fuel cost Aircraft fuel expense Restructuring charge adjustments Cash payments Changes in value and settlements of fuel hedge contracts Balance at end of year The Company will make the majority of the remaining cash payments in the first half of 2007. The accrual During March 2005, the Company notified the Port of Oakland of its decision to terminate the lease for the The Company’s operations are inherently dependent upon the price and availability of aircraft fuel. To The Company records derivative instruments, all of which are currently fuel hedge contracts, on the balance Beginning January 1, 2006, the Company records all of its fuel hedging gains and losses in Accrual for Severance and RelatedBalance Costs at beginning of year Restructuring charges The following table displays the activity and balance of the severance and related cost components of the respectively, on fuel hedge contracts that settled during the period. current year format. The followingDecember table 31, summarizes 2006, the 2005 components and of 2004 aircraft (in fuel millions): expense for the years ended for severance and related costsbalance is sheets. included in accrued wages, vacation and payroll taxes in the consolidated 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 certain costs Note 4. Fuel Hedge Contracts manage economic risks associated withcall fluctuations options, in collar aircraft structures, fuel and prices, swap the agreements Company for periodically crude enters oil, into among other initiatives. sheet at their fair value.aircraft Changes fuel in expense. the fair value of these fuel hedge contracts are recorded each period in including hedging gains and losses. was recorded in impacted employees that select theadjustments extended are medical expected coverage to becomes be known, nominal. although any remaining Company’s restructuring accrual as of and for the years ended December 31, 2006, 2005 and 2004 (in millions): Annual Report foeain.Tecs fscrte odi ae nteseii dniiainmto.Itrs n iied on operations. dividends of and statements Interest consolidated method. the identification in specific income statements the interest consolidated on in the based included in is are (expense) sold securities income securities marketable nonoperating of Comprehensive other cost Other in The the “Accumulated included operations. with caption are of value, the losses fair under and at equity gains carried shareholders’ Realized are in Loss.” securities reported The losses available-for-sale. and as gains classified unrealized were program, lending securities the epciey n r rsne sbt urn n o-urn sesi h ntecnoiae aac sheets. balance Securities consolidated Marketable the 5. in Note the in million, assets $33.5 non-current and and million current $39.3 both of as paid presented premiums are capitalized and including respectively, respectively, million, $153.3 and million 2009 Quarter Second 2009 Quarter First 2008 Quarter Fourth 2008 Quarter Third 2008 Quarter Second 2008 Quarter First 2007 Quarter Fourth 2007 Quarter Third 2007 Quarter Second 2007 Quarter First (expense) income Nonoperating gains hedging fuel of Reclassification originally as (expense) income Nonoperating (loss) income Operating gains hedging fuel of reported Reclassification originally as (loss) income Operating expense fuel Aircraft gains hedging fuel of reported Reclassification originally as expense fuel Aircraft millions): (in 2004 and 2005 31, December ended years the for reported h olwn al oprsaonsa rgnlyrpre n20 n 04t h urn-erformat current-year the to 2004 and 2005 in reported originally as amounts compares table following The tDcme 1 06ad20 l fteCmaysmreal euiis nldn euiispegdunder pledged securities including securities, marketable Company’s the of all 2005 and 2006 31, December At $68.6 were positions hedge fuel Company’s the of values fair the 2005, and 2006 31, December of As follows: as are 2006 31, December of as positions hedge fuel Outstanding ...... $ ...... 5 5.6 5% 14% ...... 26% ...... 45% ...... 50% ...... 16% ...... 36% ...... $ ...... 5 5.8 5% ...... 20% ...... 45% ...... $ ...... $ ...... $ ...... $ ...... 74 Alaska 106 2.)(7.)(53 1.)(85.5) (10.2) (75.3) (173.9) (23.3) (150.6) (85.5) (10.2) (75.3) (173.9) (23.3) (150.6) 2. 62$728$7. 87$540.7 68.7 $ $472.0 722.8 $ 96.2 $ 626.6 3. 02$146$5. . 59.2 $ 7.8 85.5 $ 58.4 5.7 $ $ 10.2 144.6 $ 19.5 $ 75.3 (10.1) $ 20.2 $ 135.0 166.5 $ 173.9 $455.2 29.5 $ 58.5 139.8 $ 23.3 $396.7 150.6 548.9 $ 72.9 $ 476.0 1.)$62$(.)$(54 . (79.8) $ 9.3 $ (85.4) $ (7.4) $ 6.2 $ (10.8) 1.)$(.)$(93 1.)$(.)$(26.3) $ (2.4) $ (16.9) $ (29.3) $ (3.1) $ (15.6) prxmt of % Approximate xetdFuel Expected Requirements Horizon 052004 2005 Consolidated aln Hedged Gallons i millions) (in 73$63.56 $63.20 $51.57 $61.89 $58.98 17.3 $56.98 17.4 $57.70 22.7 $58.78 27.9 38.3 53.7 49.4 52.3 Alaska Horizon prxmt Crude Approximate i rc e Barrel per Price Oil $67.68 $67.50 Consolidated Annual Report 9.6 (2.7) 26.7 30.6 2004 2005 2005 151.3 554.3 150.0 552.9 $ 60.0 $124.2 $207.3 $912.9 $206.1 $909.0 4.8 0.44.0 0.2 1.6 (2.9) 31.4 41.4 65.7 65.6 2006 2006 400.1 400.1 2005 $ 59.5 $134.2 $317.7 $783.5 $317.5 $783.2 $1,121.4 $745.3 2.1 1.6 2006 $935.9 75 ...... Mileage Plan receivables Receivables from fuel-hedging counterparties Other receivables Allowance for doubtful accounts Airline traffic receivables Proceeds from sales and maturities Gross realized gains Gross realized losses Receivables consisted of the following at December 31 (in millions): The Company’s overall investment strategy has a primary goal of maintaining and securing its investment At December 31, 2006, available-for-sale investments in the Company’s marketable securities portfolio had At December 31, 2006 and 2005, gross unrealized gains and losses were not material to the consolidated Of the marketable securities on hand at December 31, 2006, 52% mature in 2007, 30% in 2008, and 18% Asset-backed obligations Other corporate obligations Fair value: U.S. government securities Asset-backed obligations Other corporate obligations Marketable securities consisted of the following at December 31 (in millions): Cost: U.S. government securities Note 6. Detail of Other Financial Statement Captions Receivables principal. The Company’s investment portfolioreviewed is to managed ensure by that reputable the financial investments institutions are and aligned continually with the Company’s documented strategy. net unrealized losses totaling $0.2loss. million, Management net does of not taxes, believe whichcriteria that are for the recorded recognizing securities in the with other loss unrealized accumulated under losses comprehensive existing as other-than-temporary of guidance. December 31, 2006 meet the financial statements. thereafter. Annual Report te ossso cre icatrn,wres opnain n eerdceiso icatpurchases, aircraft on credits deferred and compensation, workers’ rent, aircraft accrued of consists Other * (noncurrent) rent, Liabilities facilities Other operations, ground to related accruals and taxes transportation and property of consists Other * (current) Liabilities Accrued Other which lease cost, rent, at prepaid carried long-term are costs, They financing items. less. deferred other or includes and months other deposits three and of costs investments maturities Deferred restricted original market. The with approximates programs. securities self-insurance liquid compensation highly workers of and consist credit of letters various guarantee Assets Other Assets Current Other and Expenses Prepaid mn te items. other among items. other among fuel, and maintenance, etitdcs o eircnetbenotes Other convertible senior for cash Restricted fuel Prepaid rent aircraft Prepaid Other* liability Plan Mileage liability benefits medical Postretirement plans) (nonqualified liability Pension plans) (qualified liability Pension millions): (in 31 December at following the of consisted liabilities Other Other* plans) (nonqualified liability Pension plans) (qualified liability Pension revenue deferred Plan Mileage millions): (in 31 December at following the of consisted liabilities accrued Other to used investments restricted primarily were deposits restricted Company’s the 2006, 31, December At other and costs Deferred investments) restricted (primarily deposits Restricted millions): (in 31 December at following the of consisted assets Other millions): (in 31 December at following the of consisted assets current other and expenses Prepaid ...... 76 ...... $123.1 $475.6 $215.4 $404.3 $156.0 91.2 $ 113.3 246.3 2006 2006 2006 $88.1 $51.2 20.7 93.6 32.6 31.9 — 2006 22.7 14.2 2.0 — $134.0 $382.2 $182.6 $383.7 $122.9 $104.3 $84.3 $47.7 217.4 2005 2005 2005 2005 23.9 90.0 20.9 54.4 34.3 41.6 29.7 4.1 8.6 1.8 Annual Report 2.5 — 73.8 2005 129.8 251.5 150.0 2005 (113.5) Total $ (0.3) $132.0 1,082.6 $ 969.1 $ 607.3 0.2 18.7 2006 172.5 — 39.2 83.7 83.7 88.1 88.1 94.2 94.2 $— $191.4 390.6 122.4 122.4 643.3 643.3 2006 (119.1) Other 1,150.8 $1,031.7 $ 721.0 ...... $39.2 $ 79.9 $ 119.1 $39.2 $1,111.6 $1,150.8 PDP Facility 77 ...... — ...... — ...... — ...... — ...... — During 2006, Alaska borrowed $285.5 million using fixed-rate and variable-rate debt secured by flight Total principal payments 2007 2008 At December 31, 2006, borrowings of $1,149.7 million were secured by flight equipment, futureDuring delivery 2005, Alaska entered into a $172 million variable-rate revolving pre-delivery payment (PDP) facility At December 31, 2006, long-term debt principal payments for the next five years are as follows (in millions): Long-term debt At December 31, 2006 and 2005, long-term debt obligations were as follows (in millions): Fixed-rate notes payable due through 2020* Unrealized gains on unsettled fuelUnrealized hedges loss on marketable securitiesconsideredRelated available-for-sale to pension plans Related to postretirement medical benefits Variable-rate notes payable due throughPre-delivery 2021* payment facility expiring inSenior 2009 convertible notes converted April 2006 Less current portion 2009 Accumulated other comprehensive loss consisted of the following at December 31 (in millions, net of tax): 2010 2011 Thereafter The weighted average variable interest rate was 6.8% and 4.5% as of December 31, 2006 and 2005, respectively. equipment and had gross borrowings on its pre-delivery payment facility of $105.9 million. Additionally, Alaska * The weighted average fixed interest rate was 6.9% and 7.0% as of December 31, 2006 and 2005, respectively. positions, and real property. with a syndicate of lenderspurchase to provide of a up portion to of 38 newPDP the Boeing facility pre-delivery 737-800 will funding aircraft requirements expire under for on the August themargin. current Borrowings Company’s 31, aircraft 2009. are The purchase secured interest by agreement the rateamounts with Company’s outstanding Boeing. is on rights The based the under on PDP the the facility one-monthdelivery Boeing relate LIBOR of purchase to plus the agreement. specified a The aircraft, aircraft specified if principal and not will before, be likely repaid using at proceeds the from time long-term the debt Company financing takes on those aircraft. Note 7. Long-term Debt Accumulated Other Comprehensive Loss Annual Report es em foet 4yas h aoiyo ipr n emnlfclte r lolae.Ttlrn expense rent respectively. Total 2004, leased. and also 2005, are 2006, facilities in terminal million, and $307.5 airport and of million, majority $324.8 The million, years. $320.6 14 was to one of terms lease Commitments Lease Commitments 8. Note provisions. loan all with compliance in was Company the 2006, 31, December At covenants. 31, December of As facility. facility. was credit credit million the this $300.0 in on 2006, covenants borrowings 31, the outstanding the December violating no limit of without were and As Group there dividends Group. Air 2006, of Air Alaska form Alaska to the to loan in loan to Group can available provisions Air Airlines Such Alaska Alaska expenditures. to funds fixed-charge other funds of and certain any amount leverage and distributing worth, dividends, from net dispositions, Airlines to asset Alaska leases liens, restrict and on either of debt limits by maintenance certain and secured requires of ratios, be and maintenance coverage will restrictions worth, borrowings contractual net specified Any contains of ratios 2%. facility levels financial plus credit specific certain LIBOR This on of collateral. depending rate cash varies interest or facility minimum aircraft credit a the with on agreement rate the interest in The 2008. March in expire Credit of Line Bank from remaining costs in financing resulted unamortized 2003. This of in 2006. million Notes April $4.4 the added of of of this end net issuance total, the is original In of which the share. as equity, per shares additional $26 outstanding the of was to Company’s of million rate equates the all $145.6 conversion which to April, The par, shares in stock. at common and, common Notes million Notes Company’s of 5.769 the the $1,000 of of per all shares shares of into 38.5 redemption holders approximately for the called by Company converted the were 2006, Notes 29, March On Notes. the LIBOR 3-month of rate interest variable arrears. a in at quarterly interest paid bore was Notes interest The This Notes). 2.5%. (the plus 2023 in due notes convertible operations. of Notes statements Convertible consolidated the in loss or range gain arrangements any debt in affected result these not on did rates changes fixed These The 6.8%. maturity. to through 6.2% rates from interest the fix to arrangements the on payments of million $140.6 from and quarter. debt million third in $62.0 the increase of facility. in The payments payment aircraft equipment. debt pre-delivery MD-80 flight normal leased by by its secured offset of debt was one variable-rate borrowings of using purchase million the $17.0 to borrowed related Horizon debt of million $11.6 assumed tDcme 1 06 h opn a es otat o 0 icatta aermiignoncancelable remaining have that aircraft 106 for contracts lease had Company the 2006, 31, December At financial specified of maintenance require that provisions contain agreements loan Alaska Certain will that institutions financial of syndicate a with facility credit variable-rate million $160 a has Alaska of issuance the of anniversary third the 2006, 31, March on Company the by redeemable became Notes The senior variable-rate of million $150.0 of placement private the completed Company the 2003, 21, March On debt long-term variable-rate existing its of several under option its exercised Company the 2006, During 78 Annual Report Facilities 181.1 $ 65.7 177.0 60.3 159.8 58.4 162.2 45.5 145.5 31.9 561.6 119.0 Operating Leases Aircraft $1,387.2 $380.8 Employers’ Accounting for Defined Benefit 79 ...... $ ...... Total lease payments In June 2005, Alaska entered into an aircraft purchase agreement to acquire 35 B737-800 aircraft with Horizon entered into an aircraft purchase agreement in October 2005 to acquire 12 Q400 aircraft with At December 31, 2006, the Company had firm purchase commitments for 51 total aircraft requiring Alaska and Horizon expect to finance the firm orders and, to the extent exercised, the option aircraft with Four defined-benefit and five defined-contribution retirement plans cover various employee groups of As of December 31, 2006, the Company adopted SFAS No. 158, 2007 Future minimum lease payments with noncancelable terms in excess of one year as of December 31, 2006 2008 2009 2010 2011 Thereafter Aircraft Commitments deliveries beginning in January 2006options and to continuing purchase through an April additional 2011.terms. 15 The Concurrent aircraft purchase with and agreement the rights also execution to included and of purchase option this up deposits purchase to using agreement, 50 cash Alaska additionalcredit and paid aircraft was a $110.9 under deferred credit million similar and of in will $9.7 aircraftof be million purchase the applied received agreement, to from Alaska the the has purchase manufacturer. converted price The 24 of $9.7 of future million the aircraft purchase upon rights delivery. into Since options the and execution 15 optionsdeliveries into beginning firm in orders. January 2007options and to continuing purchase through an July additional 2007.association 20 The with Q400 purchase the aircraft, agreement purchase of also of which included orders the one for 12 has seven Q400 been CRJ-700 Aircraft, converted model Horizon toacquire aircraft. and a 15 In the firm CRJ-700s. addition manufacturer order. to agreed In the to options terminate noted firm above, Horizon still holds options to aggregate payments of approximately $1.2 billion. leases, long-term debt, or internally generated cash. Note 9. 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. servicecontribution elected Alaska and plan officers also for and maintains other an an elected unfunded, unfunded, officers. non-contributory A defined- summary of each plan follows. Pension and Other Postretirement Plans,(SFAS an 158). amendment SFAS of 158 FASB requires Statementsbenefit recognition No. pension of 87, and the 88, other overfunded 106 postretirement or andrecognition plan underfunded 132(R) of as status the an of funded asset an status or entity’s in liability defined- other in comprehensive the income. financial statements and requires are shown below (in millions): Annual Report er.TeCmayde o urnl nedt netpa sesi h opn’ omnstock. common ten Company’s exceed the not in may assets portfolio plan bond invest the to of intend “A” life currently minimum average not a the does carry and Company securities Poor’s The Fixed-income and years. portfolio. Standard equity and/or entire Moody’s the by of rating 10% exceed not will investment 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 2005: and 2006 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 on depending respectively, of 6.80%, rate to the 3.47% workgroup. and from related respectively, and the 8.0%, 4.53% and and to plan 7.75% 3.52% the was from used varied assets used plan increase on compensation return expected the 2005, and ended years the for cost benefit periodic net 31: determine December to used assumptions average 6.80%, Weighted to 3.47% from and workgroup. 4.53% related to the 3.52% and from plan varied the used on increase depending compensation respectively, of rate the 2005, and 31: December of as obligations benefit determine to used assumptions average Weighted plans. these for date fixed-income measurement and 31 equity December marketable a of uses primarily Company consist The assets securities. plan defined-benefit The (ERISA). 1974 Plans Pension Defined-Benefit Qualified eso sesaerblne eidclyt ananteetre se loain.A niiulequity individual An allocations. asset target these maintain to periodically rebalanced are assets Pension pension for risk reasonable a at returns maximum achieving on focuses policy investment Company’s The of end the of as follows as is category, asset by plans, defined-benefit qualified 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 2006 For respectively. 2005, and 2006 31, December of as used were 5.75% and 5.50% of rates Discount 2006 For respectively. 2005, and 2006 31, December of as used were 5.50% and 5.75% of rates Discount of Act Security Income Retirement Employee the by required as funded are plans pension Company’s The ie income: Fixed equities: Non-U.S. equities: Domestic assets Plan Other securities income Fixed securities equity Non-U.S. securities equity Domestic category: Asset ...... 30% ...... 15% 55%...... 80 2006 100% 29 15 53% 3 2005 100% — 29 66% 5 Annual Report 2.5 1.3 1.9 2.8 — — (2.5) (2.5) (0.3) 2005 $ 34.5 $ 37.7 $— $— $(37.7) (32.6) $ (2.0) $(34.6) Nonqualified 4.0 1.1 2.0 — — (4.0) (4.0) (1.1) (1.1) Nonqualified 2006 $ 37.7 $ 34.6 $— $— $(34.6) (215.4) 0.2 $— $(215.4) Qualified 69.3 50.4 50.9 23.3 39.1 (34.5) (34.5) (11.1) 2005 $ 909.9 $ 989.1 $ 607.0 $ 680.9 $(308.2) 9.2 Qualified — (2.9) 52.3 56.1 85.6 (52.5) (52.5) 121.9 2006 $ 989.1 $1,051.3 $ 680.9 $ 835.9 $ (215.4) 81 ...... The accumulated benefit obligation for the qualified defined-benefit pension plans was $964.8 million and As of December 31, 2006, the amounts recognized in the consolidated balance sheet were as follows (in Alaska also maintains an unfunded, noncontributory defined-benefit plan for certain elected officers. This Discount rates of 5.75% and 5.50% were used as of December 31, 2006 and 2005, respectively. For both Discount rates of 5.50% and 5.75% were used as of December 31, 2006 and 2005, respectively. For both The following table sets forth the status of the plans for 2006 and 2005 (in millions): Benefits paid Benefits paid Employer contributions Service cost Interest cost Curtailment (gain) loss Change in assumptions Actuarial (gain) loss Actual return on plan assets Accrued benefit liability-current End of year Funded status (unfunded) $904.8 million at December 31,nonqualified 2006 defined-benefit and plan 2005, was respectively. $33.4 Therespectively. million accumulated and benefit $36.1 obligation million for at the December 31, 2006 and 2005, millions): End of year Plan assets at fair value Beginning of year Accrued benefit liability-long term Total liability recognized Projected benefit obligation (PBO) Beginning of year Nonqualified Defined-Benefit Pension Plan plan uses a December 31 measurement date. Weighted average assumptions used to determine benefit obligations as of December 31: years, the rate of compensation increase used was 5.00%. Weighted average assumptions used toDecember determine 31: net periodic benefit cost for the years ended years, the rate of compensation increase used was 5.00%. Combined Disclosures for Defined-Benefit Pension Plans Annual Report euto fti qiycag f$. ilo nto ae f$. ilo)piaiyrfetn ihrthan higher reflecting primarily a million) recorded $3.3 Company of the taxes 2003, of In (net assets. discount tables. million on the RP2000 $5.2 return of the of expected reduction to charge the tables equity to mortality this attributed GAM83 of partially the reduction Company be from the can change million), that 2005 a $1.2 plans in Company and of defined-benefit charge the rate taxes the The 2004, of with employees. and (net connection eligible 2005 million in for In $2.3 equity sponsors plans. and to the million) charges of $24.4 non-cash status of in funded taxes respectively, the of recognize (net fully million to $41.2 order recorded in AOCI into loss net expense pension Net loss actuarial Recognized loss Curtailment cost service prior of Amortization assets on return Expected cost Interest cost Service millions): (in 2004 recognized amount Net (pretax) AOCI term liability-long benefit Accrued liability-current benefit Accrued sheet: asset balance Intangible consolidated the in recognized Amounts recognized amount Net cost service prior Unrecognized assets) plan of loss value Unrecognized fair less (PBO status Funded million $0.1 is 2007 in AOCI from loss net and cost respectively. service million, defined-benefit prior $0.3 nonqualified of and the amortization For estimated plans. the pension plans, defined-benefit pension qualified the for respectively, million, (pretax) AOCI in recognized Amount loss Net cost service Prior comprehensive other accumulated in included and cost (AOCI): benefit loss periodic or net income in reflected yet not Amounts pnaoto fSA 5 n20,teCmayrcre l fteurcgie ro evc otand cost service prior unrecognized the of all recorded Company the 2006, in 158 SFAS of adoption Upon and 2005, 2006, for components following the included plans defined-benefit the for expense pension Net 158): SFAS of adoption the to (prior 2005 31, December of as are disclosures following The $11.7 and million $5.0 is 2007 in AOCI from loss net and cost service prior of amortization estimated The ...... 82 78.3 $ 52.4 $ 2006 (55.0) 19.6 56.1 0.2 5.0 Qualified 17$78.3 $ 71.7 $ 53.8 $ 50.4 $ 2005 4.)(43.9) (49.9) 5415.3 15.4 48.0 50.9 —— . 5.1 4.9 2004 Qualified Qualified 9.4 $ 33.2 $ 9.4 $ $(308.2) (182.6) 3.6 $ 1.1 $ 2006 200.4 284.4 (41.6) — — 0.4 2.0 0.1 33.2 Nonqualified $268.7 28.0 $ . 3.4 $ 3.6 $ 1.1 $ 1.3 $ 240.7 2005 —— —— Nonqualified Nonqualified . 0.3 0.3 1.9 1.9 . 0.1 0.1 $(28.7) 0.4 $ $(28.7) $(37.7) (34.3) (1.8) 7.0 8.6 0.4 2004 $6.3 $0.3 6.0 Annual Report 2.2 4.1 1.2 3.4 — (1.2) (2.6) (1.2) 2005 2005 2.2 2.2 2.3 2.3 $— $ 76.2 $ 82.1 $— $(82.1) 12.8 $ 2.0 $23.8 Nonqualified 8.7 4.9 2.2 4.3 — (0.3) (2.2) (2.2) 2006 2006 $— $ 82.1 $ 97.5 $— $(97.5) 53.0 54.7 53.6 62.6 375.3 $ 52.4 $651.6 Qualified 83 ...... Actuarial (gain) loss Benefits paid End of year Amendments Benefits paid Interest cost Employer contributions Service cost Actual return on plan assets Funded status (unfunded) Plan assets at fair value Beginning of year End of year Accumulated postretirement benefit obligation Beginning of year Total payments The Company allows retirees to continue their medical, dental, and vision benefits by paying all or a portion 2007 The Company expects to contribute approximately $50 million and $2 million to the qualified and Future benefits expected to be paid over the next ten years under the defined-benefit pension plans from the 2008 2009 2010 2011 2012 - 2016 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 2005 this the a was subsidy actual subsidy $97.5 is cost to million unfunded, ofdiscount and and the rate $82.1 at retirees’ of million, December claims. 5.75% respectively. 31, The and This 2006 5.50% liability in was 2006 determined and using 2005, an respectively. assumed nonqualified defined-benefit pension plans, respectively, during 2007. assets of those plans as of December 31, 2006 are as follows (in millions): Annual Report hnei eredpsrtrmn eei obligation benefit postretirement year-end in Change cost interest and service in Change millions): (in 2004 and 2005, 2006, during plans medical postretirement millions): (in follows as are 2006 31, December payments. of benefit expected the to equal is which 2007, in plan benefits medical postretirement following the included millions): plans (in medical 2004 postretirement and the 2005, for 2006, cost for benefit components periodic Net costs. medical retiree 2005. 31, December at million $54.4 totaled and sheets, balance consolidated respectively. million, $1.5 and (pretax) AOCI in recognized Amount AOCI: in loss included Net and cost benefit cost periodic service net Prior in reflected yet not Amounts recognized liability Total term liability-long medical postretirement Accrued liability-current medical postretirement Accrued so eebr3,20,teaonsrcgie ntecnoiae aac he eea olw i millions): (in follows as were sheet balance consolidated the in recognized amounts the 2006, 31, December of As %lwrtedrate trend lower 1% rate trend higher 1% rate trend lower 1% rate trend higher 1% Company’s the on effect following the has costs care health in rate trend lower or higher 1% A payments Total 2016 - 2012 2011 2010 2009 2008 as plan benefits medical postretirement 2007 the under years ten next the over paid be to the expected to benefits million Future $3.9 approximately contribute to expects Company the plan, non-funded a is this As cost benefit periodic Net (gain) loss actuarial Recognized cost service prior of Amortization assets on return Expected cost Interest cost Service of subsidy the with associated obligations assess to date measurement 31 December the a on uses liabilities Company other The within included was subsidy the to related liability million accrued $(0.2) the is 2006, 2007 to in Prior AOCI from loss net and (credit) cost service prior of amortization estimated The ...... 6.4 5.7 ...... 5.1 ...... 4.5 ...... 3.9 $ ...... 0.7 ...... $ ...... $ ...... 84 $15.5 4.3 $ 2006 — 1.9 4.4 4.9 12.3 $ 1.4 $ 2006 (10.6) (1.2) . 9.3 $ 8.5 $ 3.6 $ 3.4 $ 2005 06 (0.2) (0.6) —— . 1.8 1.6 4.1 4.1 1. $10.1 $11.4 1.3 $ 1.2 $ 2005 97 (8.6) (9.7) (1.1) (1.0) $63.4 2004 37.8 $(97.5) (93.6) 2004 29.8 29.1 (3.9) Annual Report After Application of SFAS 158 Medical Benefit Plans Postretirement Plans Adjustments Pension Nonqualified Plans Pension Qualified was a new program in 2005 that entitles all Air Group 28.3 $ (28.0) $(0.3) $ — $ — 85 169.1329.7 (42.8) 114.5 (0.6) 1.6 (11.1) 29.8 114.6 475.6 (100.0) (71.7) (1.0) (18.7) (191.4) Before Application of SFAS 158 .... is a program that rewards non-union employees and Alaska dispatchers, is based on Air Group profitability. Alaska’s pilots, ramp service and clerical, pay Alaska’s mechanics and Alaska’s flight attendants a percentage of their ...... $ Variable Pay Plans Operational Performance Rewards Program Profit Sharing Plan earnings as certain pre-tax margin levels are achieved. Performance-Based Pay employees to quarterly payouts ofobjectives up are to met. $300 per person if certain operational and customer service office and passenger service employees, and certain Horizon employees participate in this plan. represented by TWU, based on(3) four achievement separate of metrics unit-cost related goals, to: and (1) (4) Air employee Group engagement. profitability, (2) safety, ...... • As noted in Note 1, the Company adopted SFAS 123R, effective for all stock options granted beginning • The • The The defined-contribution plans are deferred compensation plans under section 401(k) of the Internal In 2006, the Company established a noncontributory, unfunded defined-contribution plan for certain elected Alaska and Horizon have four separate plans that pay employees based on certain financial and operational • The In the year of adoption, SFAS 158 requires disclosure of the incremental effect of applying SFAS 158 on Note 10. Stock-Based Compensation Plans January 1, 2006. For stockthe options “modified granted prospective prior method” to for JanuaryCompany transition 1, accounts permitted 2006, for by for the SFAS which unvested 123R thethe portion was vesting consolidated of used. period statements these Under is of awards this not operations on method,calculated complete, beginning a the for January prospective pro-forma 1, basis, disclosures. 2006 with The using expenseCompany standard the recognized grants applies grant-date in to to fair employees both values and stock previously the options Company’s and Employee restricted Stock stock Purchase units Plan that (ESPP). the Intangible assets Deferred income taxes (long-term liability) Other liabilities (long-term) AOCI Defined-Contribution Plans Revenue Code. All of theseplans plans was require $24.4 Company million, contributions. $22.9 Total million, expense and for $23.2 the million defined-contribution in 2006, 2005, and 2004, respectively. officers of the Company whorecorded were as ineligible liabilities for under the the nonqualified plan defined-benefit are pension not plan. material Amounts to the consolidated balanceEmployee sheet Incentive-Pay at Plans December 31, 2006. metrics. The aggregate expense undermillion, these respectively. plans The in plans 2006, are 2005 summarized and below: 2004 was $36.8 million, $20.0 million, $5.3 Impact of SFAS 158 individual line items in themillions): consolidated balance sheets. The following table illustrates these impacts (in Annual Report ihacrepnig$. ilo a eei.Tettlitiscvleo pin xrie uig20 was 2006 during exercised options of value intrinsic total The benefit. tax million $0.9 corresponding a was with there and occurred. options they all when of for term accounted historical were average forfeitures expected an as the the on rate and to based forfeiture options Prior was of the groups. term pay estimate of employee expected not no term homogenous the does expected various 123R, Company The for SFAS the future. experience of as immediate historical the adoption zero the on nearest is in based term yield so are the dividend do rates for The to forfeiture effect grant. plans in of no future curve time has of yield the and judgment Treasury at dividends management’s U.S. option and the the option on of the based term of is expected term rate expected interest the risk-free to The equal volatility. period time a over volatility granted options of value fair Weighted-average yield dividend Expected rate interest Risk-free term Expected volatility 2004: Expected and 2005, 2006, in grants for used assumptions weighted-average following the with model pricing 2006 31, December at Exercisable 2006 31, December Outstanding, expired or Forfeited Exercised Granted 2005 31, December Outstanding, years. four after method. 100% straight-line and the years, using grantees three period all after service Substantially 75% the 538,020. years, over is two amortized 2006 after is total 31, 50% cost The December year, Compensation shares. of one treasury as after Company’s Plan vested the 1997 Long-term 25% options from the 1997 are When issued from the issued. are options except are shares outstanding plans shares exercised, of all common are number For new Plan years. exercised, 1997 awards. ten are the stock to options under or up when granted options of Plan), either terms (1997 of have Plan granted grant granted Equity been future options Incentive have for stock shares available the employees 7,322,050 were plans, and for shares all officers options 875,295 Under directors, plans, 2006, to various 31, to grant the December options of Under at granting date subsidiaries. and, the the its for on and provide prices Company to market the continues at of Plan) stock Equity common Incentive Company’s Long-Term the 2004 purchase (the which of one only Options Stock and wages in recorded is operations. not expense of did compensation statements awards stock-based consolidated stock All the restricted standard. in Company’s the benefits the of for adoption Accounting the ESPP. with Company’s change the and plans equity incentive h dpino FS13 hne h conigfrsokotosudrteCmayslong-term Company’s the under options stock for accounting the changed 123R SFAS of adoption The h opn eoddsokbsdcmesto xes eae osokotoso 34mlini 2006, in million $3.4 of options stock to related expense compensation stock-based recorded Company The historical the of combination a on based is stock common the of volatility price market expected The option- Black-Scholes the using grant of date the on estimated was grant option each of value fair The 2006: 31, December ended year the for activity option stock summarize below tables The plans, equity incentive long-term of number a under outstanding awards option stock has Company The ...... 86 ,3,1 3.539$14.4 $20.3 3.9 5.0 $32.45 1,830,110 $32.08 2,539,268 $31.05 3,376,015 1670 41.38 28.71 (106,750) (970,937) 4,4 37.81 240,940 Shares e Share Per Weighted- 18.32 $ Exercise Average . years 5.7 Price 2006 4.70% — 44% Contractual ie(Years) Life Weighted- Average 43 11.73 $ 14.38 $ er years 5 years 5 2005 .9 3.43% 4.39% —— 3 37% 43% Aggregate au (in Value millions) Intrinsic 2004 Annual Report Price Share Price Per Per Share — 37.37 31.46 $32.89 $31.22 Weighted-Average Grant Date Fair Value Shares Shares 208,530621,190 $18.69 893,358 26.21 646,790 31.63 169,400 38.55 47.75 109,205479,735 $18.66 660,045 26.31 411,725 31.27 169,400 38.85 47.75 2,539,268 $32.08 1,830,110 $32.45 — (5,145) of Units Number 449,250 332,130 122,265 Life (years) Remaining 87 ...... 5.0 ...... As of December 31, 2006, $8.7 million of compensation cost associated with unvested restricted stock Non-vested at December 31, 2006 Non-vested at December 31, 2005 Granted Vested Forfeited Options exercisable The Company grants restricted stock units (RSUs) under the 2004 Long-term Incentive Equity Plan. As of The following table summarizes information about outstanding RSUs: Options outstanding Range of Exercise prices Exercisable: $10to$20...... Outstanding: $10to$20...... 5.7 Range of Exercise prices $21to$28...... $29to$34...... 5.7 $35to$45...... 5.3 $46to$58...... 4.8 1.3 $21to$28...... $29to$34...... $35to$45...... $46to$58...... The following table summarizes stock options outstanding and exercisable at December 31, 2006 with their awards attributable to future serviceover had a not weighted-average yet period been of recognized. 1.1 This years. amount will be recognized as expense Restricted Stock Awards December 31, 2006, 464,475 totaleligible RSUs for have dividends. been The granted fair understock value this on of plan. the the The date RSU RSUs of awards arethe grant. is non-voting awards Compensation based and “cliff cost on are vest” for the not after RSUs closingRSUs three is price of years. recognized of $3.8 The over the million Company three Company’s ($2.4 recorded yearsrespectively. common million stock-based from These after compensation the amounts tax) expense date are and related of included $2.1 to grant in million as wages ($1.3 and million benefits after in tax) the in consolidated 2006 statements and of 2005, operations. $10.3 million. Cash received fromvested option during exercises 2006 during with 2006 an totaledcompensation aggregate $27.9 cost fair million. associated value A with of total unvested $4.3 ofrecognized. stock million. 365,568 This option As options amount awards of will attributable December be to 31, recognized future 2006, as service $7.2 expense had million over not of a yet weighted-average been period of 1.6 years. weighted-average exercise prices and remaining contractual lives: 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 future future, subject the on the be on rely in may based not losses carryforwards is does additional conclusion and incur This differences Company 2006. temporary the 31, taxable Should December existing of of as reversals recorded future been expected has allowance valuation no thus in ending and 2007 in beginning expire effected) tax million ($1.8 million $46.5 of carryforwards loss State * liability (asset) tax deferred Net liability tax deferred Noncurrent asset tax deferred Current liabilities (assets) 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 contracts hedge depreciation Fuel book over tax of Excess purposes. tax for amounts such and purposes reporting financial for liabilities and Taxes Income 11. Note and proceeds shares cash 93,342 in 2005, resulting and ESPP, 2006 the In under are issued. employees million. shares are Company $2.5 of shares by of issuance the purchased the which were the from in respectively, of received period shares, 85% Proceeds the 114,151 for discount. in awards 15% equity is option the stockholders’ value Company’s of to fair the value credited date as intrinsic grant manner the The same plus 2006. the award is in in of share cost million model Because compensation $0.9 Black-Scholes lower. such, was the is as ESPP using whichever and Company’s calculated date, 123R the purchase SFAS for closing quarterly under cost the the compensatory Compensation of or considered recognized. 85% period is at offering ESPP stock the the common of attributes, Company day these purchase first can the employees on ESPP, price the market of terms the Under Code. Plan Purchase Stock Employee 2025. h opn a ocue hti smr ieyta o htisdfre a seswl eraial and realizable be will assets tax deferred its that not than likely more is it that concluded has Company The 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 Revenue Internal the of 423 Section under qualify to intended is which ESPP, its sponsors Company The ...... 88 (19.6) $ $(134.2) (19.6) $ 466.0 $ (504.2) (149.5) (204.0) 2006 114.6 484.6 (89.6) (23.6) (16.6) 10.9 (6.0) (1.8) (3.5) (9.6) 7.7 64.6 $ (91.8) $ 64.6 $ 437.0 $ (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 Annual Report 91.2 68.6 2004 2004 783.2 111.3 Fair Value 1,162.5 $ 230.7 4.6 0.7 0.8 (0.4) 2.9 (4.3) 3.5 (0.4) 2.4 2.1 45.2 (1.7) 49.8 (1.0) 2005 (1.2) 0.2 48.0 (7.2) 38.4% 25.7% $52.7 $(5.3) $ 2.1 $(3.9) 2005 91.2 68.6 $137.2 $(20.6) $ 52.7 $ (5.3) 783.2 111.3 December 31, 2006 1,150.8 2.4 3.0 Amount Carrying (6.6) $ 230.7 (31.6) (38.2) 2006 3.0 (5.8) (1.7) $(35.2) $ 0.6 40.1% (30.7) 2006 $(87.8) $(35.2) ...... 89 ...... State The estimated fair values of the Company’s financial instruments were as follows (in millions): In 2005, the deferred tax benefit related to the cumulative effect of the accounting changeIncome for tax federal expense and (benefit) reconciles to the amount computed by applying the U.S. federal rate of 35% to State Federal The components of income tax expense (benefit) were as follows (in millions): Federal accruals for periods for whichare the not statute significant of as limitations of expired December in 31, 2006. 2006. Remaining tax contingency accruals Other – net* State income taxes Nondeductible expenses Expected tax expense (benefit) Marketable securities Securities lending collateral (restricted cash) Restricted deposits Fuel hedge contracts Liabilities: Long-term debt Assets: Cash and cash equivalents Effective tax rate * Other-net in 2006 includes $5.5 million of tax benefits associated with the reduction of certain tax contingency Note 12. Financial Instruments Income (loss) before income tax and accounting change Actual tax expense (benefit) Total deferred Total tax expense (benefit) related(loss) to before income accounting change state income taxes was $48.9 million and $5.4 million, respectively. income (loss) before income tax and accounting change as follows (in millions): Total current Deferred tax expense (benefit): Current tax expense (benefit): Annual Report . ilo tc pin,rsetvl,wr xlddfo h aclto fdltdESbcuete were they because EPS and diluted million of 3.4 calculation million, the 2.5 from 2004, excluded senior and were stock antidilutive. the 2005, respectively, common of 2006, options, of conversion In stock impact upon calculations. million dilutive outstanding the 3.7 the been in 2005, have included added 31, would were be December that notes must ended shares convertible tax, year common of the million net For 5.8 the expense, loss. and For interest or options method. associated income treasury-stock the net the dilutive, the using are to the options, securities back of stock convertible as in-the-money the securities of which convertible exercise in contingently the years common of and additional conversion year plus the the is outstanding assuming of EPS shares outstanding beginning Diluted common been (EPS). average have share the would per by that senior (loss) (loss) shares and earnings income options diluted net stock for dividing common calculation by Company’s the calculated the the in before from included income shares are reported common notes determining Company potential convertible in the the number” As 2005, “control antidilutive. in the or change as dilutive accounting change are accounting shares an common of potential effect whether cumulative the and items extraordinary (EPS) Share per (Loss) Earnings 13. Note government and industry many across dispersion the and place takes settlement that segments. frequency the to due 2006 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 counterparties. the by nonperformance anticipate not does and contracts fuel-hedging its to counterparties are Credit of Concentrations analysis flow cash discounted a deposits on restricted based of is rate. value debt borrowing fair long-term current The The of Company’s prices. prices. value the market exchange fair using quoted commodity The on on amount. based based carrying is is the securities contracts approximates marketable hedge of fuel value of fair value The fair instruments. these of maturity short ogtr etadcptllaeobligations lease capital and debt Long-term Liabilities: contracts hedge Fuel deposits Restricted cash) (restricted collateral lending Securities securities Marketable equivalents cash and Cash Assets: FSN.18 Erig e hr”rqie htcmaisueicm rmcniun prtosbefore operations continuing from income use companies that requires Share” per “Earnings 128, No. SFAS 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 the to due values carrying approximates collateral lending securities and equivalents cash of value fair The ...... 90 73.6 $ Carrying Amount 1,082.6 eebr3,2005 31, December 153.3 104.3 112.0 909.0 73.6 $ 1,089.5 Value Fair 153.3 104.3 112.0 909.0 Annual Report 2004 5.5 NA 5.5 NA 2005 33.917 26.859 27.609 26.859 27.609 26.859 27.609 26.859 33.917 26.859 33.917 26.859 $ (2.66) $$ — (5.9) $ (15.3) $ (0.4) $ (15.3) $ (0.01) $ (0.57) $ 84.5 $ (15.3) $ 3.06$ $ (90.4) (0.57) $ — $ (3.27) $$ — (5.9) $ (15.3) $ (0.21) $ (0.57) $ 84.5 $ (15.3) $ 90.0 $ (15.3) $ 2.65$ $ (90.4) (0.57) $ — NA NA 2006 37.939 37.939 37.939 37.939 37.939 37.939 $— $ (52.6) $ (52.6) $ (1.39) $ (52.6) $ (1.39) $— $— $ (52.6) $ (1.39) $ (52.6) $ (52.6) $ (1.39) $— 91 ...... Diluted EPS SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, as amended Per share cumulative effect of accounting change Diluted EPS before accounting change EPS...... EPS before accounting change EPS calculations were as follows (in millions except per-share amounts): Interest on convertible notes, net of tax Weighted average shares outstanding Note 14. Operating Segment Information (SFAS 131), requires that aabout public its company reportable report operating annual segments. andwhich Operating interim separate segments, financial financial as and information defined, descriptive is are information in available components deciding that of how is an to evaluated enterprise allocate regularly about reporting resources by segments, and the consisting in chief of assessing operating Alaska performance. decision-maker Nature and The of Horizon. Company Operations. These has segments two are primary more operating fully and described in Note 1 under Net loss Diluted loss Diluted income (loss) before accounting change Cumulative effect of accounting change, net of tax Per share cumulative effect of accounting change Net loss Diluted Earnings (Loss) Per Share Income (loss) before accounting change Weighted-average shares outstanding Cumulative effect of accounting change,Weighted-average net shares of outstanding tax Weighted-average shares outstanding Interest on convertible notes, net of tax Weighted-average shares outstanding Weighted-average shares outstanding Basic Earnings (Loss) Per Share Income (loss) before accounting change Annual Report hthv enrcre sa fstt diinlpi-ncptlo h osldtdblnesheets. balance consolidated the on capital paid-in expenses additional offering-related to of offset million an $0.4 as approximately recorded had been Company have The that million. $200.4 of proceeds aggregate Offering Horizon, Stock and 15. Alaska Note in investments its including Inc., Group, returned. Air deposits Alaska of company, net parent deposits, the aircraft Includes include expenditures Capital ** * period: of end at assets Total expenditures*: Capital change: accounting and tax income before (loss) Income expense: Interest income: Interest expense: amortization and Depreciation revenues: Operating Other** Horizon Consolidated millions): (in follows Horizon and Alaska for information Financial nDcme 6 05 h opn od57mlinsae fiscmo tc t$51 e hr for share per $35.15 at stock common its of shares million 5.7 sold Company the 2005, 16, December On consolidation. in eliminated are which Consolidated accounts inter-company of Elimination Other** Horizon Alaska Consolidated Horizon Alaska Consolidated Alaska Consolidated accounts company inter- of Elimination Other** Horizon Alaska Consolidated accounts company inter- of Elimination Other** Horizon Alaska Consolidated Other** Horizon Alaska revenues inter-company of Elimination Other** Horizon Alaska ...... 92 $4,077.1 $2,692.5 3,334.4 3,712.0 (960.7) 2006 916.8 409.0 682.1 116.6 565.5 157.5 137.8 644.0 (87.8) (92.2) 11.7 78.0 73.3 54.3 56.3 18.5 (7.3) (5.7) (5.7) (3.2) — 3.0 7.4 3.7 1.2 1.1 3,792.0 $ $2,233.0 2,416.1 $ (1,043.8) ,7. 2,723.8 2,975.3 1,012.1 3,511.9 2005 3. (20.6) 137.2 (27.0) 124.2 311.8 167.5 416.9 159.6 373.8 142.6 143.4 128.1 125.4 503.2 556.4 1.)(10.7) (13.4) 6417.1 26.4 317.9 43.1 51.9 63.0 44.1 24.5 51.2 30.9 26.2 32.5 13.4 16.8 34 (3.1) (3.4) (3.1) (3.4) . (13.8) 1.7 . 7.0 3.9 9.7 5.5 0.3 1.1 0.2 1.6 1.1 1.2 1.4 1.1 2004 Annual Report 93 In September 2006, the SEC issued SAB 108. SAB 108 expresses SEC staff views regarding the process by The Company historically has depreciated substantially all leasehold improvements over the shorter of the The difference between the depreciation expense recorded and the depreciation expense that would have In connection with the purchase of certain aircraft, the manufacturer paid Horizon a “market subsidy” Previously, the fleet subsidy credit was recognized as the cash was received, i.e. over the payment period. The difference between the Company’s historical accounting practice and the current practice for income Note 16. Impact of Staff Accounting Bulletin No. 108 (SAB 108) which misstatements in financial statementsmisstatements are are evaluated material for to purposes the ofafter Company’s determining November financial whether 15, statements. those 2006. SAB The 108retained transition was earnings provisions effective for of for the the fiscal cumulative bulletin yearsSAB effect permit ending 108 of the in immaterial Company the errors to fourth relating adjustthe quarter to beginning Company of prior has 2006, years. adjusted with The beginning an Companystatements retained effective adopted for earnings date the for of items 2006 January described in 1,immaterial below. the 2006. to Management accompanying In prior of consolidated accordance periods. the financial with Company the considers bulletin, these adjustments to be Depreciation of Leasehold Improvements lease term or their estimateddepreciated economic over useful their life. estimated However, useful leaseholdimprovements lives. improvements over The at the Company airports longer followed were period the generally least due practice the to of period the depreciating over expectation leasehold which thatthe the the Chief leasehold underlying Accountant improvements lease of were would the being beclarifying Securities depreciated. renewed its and In for position Exchange February at that Commission 2005, leasehold (“SEC”) thethe improvements issued Office shorter in interpretive of of an guidance their operating economic leaseagreements lives should do or be not the depreciated generally remaining by carry lease theterm” a term, lessee definitions. renewal as over right defined in in them, SFAS which 13. is Our a airport key lease consideration for SFAS 13 “lease been recorded had the Companyterm depreciated was those not leasehold material improvements to usingaccumulated the the difference consolidated shorter deemed statements life material of of to operations theaccumulated the in lease difference Company’s any would consolidated individual have balance year, been sheets. norto material However, was correct to the the the the accumulated consolidated depreciation statementseconomic of of lives leasehold operations. or improvements As the to such, remaining depreciate in lease them order term, over the the Company shorter adjusted of its their beginning retained earnings forHorizon 2006. Fleet Subsidy payment as an inducement toQ200 purchase aircraft larger and aircraft. eight This years market for subsidy Q400 was aircraft paid following quarterly delivery for of seven the years aircraft. for However, upon further review, managementto determined recognize that the the credit correct ratably methodtime over of of the accounting the full would cash lease have payments. term been of the aircraft, generally 15 to 17 years, rather than atstatement the recognition was not materialwas to the the deferred consolidated credit statements that ofsheets. should operations However, have in the been any accumulated recorded individual difference deemed year,operations. would material nor As have to such, been the in material Company’s order to consolidatedbeginning to the balance retained correct consolidated earnings the statements for amount of 2006. of deferred credit recognized, the Company adjusted its Annual Report rirto;hwvr aaeetde o eiv n naoal ucm ol emtra othe this to of material operations. outcome be of the would results predict outcome or cannot unfavorable flows Company any cash in The believe Company’s commenced 2007. not matter April does this in management for resume however, Arbitration to arbitration; the contract. scheduled when labor is Seattle acceptable and in an 2007 operation on January service agreement ramp reach the not subcontracting could things, parties other among by, agreement bargaining bad in closed. engaged are and matters quo these status and a Act expired dismissed Labor has also Railway period court the appeal the violated The time, Alaska bargaining. same that faith the alleging of At IAM permissibility Seattle. the the in by regarding operation counterclaim dispute service International of ramp the the arbitration Alaska’s 2006, against compel of April lawsuit to subcontracting In Alaska’s seeking counterclaim. of (IAM) IAM dismissal Machinists the voluntary of dismiss granted Association 475 to Seattle Alaska approximately motion in 2005, of a court 13, reduction filed district May immediate Alaska federal 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 collective Seattle. against engaged the in claim under operation counter permissibility, service a the ramp filed regarding Alaska’s IAM dispute of a subcontracting of of arbitration agreement, compel bargaining to seeking (IAM) Machinists of Contingencies 18. Note a with agreement maintenance engine hour” the 2004. by late “power in a party the of third adopting execution of the effect including the program, million disclosing maintenance $144.7 believe of not its charge does of a Company value in The expense book resulting tax). net aircraft after the all million off for ($90.4 wrote overhauls pre-tax Company engine the and 2005, airframe 1, capitalized frequent, January previously more effective but Accordingly, shorter, industry. on the airline more that the focuses believes now also airframes Management approved its visits. Company’s of maintenance the majority Additionally, the activities. for maintenance program in maintenance allocations the repair or versus overhaul overhaul the determine of life the the of that shorter believes the the over Under expense term. maintenance lease to remaining amortized and capitalized were costs the from overhauls Principle Accounting in Change 17. Note millions): Adjustments of Impact te liabilities Other depreciation Accumulated diinly h A ie reac gis lsaalgn htAak iltdtecollective the violated Alaska that alleging Alaska against grievance a filed IAM the Additionally, Association International the against Seattle in court district federal in lawsuit a filed Alaska 2005, March In engine and airframe major for accounting of method its changed Company the 2005, 1, January Effective earnings Retained taxes income Deferred (in below presented are balances beginning 2006 on tax, of net above, noted items the of each of impact The ehdo e noefr20 rvdsmaigu nomto eas fcagsi h Company’s the in changes of because information meaningful provides 2005 for income net on method Total ietexpense direct ...... $ — $ — $ $— ...... aiaieadamortize and capitalize ...... — ...... ehdi rfrbebcuei lmntstejdmn n siainnee to needed estimation and judgment the eliminates it because preferable is method ...... ietexpense direct ehdt the to method ehd vralcssaeepne sicre.TeCompany The incurred. as expensed are costs overhaul method, ietexpense direct 94 ietexpense direct ehdi h rdmnn ehdue in used method predominant the is method ehd ne h omrmto,these method, former the Under method. uuaieEfc so aur ,2006 1, January of as Effect Cumulative Improvements Leasehold 1. 10.3 $ — $ $10.3 60 1.)(18.6) (11.1) (12.6) (6.8) (6.0) (4.3) Subsidy Fleet 9419.4 19.4 direct Total Annual Report 95 The Company could potentially be responsible for environmental remediation costs primarily related to jet Despite more than a year of negotiations to reach a mutual agreement, in December 2006, the Company was The Company is a party to routine commercial and employment litigation incidental to its businessManagement and believes with the ultimate disposition of these matters is not likely to materially affect the fuel and other petroleum contaminationCompany’s that system. occurs The in Company the has normalcontamination established course based an of on accrual business information for at currently estimated various2005. available. remediation locations The costs in accrual for the was known not significant at December 31, 2006 or notified by the City ofAirport Los (LAX) Angeles would that be terminal unilaterally chargesoperations increased related fees dramatically to were for its increased 2007 operations retroactively and atairlines to beyond. Los operating January Additionally, Angeles in 2006. maintenance International Terminals These and 1 increasesthrough and were 8, 3 made because at applicable of LAX, for their but all Terminals long-term were 1 leases not and currently imposed 3, in on have effect. airlinesdisparate filed Alaska operating changes a and in of complaint Horizon, Terminals such with along 2 great the withdiscrimination and amounts Department other under 4 and of airlines federal the Transportation in statutes long (DOT) and duration allegingU.S. DOT of that Secretary and such these of FAA changes Transportation policies. constitute early By unreasonable appealed in statue, to the this the summer question Federal of will Circuit 2007. be Court An resolved in adverse by Washington, decision the D.C. by the Secretary could be respect to which no material liability is expected. Company’s financial position or resultsunderstanding of of operations. the However, relevant this law beliefand and is risks facts; based associated it on with is management’s litigation subject current and to the various actions contingencies, of including judges the and potential juries. costs Annual Report eray2,2007 21, February Washington Seattle, LLP KPMG operation effective the and of, reporting. assessment financial management’s over dated on control report opinion internal our unqualified of, and an (COSO), expressed Commission 2007 Treadway 21, of the February as of reporting Organizations financial in Sponsoring over established of control criteria Committee internal on Inc.’s based Group, 2006, Air 31, Alaska December of effectiveness the States), (United errors. statement financial of impact the Staff assesses SEC Statements Company of Financial provisions Year the Current adopted in Company Misstatements 132(R) the and statements, 108, 106 financial No. 88, consolidated Bulletin 87, the Accounting No. to Statements 16 FASB Note of in amendment discussed 158, Plans—an No. Postretirement SFAS Other of and provisions Pension the adopted 123(R), and No. awards (SFAS) compensation Standards Accounting Financial of Statement whole, thereon. a forth as set taken information statements the financial respects, consolidated material in financial basic all 2006, related the in 31, the to fairly, December opinion, relation their presents ended our in of period in considered results three-year Also when the the principles. schedule, and in accounting statement 2005, years accepted and the generally 2006 of U.S. 31, each with December for conformity of flows as cash Inc. their Group, and Air operations Alaska of position financial the for basis reasonable a provide as audits well our as that management, believe audit by We opinion. An made presentation. our statements. estimates statement financial significant financial the and overall in used the disclosures principles evaluating and accounting includes amounts the audit the assessing assurance An supporting includes reasonable misstatement. evidence also obtain material basis, to of test audit free a the are on perform statements examining, and financial plan consolidated we the that whether require about standards Those States). (United Board schedule statement financial and statements financial Our consolidated audits. management. these our Company’s on on the opinion audits based consolidated of an our These responsibility express with II. the to connection schedule are is In statement schedule responsibility 2006. financial statement 31, audited financial December have and ended also statements period we financial and three-year statements, equity the financial shareholders’ in consolidated operations, years the of the of statements of consolidated each related for the flows and cash 2005, and 2006 31, December Inc.: Group, Air Shareholders Alaska and Directors of Board The eas aeadtd nacrac ihtesadrso h ulcCmayAcutn vrih Board Oversight Accounting Company Public the of standards the with accordance in audited, have also We of provisions the adopted Company the statements, financial consolidated the to 1 Note in discussed As respects, material all in fairly, present above to referred statements financial consolidated the opinion, our In Oversight Accounting Company Public the of standards the with accordance in audits our conducted We of as Inc. Group, Air Alaska of sheets balance consolidated accompanying the audited have We EOTO NEEDN EITRDPBI CONIGFIRM ACCOUNTING PUBLIC REGISTERED INDEPENDENT OF REPORT osdrn h fet fPirYa isaeet hnQuantifying when Misstatements Year Prior of Effects the Considering nenlCnrlItgae Framework Control—Integrated Internal hc eutdi hnei h anri hc the which in manner the in change a in resulted which , 96 hr ae Payment Based Share mlyr’Acutn o eie Benefit Defined for Accounting Employers’ o t stock its for , sudb the by issued .As Annual Report issued by the issued by COSO. Alaska Air Group, Inc.’s . issued by COSO. Also, in our opinion, Alaska Air 97 Internal Control—Integrated Framework Internal Control—Integrated Framework . Integrated Framework — Internal Control REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We conducted our audit in accordance with the standards of the Public Company Accounting Oversight A company’s internal control over financial reporting is a process designed to provide reasonable assurance Because of its inherent limitations, internal control over financial reporting may not prevent or detect In our opinion, management’s assessment that Alaska Air Group, Inc. maintained effective internal control We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board We have audited management’s assessment, included in the accompanying Management Report on Internal Group, Inc. maintained, in allDecember material 31, respects, 2006, effective based internal on control criteria over established financial in reporting as of KPMG LLP Seattle, Washington February 21, 2007 Committee of Sponsoring Organizations ofmanagement the is Treadway responsible Commission for (COSO) maintainingassessment effective of internal the control effectiveness over of financialopinion internal reporting on control and management’s over for assessment financial its and reporting.control an Our over opinion responsibility financial on is reporting the to based effectiveness express on of an our Alaska audit. Air Group, Inc.’s internal Board (United States). Those standardsabout require whether that effective we internal plan control andaudit over perform included financial the obtaining reporting audit an was to understanding maintained obtainassessment, of in reasonable testing internal all assurance and control material evaluating over respects. the financial Our other design reporting, procedures and evaluating as operating management’s we effectiveness considered ofreasonable necessary internal basis in control, for the and our circumstances. performing opinion. We such believe that our audit provides a regarding the reliability of financialaccordance reporting with and generally the accepted preparation accounting ofincludes principles. financial those A statements policies company’s for and internal external procedures controlaccurately purposes that over in and (1) financial fairly pertain reporting reflect to the theassurance transactions maintenance that and of transactions dispositions records are of that, recorded the inwith as assets reasonable generally necessary of detail, accepted to the accounting permit company; principles, preparation (2)only and of provide in that financial reasonable accordance receipts statements with and in authorizations expenditures accordance assurance of of regarding management the prevention and company or directors are timely of beingcompany’s detection the made assets of company; that unauthorized and could acquisition, (3) have use, provide a or reasonable material disposition effect of on the the financial statements. misstatements. Also, projections of anycontrols evaluation may of become effectiveness inadequate to because futurepolicies of periods or changes are procedures in subject may conditions, to deteriorate. or the that risk the that degree of compliance with the over financial reporting as ofestablished December in 31, 2006, is fairly stated, in all material respects, based on criteria (United States), the consolidated balanceand sheets the of related Alaska consolidated Air statements Group,the of Inc. three-year operations, as period shareholders’ of ended equity December December and 31,opinion 31, cash 2006 on 2006, flows and those and for 2005, consolidated our each financial report of statements dated the February years 21, in 2007 expressed an unqualified The Board of Directors andAlaska Shareholders Air Group, Inc.: Control, that Alaska Air Group,December Inc. 31, maintained 2006, effective based internal on control criteria over established financial in reporting as of Annual Report APnticm ls)bfr conigchange accounting before (loss) income net GAAP tax of net charges, Impairment tax of net tax charges, of Restructuring net (losses), 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) 2006 31, December Ended Year 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 Millions) (In diinly n20,alreprino h eev a eesdi oncinwt h ucaeo five of purchase the with connection in aircraft. released underlying was lessors. the reserve the on the from extended of aircraft is portion MD-80 lease large the a if 2006, liabilities in long-term Additionally, 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 ...... ( ...... —3663—— — 6.3 3.6 — ...... $3.3 $ ...... 6.9 $ ...... 2.7 $ ...... 3.0 $ ...... 1.7 $ ...... lsaArGop Inc. Group, Air Alaska lsaArGop Inc. Group, Air Alaska ...... $ ...... $ ...... 98 ...... ——— Beginning 2006 3. 50$52$3.)$(67.5) $(30.8) 5.2 $ 55.0 $ 137.7 1.)—(67 — — (26.7) — 118.5) 5.)3. 17—— $(67.2) — 13.5 $ $(15.3) — — 84.5 $ (52.6) (31.8) 31.7 (12.7) 38.6 (15.5) (56.3) Balance 2. 36$(.)$20.5 (3.8) $ $3.6 $20.7 $20.7 (4.1) $ $5.9 6.9 $ $18.9 $(10.6) $18.9 (0.6) $3.3 $ $14.2 $1.5 $18.0 2005 oExpense to Additions Charged 41$(.)$1.0 $ (6.4) $ 2.9 $4.1 $ (1.4) $ 3.3 $ $1.6 (6.5) $ 2.7 $2.9 $ (1.5) $ $1.2 3.0 $ (1.2) $ $2.5 2004 Deductions (A) 2003 430.3 44.3 ceueII Schedule Balance Ending 2002 Annual Report 99 OTHER INFORMATION CHANGES IN AND DISAGREEMENTS WITHFINANCIAL ACCOUNTANTS DISCLOSURE ON ACCOUNTING AND CONTROLS AND PROCEDURES Our certifying officers concluded, based on their evaluation, that disclosure controls and procedures were effective. During 2006, the separate accounting and payroll departments of Alaska and Horizon were combined into Our management is responsible for establishing and maintaining adequate internal control over financial Our management’s assessment of the effectiveness of our internal control over financial reporting as of We intend to regularly review and evaluate the design and effectiveness of our disclosure controls and As of December 31, 2006, an evaluation was performed under the supervision and with the participation of Internal Controls over Financial Reporting one Air Group accounting andprocesses payroll across function the in two an companies. attemptinventory Additionally, to system. in improve There 2006, economies were Horizon of no implemented scalethe changes a and changes in new standardize described the maintenance above, Company’s and identified internalreasonably in control likely management’s over to evaluation financial materially that reporting, affect, have including the materially Company’s affected, internal or control are over financial reporting. Management’s Report on Internal Controls over Financial Reporting reporting, as such term isparticipation defined of in our Exchange management, Act including Rulesconducted our 13a-15(f). an principal Under evaluation executive the of officer supervision the and andframework effectiveness principal with in of financial the Internal our officer, Control internal we – controlthe Integrated over Treadway Framework financial Commission issued reporting (the by based COSO the onmanagement Framework). Committee the concluded Based of that on Sponsoring our our Organizations internal evaluation of control under over the financial COSO reporting Framework, was our effective as of December 31,December 2006. 31, 2006 has beenin audited their by report KPMG which LLP, is an included independent herein. registered public accounting firm, as stated procedures and internal control 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 control While may over we cause financial believe us reporting the to are modify our controlsITEM and 9B. procedures. None ITEM 9. None ITEM 9A. Evaluation of Disclosure Controls and Procedures 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 ofour designed our current to disclosure and ensure controls periodic that and reports the procedures.recorded, filed information These processed, with required summarized or to and submitted be reported to disclosedand within the by that the Securities us the time and in information periods Exchange is specified Commissionon accumulated by (the a and the SEC) timely communicated SEC’s is basis. to rules our and management, forms, including our certifying officers, Annual Report TM14. ITEM Proxy. 13. ITEM Proxy. 2007 our from reference by herein incorporated Information,” 12. ITEM 11. the ITEM on information such posting by above enumerated website. principal definition internet our ethics our to of of applies functions code portion that similar the governance ethics performing of corporate of persons element code or any our officer to of accounting relates provision principal that a officer, Form from, financial of waiver principal 10 a officer, Item or executive under to, requirement amendment disclosure an the regarding satisfy 8-K to intend We Governance.” Information—Corporate code. the the in to identified adherence persons for or accountability person appropriate an to code 5. the of violations of reporting internal prompt the regulations; and rules laws, governmental 4. applicable files with registrant compliance a that documents and reports 3. in disclosure understandable and timely, between accurate, interest fair, of full, conflicts apparent or actual of 2. handling ethical the including conduct, ethical and honest written of promote: set to a and 1. is wrongdoing ethics deter of to code designed A reasonably functions. are similar that performing standards persons and officer accounting principal Ethics of Code information for 4 Item following to I referred Part (hereinafter in AK Registrant” Anchorage, the officers. in of executive 2007 Officers to 12, “Executive relating June See on Proxy”). held “2007 be our to as Shareholders of Meeting Annual Group’s 10. ITEM e PicplAcutn esadSrie, noprtdhri yrfrnefo u 07Proxy. 2007 our from reference by herein incorporated Services,” and Fees Accountant “Principal See 2007 our from reference by herein incorporated Transactions,” Related and Relationships “Certain See Plan Compensation “Equity and Management” and Owners Beneficial Certain of Ownership “Security See Proxy. 2007 our from reference by herein incorporated Compensation,” “Executive See Info—Investor “Company under www.alaskaair.com at website Internet our on located is ethics of code Our and code; registrant; the by made communications public other in and Commission the to, submits or with, relationships; professional and personal officer, financial principal officer, executive principal our to applies that ethics of code a adopted have We Air for Statement Proxy definitive the from reference by herein incorporated Directors,” of “Election See RNIA CONATFE N SERVICES AND FEES ACCOUNTANT PRINCIPAL TRANSACTIONS RELATED AND RELATIONSHIPS CERTAIN MANAGEMENT AND OWNERS BENEFICIAL CERTAIN OF OWNERSHIP SECURITY COMPENSATION EXECUTIVE REGISTRANT THE OF OFFICERS EXECUTIVE AND DIRECTORS ATIII PART 100 Annual Report 101 PART IV : Financial Statement Schedule II, Valuation and Qualifying Accounts, for The financial statements included in Item 8 above See Exhibit Index on page 103. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES The following documents are filed as part ofFinancial this Statements: report: the years ended December 31, 2006, 2005 andExhibits: 2004, included in Item 8 above Financial Statement Schedules ITEM 15. 1. 3. 2. Annual Report h olwn esn nFbur 3 07o eafo h eitatadi h aaiisindicated. capacities the in and registrant the of behalf on 2007 23, February on persons following the By: authorized. duly thereunto undersigned, the INC. by GROUP, AIR behalf ALASKA its on signed be to report this caused duly has usatt h eurmnso eto 3o 5d fteScrte xhneAto 94 h registrant the 1934, of Act Exchange Securities the of 15(d) or 13 Section of requirements the to Pursuant usatt h eurmnso h euiisEcag c f13,ti eothsbe indblwby below signed been has report this 1934, of Act Exchange Securities the of requirements the to Pursuant s .K J. /s/ s B /s/ s P /s/ s P /s/ s J /s/ s .M R. /s/ himnadCifEeuieOfficer Executive Chief and Chairman s M /s/ s B /s/ s B /s/ s B /s/ s D /s/ s J /s/ s R /s/ s W /s/ s W /s/ RANDON ATRICIA HYLLIS ESSIE .KnehThompson Kenneth J. OHN rno .Pedersen S. Brandon RADLEY RUCE YRON ARK eseJ ngt Jr. Knight, J. Jessie arcaM Bedient M. Patricia hli .Campbell J. Phyllis ENNIS ENNETH akR Hamilton R. Mark .Mr Langland Marc R. rc .Kennedy R. Bruce ICHARD ensF Madsen F. Dennis rde .Tilden D. Bradley onV Rindlaub V. John ihr .Wien A. Richard ILLIAM yo .Mallott I. Byron ila .Ayer S. William ila .Ayer, S. William ILLIAM ARC .R V. .K J. .H R. .K R. .M I. .C J. .M F. .B M. .P S. L .T D. NIGHT .W A. T ANGLAND INDLAUB A S. AMILTON .A S. AMPBELL ENNEDY HOMPSON ALLOTT EDERSEN ADSEN EDIENT ILDEN YER YER IEN ,J R . SIGNATURES 102 iaca fie PicplFnnilOfficer) Financial (Principal Officer Financial Chief and President/Finance Vice Executive and Director Officer Executive Chief President, Chairman, 2007 23, February Date: Director Director Director Director Director Director Director Director Director Director Director Officer) Accounting (Principal Controller and President/Finance Vice Annual Report 103 EXHIBIT INDEX (files as part of July 10, 2006 Form 8-K) 2006 Form 8-K/A) America, N.A. as administrative agent,Association Citicorp as USA, documentation Inc. agent, as and syndicationForm other agent, 10-Q) lenders. U.S. (Exhibit Bank 10.1 National to First Quarter 2005 Airlines, Inc. (Exhibit 10.1 to Second Quarter 2005 Form 10-Q) Airlines, Inc. (Exhibit 10.2 to Second Quarter 2005 Form 10-Q) Industries, Inc. and Bombardier, Inc. (Exhibit 10.1 to Third Quarter 2005 FormNew York 10-Q) Branch, as securityDeutsche agent, Girozentrale Norddeutsche (Exhibit Landesbank 10.2 Girozentrale, to and Third DekaBank Quarter 2005 Form 10-Q) amended through September 14, 2006*** (Exhibit 10.1 to September 18, 2006 Formrestricted 8-K) stock unit agreements (Exhibit 10.2 to 2004 Form 10-K)*** Statement No. 33-52242)*** Alaska Airlines, Inc. for thelease lease agreements of and a Letter B737-400 Agreement aircraft,Form #1 summaries 10-K) dated of January 19 22, substantially 1990 identical (Exhibit 10-14 to 1990 333-09547)*** 333-39899)*** First Amendment to the AlaskaPlan Airlines, for Inc. Officers and (Exhibit Alaska 10.15 Air to Group, 1997 Inc. Form Supplementary 10-K)*** Retirement Amendment to the Alaska Airand Group, Second Inc. Amendment 1995 to Elected the OfficersRetirement Alaska Supplementary Plan Air Retirement (Exhibit Group, Plan 10.16 Inc. to 1995 1997 Elected Form Officers 10-K)*** Supplementary Pursuant to Item 601(a)(2) of Regulation S-K, this Exhibit IndexCertain immediately of precedes the the following exhibits. 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 Alaska 16, Air 2006 Group, Inc., as amended through March 9, 2006 (Exhibit 3(ii) to March 16, *10.1 . Credit Agreement dated as of March 25, 005 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 as Air*10.8 Group, Inc. Long-Term Incentive Equity Plan and form of stock Alaska option Air and Group, Inc. 1988 Stock Option Plan, as amended through May 19, 1992 (Registration *10.10 Alaska Air Group, Inc.*10.11 1996 Long-Term Incentive Equity Plan (Registration*10.12 Statement Alaska Air Group, Inc. Non Employee Director Alaska Stock Air Plan Group, (Registration Inc.*10.13 Statement 1997 333-33727)*** Non Officer Long-Term Incentive Equity Plan (Registration Alaska Statement Air Group, Inc. 1981 Supplementary Retirement Plan*10.14 for Elected Officers, as amended by Alaska Air Group, Inc. 1995 Elected Officers Supplementary Retirement Plan, as amended by First 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*#10.3 Terms Agreement dated June 15, 2005, between the Boeing Company Purchase and Agreement*#10.4 Alaska No. 2497 dated June 15, 2005, between the Boeing Company Supplemental and to*#10.5 Alaska Master Purchase 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 1350 management Financial Section Indicates Chief U.S.C. of 18 herewith. *** Certification to Filed 906 Pursuant Section Officer filed. 1350 Executive Previously 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 Chief **32.2 of Certification LLP) 302 (KPMG Section Firm Accounting Public **32.1 Registered Independent of Consent Registrant the of **31.2 Subsidiaries Charges Fixed to Earnings of Ratio **31.1 of Computation of Statement **23.1 **21 **12.1 1.1Aak i ru,Ic 04Ln-emIcniePa efrac tc ntAward Unit Stock Performance Plan Incentive Long-Term 2004 Inc. Group, Air (Exhibit Alaska Agreement Award Unit Stock Plan Incentive Long-Term 2004 Inc. Group, Air Alaska Agreement Option Stock *10.21 Nonqualified Plan Incentive Long-Term 2004 Inc. Group, Air Alaska *10.20 Alaska and Bagley D. George between and Alaska by between Agreement 1996 Non-Compete 29, and *10.19 December Retirement of as dated arrangement plan retirement Supplemental (a) *10.18 First by amended as *10.18 Plan, Compensation Deferred Nonqualified Inc. to Group, 10.18 Air (Exhibit Alaska 1999 27, October dated Agreement Control of Change Inc. Group, Air Alaska Statement (Registration *10.17 Plan Equity Incentive Long-Term 1999 Inc. Group, Air Alaska *10.16 *10.15 gemn Ehbt1. oFbur ,20 om8-K)*** Form 2007 2, February to 10.3 (Exhibit Agreement 8-K)*** Form 2007 2, February to 10.2 8-K)*** Form 2007 2, February to 10.1 (Exhibit 8-K)*** Form 2005 14, September to 10.1 (Exhibit Inc. Airlines, 10-K)*** Form 2004 to 10.19 (Exhibit Bagley George and Inc. Airlines, 23, September dated 333-107177 No. Statement (Exhibit Registration Plan to 2003) Compensation 1 Deferred No. Nonqualified Amendment Inc. to Group, 10.17 Air Alaska the to Amendment 10-K) Form 1999 333-87563)*** 104 Annual Report Exhibit 31.1 William S. Ayer Chairman, President & CEO /s/ William S. Ayer CERTIFICATIONS December 31, 2006; 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 fairly this present report; in all materialregistrant respects as the of, financial and condition, for, results the of periods operations presented and in cash this flows report; of the 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)) for the registrant and designed under our supervision, toconsolidated ensure subsidiaries, that is material made information known relatingin to to which us the this by registrant, report others including is within its being those 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 fourth registrant’smaterially fiscal internal affect, quarter control the that over registrant’s has financial internal materially reporting control affected, that over or financial is reporting; reasonably and likely to internal control over financial reporting,registrant’s to board the of registrant’s directors: auditors and the audita) committee all of significant 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 February 23,2007 By 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 report, The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be 5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of Annual Report eray2,20 By 2007 23, February 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 report, this in 4. included information financial other and statements, financial the knowledge, state my to on omit Based or fact material a 3. of statement untrue any contain not does report ended this period knowledge, the my for on Inc. Based Group, Air Alaska of 10-K 2. Form 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 fraud, process, any record, b) to 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 significant the all of a) committee audit the and auditors directors: registrant’s of the board to registrant’s reporting, financial over control internal to likely and reasonably reporting; is financial or over that affected, control reporting materially internal financial has registrant’s over that the control quarter affect, internal fiscal materially registrant’s fourth the registrant’s in the change during any the occurred report of this end in the and Disclosed of evaluation; d) as 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 Evaluated with c) accordance 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 internal period such the Designed during b) particularly 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 disclosure and such registrant Designed the a) for 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 the of report; flows this cash in and presented operations periods of the results for, condition, and financial of, the as respects registrant material all in present report; fairly this 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 2006; 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, 2006“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 23, 2007 By Annual Report eray2,2007 23, February By 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”), 2006 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 TI AEITNINLYLF BLANK] LEFT INTENTIONALLY PAGE [THIS Corporate Directory

Alaska Air Group BOARD COMMITTEE Alaska Airlines STAFF VICE Directors ASSIGNMENTS: Officers PRESIDENTS:

William S. Ayer Audit: William S. Ayer Jeffrey M. Butler age 52 Patricia M. Bedient, Chair Chairman, President & CEO Customer Service-Station Chairman, President & CEO Mark R. Hamilton Operations Dennis F. Madsen EXECUTIVE Alaska Air Group & Kelley J. Dobbs John V. Rindlaub VICE PRESIDENTS: Alaska Airlines Human Resources Patricia M. Bedient Compensation: Kevin P. Finan Phyllis J. Campbell, Chair Operations Benito Minicucci age 53 Maintenance Senior Vice President, Jessie J. Knight, Jr. Dennis F. Madsen Gregg A. Saretsky Finance & Strategic Planning Marketing & Planning ThomasR. O’Grady Weyerhaeuser Company John V. Rindlaub Commercial & Regulatory Phyllis J. Campbell Governance & Nominating: Bradley D. Tilden Law, Deputy General age 55 R. Marc Langland, Chair Finance & CFO Counsel President & CEO Jessie J. Knight, Jr. SENIOR VICE PRESIDENTS: John F. Schaefer, Jr. The Seattle Foundation Byron I. Mallott Finance & Treasurer J. Kenneth Thompson Glenn S. Johnson Mark R. Hamilton Customer Service-Airports Joseph A. Sprague age 62 Safety: Public & Government Affairs President Richard A. Wien, Chair William L. MacKay University of Alaska Mark R. Hamilton Alaska Horizon Air Officers Bruce R. Kennedy Byron I. Mallott Robert M. Reeder age 68 J. Kenneth Thompson Information & Jeffrey D. Pinneo Chairman Emeritus Alaska Air Group Communication Services President & CEO Alaska Air Group Officers VICE PRESIDENTS: SENIOR VICE PRESIDENTS: Jessie J. Knight, Jr. age 56 William S. Ayer Benjamin F. Forrest, Jr. Thomas M. Gerharter Executive Vice President Chairman, President & Flight Operations Operations Sempra Energy CEO Donald S. Garvett Andrea L. Schneider R. Marc Langland Bradley D. Tilden Planning & Revenue Customer Services age 65 Executive Vice President, Management Chairman & President Finance & CFO VICE PRESIDENTS: Northrim Bank ChrisR. Glaeser Keith Loveless Safety Eugene C. Hahn Dennis F. Madsen Vice President, Legal & Flight Operations age 58 Corporate Affairs, General Dennis J. Hamel Chairman Counsel and Corporate Human Resources Marne K. McCluskey Seatab Software Secretary Employee Resources Stephen B. Jarvis Byron I. Mallott Brandon S. Pedersen Sales & Customer Experience Rudi H. Schmidt age 63 Vice President, Finance & Treasurer Keith Loveless Senior Fellow Finance & Controller Celia M. Sherbeck First Alaskans Institute Legal & Corporate Affairs, John F. Schaefer, Jr. General Counsel & Maintenance & Engineering John V. Rindlaub Report Annual Staff Vice President, Corporate Secretary Arthur E. Thomas age 62 Finance & Treasurer CEO Frederick L. Mohr Legal & Administration, Wells Fargo Bank NA Maintenance & Engineering Corporate Secretary Pacific Northwest Region Brandon S. Pedersen Patrick A. Zachwieja J. Kenneth Thompson Finance & Controller Marketing & Planning age 55 President & CEO Edward W. White Pacific Star Energy LLC Corporate Real Estate Richard A. Wien age 71 Chairman & CEO Florcraft, Inc. Annual Report etl,Prln n Boise. and Portland are Seattle, hubs major Its Canada. Alberta, and Columbia British and Nevada, Montana, Idaho, Washington, Oregon, Colorado, California, in destinations 49 to transportation provides air and revenues Group Air 19% of about for accounts Air Horizon service. customer outstanding for noted similarly is 1981, in organized corporation Washington a Inc., Industries, Air Horizon Angeles. Los and Portland Seattle, Anchorage, are hubs major Its in Mexico. destinations 10 to and Canada, in Alberta and Columbia to British service provides also Alaska D.C. Washington, in National Reagan and Newark, Orlando, Miami, Denver, Dallas, Chicago, Boston, flies to airline the Arizona, and Nevada California, Oregon, Washington, Alaska, in its destinations to to addition service In cities. 48 to service air scheduled Group provides Air revenues, of 81% about for accounts which Alaska, service. customer award-winning its for noted is 1932, in founded corporation Alaska an Inc., Airlines, Alaska 1985. in Delaware corporation a as organized was Group Air Alaska Mexico. and Canada, States, United the in destinations 90 serve collectively that carriers Seattle-based Air, Horizon and Airlines Alaska for company the holding is Inc., Group, Air Alaska oprt Profile Corporate 3 et5 West 939 Cook Captain 2007 Hotel 12, June Tuesday, p.m., 2 Meeting Annual Washington Seattle, LLP KPMG Auditors Independent http://www.computershare.com Internet: 1-877-282-1168 Telephone: 02940-3078 RI Providence, 43078 Box P.O. Services Investor Computershare rnfrAetadRegistrar and Agent Transfer 98168-0947 Washington Seattle, 68947 Box P.O. Address: Mailing 392-5040 (206) Telephone: 98188 Washington Seattle, Blvd. International 19300 Headquarters Corporate Information Investor omnSok(ybl ALK) (Symbol: Stock Common Exchange Stock York New Securities of Listing Alaska Anchorage, th Avenue front cover: Photos by Jane Griffi th

back cover:

Alaska Airlines Starliner 75 (top of page) In honor of Alaska’s 75th anniversary, employees chose one of the airline’s historical liveries to bedeck a new Boeing 737-800. The “Starliner” was introduced in 1945 after the airline changed its name from Alaska Star Airlines to Alaska Airlines.

Horizon Air Q400 (bottom of page) The Bombardier Q400 off ers speed and comfort — as well as relative quietness, appreciated by the communities Horizon serves. Alaska Air Group, Inc. P.O. Box 68947 Seattle, WA 98168-0947

www.alaskaair.com Alaska Airlines Reservations