ALASKA AIR GROUP 2010 ANNUAL REPORT 2010 ANNUAL REPORT HIGHEST IN CUSTOMER SATISFACTION • BEST ON-TIME PERFORMANCE TOP PERFORMING AIRLINE • AIRLINE TECHNOLOGY LEADERSHIP AWARD BEST LOYALTY CREDIT CARD • MAINTENANCE TRAINING EXCELLENCE For the third year in a row, Alaska Airlines was ranked “Highest in Customer Satisfaction Among Traditional Network Carriers” by J.D. Power and Associates We ranked high in six of the study’s seven measures, including flight crew, aircraft, boarding/deplaning/baggage service, check-in, costs and fees, and reservations. A representative of J.D. Power cited Alaska’s baggage service guarantee as a factor in its favorable showing, saying that customers know they’re receiving something of value in return for the fee they pay to check their luggage. “HIGHEST IN CUSTOMER SATISFACTION AMONG TRADITIONAL CARRIERS IN NORTH AMERICA, THREE YEARS IN A ROW” 2010 Annual Report Page 1 In 2010 Alaska Airlines was named Adjusted pre-tax margin - 2010 15% “Top-Performing 10% 5% Airline of the Year” 0% -5% by Aviation Week Magazine Delta United jetBlue Southwest American US Airways Alaska Air Group The magazine highlighted our smaller size and Adjusted pre-tax margin - 2009 independence as one of 10% our biggest assets. 5% 0% -5% -10% Delta jetBlue United Southwest American Continental US Airways Alaska Air Group The magazine also cited our recent financial performance, which is among the best in the industry. page 2 Alaska Air Group Alaska Airlines was awarded the “On-Time Performance Service Award” among major North American airlines by FlightStats.com for our 2010 on-time performance. A few years ago, we knew we had to fix our operation and we set out to do just that. We’re proud of the results and we 100% know our customers are too. 90% 80% 70% 20th 12th 12th 7th 2nd 1st 60% 50% 2005 2006 2007 2008 2009 2010 Flights arriving within 15 minutes of scheduled arrival Rankings in 2008-2010 are among the 10 largest domestic airlines 2010 Annual Report Page 3 In January 2011, Air Transport World named Alaska Airlines the winner of the “2011 Airline Technology Leadership Award,” citing our pioneering of RNP (Required Navigation Performance) technology in the 1990s, our “Airport of the Future,” and the “Greener Skies Over Seattle” project, among other notable accomplishments. page 4 Alaska Air Group Our Mileage Plan program was recognized as having the “Best Loyalty Credit Card” in North America at the Frequent Traveler Awards in 2010. The Mileage Plan program is no stranger to awards – it won the Freddie Award for “Program of the Year” five times in seven years. 2010 Annual Report Page 5 Alaska Airlines received a ninth and Horizon Air received an eleventh consecutive Diamond Award for maintenance training excellence through the Federal Aviation Administration’s William O’Brien Maintenance Technician Awards Program. These awards underscore our commitment to our core values of safety and compliance and reflect the daily investment we make in the training and technical excellence of our technicians. page 6 Alaska Air Group To Our Shareholders A LOOK BACK As we look back on our record-setting year, I want to spend some time to reflect on the changes we’ve made over the past decade that made our performance in 2010 a reality. But first, let’s take a look at some of our achievements from last year. Š Alaska Air Group reported record Alaska Air Group Net Profit earnings in 2010, resulting in a Generally Accepted Accounting Principles (GAAP) record 11.1 percent pretax profit Adjusted for unusual items margin, which is among the best in the industry. This year’s results also 300 262.6 251.1 represent our seventh consecutive year of profitability and we exceeded 135.8 121.6 150 124.3 88.7 our 10 percent Return on Invested 84.5* 91.6 Capital goal, reporting 10.7 percent 55.0 13.5 5.2 4.4 for 2010. 0 (15.3) ($ in millions) (30.8) (67.5) (54.5) (67.2)* (150) (135.9) 2002 2003 2004 2005 2006 2007 2008 2009 2010 * $(118.6) mil. and $(5.9) mil. after accounting changes in 2002 and 2005, respectively. See reconciliation of GAAP to adjusted amounts on pages 28 and 40 of Alaska Air Group’s 2010 Annual Report on Form 10-K. Š Both Alaska and Horizon reported Load Factor record passenger load factors. As a Alaska Airlines result of our ability to quickly shift Horizon Air 90 83.3 capacity to markets where our 77.3 79.3 75.9 76.6 76.2 75.7 80 72.9 74.1 73.4 72.9 73.1 customers want to fly, our airplanes 68.1 70.0 69.3 72.8 70 62.4 63.9 were fuller than they ever have 60 been. 50 40 30 20 10 Percent of seats filled 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 Š Alaska reported record on-time performance, with 87.6 percent of flights arriving on time during 2010 – the highest among the ten largest domestic carriers. Š We also reported record revenues of $3.8 billion, record free cash flow of nearly $350 million, and the lowest debt leverage we’ve had since 1999. At the heart of these results are the 12,000 hardworking Alaska and Horizon employees who truly care about our company and provide outstanding service to our customers. Working together, we produced these great results and I am grateful to all of our people for their tremendous efforts. Our accomplishments have been noticed by others outside our company as well: Š 2010 marked the third year in a row that Alaska was ranked “Highest in Customer Satisfaction Among Traditional Network Carriers” by J.D. Power and Associates. Š Alaska was named the “Top-Performing Airline of the Year” by Aviation Week magazine in 2010, outranking global airline customer-service stalwarts such as Singapore Airlines and Cathay Pacific. The magazine highlighted our smaller size and independence as one of our biggest assets. Š Alaska was awarded the “On-Time Performance Service Award” among major North American airlines by FlightStats.com for our 2010 on-time performance. Š In January 2011, Air Transport World named Alaska the winner of the “2011 Airline Technology Leadership Award,” citing our pioneering of RNP (Required Navigation Performance), our “Airport of the Future,” and our Greener Skies Over Seattle project, among other notable accomplishments. Š Our Mileage Plan program was recognized as having the “Best Loyalty Credit Card” in North America at the Frequent Traveler Awards in 2010. The success in 2010 reflects the efforts of the past decade as much as the last twelve months. In 2003, we embarked on a transformation plan that we called the “2010 Plan.” In that plan, we envisioned a virtuous cycle that starts with engaged employees who deliver excellent customer service leading ultimately to sustained financial success. That success, in turn, allows us to grow our business. In that plan we set forth a number of ambitious objectives to define a great company, not just a great airline. Let me share some of those objectives with you. Š First – safety. We aim to be consistently recognized as having best-in-class safety practices. In that vein, Alaska and Horizon received their ninth and eleventh consecutive Diamond Awards, respectively, from the FAA in 2010 for maintenance training excellence and both companies have developed robust vendor oversight programs. Š Second – network. We’ve restructured our network to be more balanced seasonally and less affected by demand fluctuations in any one region. Our service to the Hawaiian Islands that we began 3 1⁄2 years ago now represents about 15 percent of our network. New Alaska Routes 2007 – 2011 Anchorage Bellingham Minneapolis/ Seattle St. Paul Portland Las Boston Vegas Chicago Sacramento St. Louis Oakland San Jose San Francisco Los Angeles Lihue Long Beach Atlanta San Diego Austin Honolulu Houston Maui Puerto Vallarta Kona Cabo Guadalajara Š Third – market-based compensation. Generous incentive plans enhance market-based compensation and align all employees around common financial and operational goals. Our employees earned an additional $92 million from these incentive plans in 2010 – which equates to more than one month’s pay for every employee. Š Fourth – fleet. In 2008, we achieved our goal of a single fleet of efficient Boeing 737 aircraft at Alaska. And this year, Horizon will complete its transition to a single fleet of all Q400 aircraft in June. Š Fifth – growth. Air Group’s capacity has Cumulative Capacity Growth Since 2003 grown by 18 percent since 2003 in contrast Domestic Industry to overall domestic capacity, which has Alaska Air Group remained flat – and most importantly, our 25.0% growth has been profitable. With the new 20.0% fleet order of Boeing 737-900ER aircraft 15.0% announced in January 2011, we will have 10.0% the option to grow at a rate of 3 percent to 6 5.0% percent annually for many years, assuming 0.0% economic conditions and fuel prices support -5.0% that level of growth. 2003 2004 2005 2006 2007 2008 2009 2010 Š And finally – costs. Alaska’s Alaska Airlines Mainline Unit Costs* non-fuel unit costs have declined 9.00¢ from 8.73 cents in 2001 to 7.85 8.73¢ 8.52¢ cents in 2010. In fact, we 8.50¢ 8.34¢ reduced unit costs more than any 8.26¢ other major domestic airline in 7.92¢ 2010. However, we know we’re 8.00¢ 7.85¢ 7.76¢ not done. Customers want low 7.90¢ fares, and to have low fares, we 7.50¢ 7.50¢ 7.60¢ must have low costs.