2006 Annual Report It’s about Spirit. 1932 is really not so long ago in the grand scheme of things. But for an airline, a history spanning 75 years is remarkable. As we embark on our 75th year, Alaska Airlines 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 Alaska Airlines 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 Boeing 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 Regional Airline 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 Seattle 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. Bill Ayer, 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 Alaska Air Group 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. Horizon Air 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.