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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
FORM 10-K
 
(Mark One)
T    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934[NO FEE REQUIRED]
For the fiscal year ended December 31, 2010
 
OR
 
£    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
 For the transition period from                      to                     
 
Commission File Number 1-8957
ALASKA AIR GROUP, INC.
A Delaware Corporation
 
91-1292054
 
19300 International Boulevard, Seattle, Washington 98188
 
(I.R.S. Employer Identification No.)
 
Telephone: (206) 392-5040
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of Each Class
 
 
Name of Each Exchange on Which Registered
 
Common Stock, $1.00 Par Value
 
New York Stock Exchange
 
Securities registered pursuant to Section 12(g) of the Act: None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  T   No  £ 
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes £      No   T
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  T  No  £ 
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes T No £
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  £
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act (Check one):
 
Large accelerated filer   T  Accelerated filer  £     Non-accelerated filer   £  Smaller reporting company   £
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes £ No T
 
As of January 31, 2011, shares of common stock outstanding totaled 35,831,543. The aggregate market value of the shares of common stock of Alaska Air Group, Inc. held by nonaffiliates on June 30, 2010, was approximately $1.6 billion (based on the closing price of $44.95 per share on the New York Stock Exchange on that date).
 
DOCUMENTS INCORPORATED BY REFERENCE
Title of Document
 
 
Part Hereof Into Which Document is to be Incorporated
 
Definitive Proxy Statement Relating to
2011 Annual Meeting of Shareholders
 
Part III
 
Table of Contents

ALASKA AIR GROUP, INC.
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2010
 
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
REMOVED AND RESERVED
 
 
 
 
 
 
 
 
 
ALASKA AIRLINES
 
 

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HORIZON AIR
 
CONSOLIDATED NONOPERATING INCOME (EXPENSE)
 
CONSOLIDATED INCOME TAX EXPENSE (BENEFIT)
 
 
ALASKA AIRLINES
 
HORIZON AIR
 
CONSOLIDATED NONOPERATING INCOME (EXPENSE)
 
CONSOLIDATED INCOME TAX EXPENSE (BENEFIT)
 
 
 
 
 
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As used in this Form 10-K, the terms “Air Group,” “our,” “we” and the “Company” refer to Alaska Air Group, Inc. and its subsidiaries, unless the context indicates otherwise. Alaska Airlines, Inc. and Horizon Air Industries, Inc. are referred to as “Alaska” and “Horizon,” respectively, and together as our “airlines.”
 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
In addition to historical information, this Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. Forward-looking statements are those that predict or describe future events or trends and that do not relate solely to historical matters. You can generally identify forward-looking statements as statements containing the words “believe,” “expect,” “will,” “anticipate,” “intend,” “estimate,” “project,” “assume” or other similar expressions, although not all forward-looking statements contain these identifying words. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from historical experience or the Company’s present expectations.
 
You should not place undue reliance on our forward-looking statements because the matters they describe are subject to known and unknown risks, uncertainties and other unpredictable factors, many of which are beyond our control.
 
Our forward-looking statements are based on the information currently available to us and speak only as of the date on which this report was filed with the SEC. We expressly disclaim any obligation to issue any updates or revisions to our forward-looking statements, even if subsequent events cause our expectations to change regarding the matters discussed in those statements. Over time, our actual results, performance or achievements will likely differ from the anticipated results, performance or achievements that are expressed or implied by our forward-looking statements, and such differences might be significant and materially adverse to our shareholders. For a discussion of these and other risk factors in this Form 10-K, see “Item 1A: Risk Factors.” Please consider our forward-looking statements in light of those risks as you read this report.
 

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PART I
 
ITEM 1.  OUR BUSINESS
 
Alaska Air Group, Inc. (Air Group, the Company, we or us) is a Delaware corporation incorporated in 1985 and we have two principal subsidiaries: Alaska Airlines, Inc. (Alaska) and Horizon Air Industries, Inc. (Horizon). Through these subsidiaries, we provide passenger air service to more than 23 million passengers per year to more than 90 destinations. We also provide freight and mail services, primarily to and within the state of Alaska and on the West Coast. Although Alaska and Horizon both operate as airlines, their business plans, competition, and economic risks differ substantially. Alaska is a major airline that operates an all-jet fleet with an average passenger trip length in 2010 of 1,232 miles. Horizon is a regional airline, operates turboprop and jet aircraft, and its average passenger trip length in 2010 was 359 miles. Individual financial information about Alaska and Horizon is in Note 12 to the consolidated financial statements and throughout this report, specifically in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
 
Both of our airlines continue to distinguish themselves from competitors by providing award-winning customer service and differentiating amenities. Our outstanding employees and excellent service in the form of advance seat assignments, expedited check-in with Airport of the Future®, web check-in, flight alerts, an award-winning frequent flyer program, well-maintained aircraft, a first-class section aboard Alaska aircraft, and other amenities are regularly recognized by independent studies, awards, and surveys of air travelers. For example, Alaska has ranked “Highest in Customer Satisfaction among Traditional Network Carriers” in 2010, 2009 and 2008 by J.D. Power and Associates, was named "Top-Performing Airline" in 2010 by Aviation Week Magazine, was recognized for having the "Best Loyalty Credit Card" in North America in 2010 at the Frequent Traveler Awards, and won the “Program of the Year” Freddie award for 2008 and 2007 for our Mileage Plan program.  We are very proud of these awards and we continue to strive to offer the best customer service in the industry.
 
ALASKA RANKED “HIGHEST IN CUSTOMER SATISFACTION AMONG TRADITIONAL NETWORK CARRIERS” IN 2010, 2009 AND 2008 BY J.D. POWER AND ASSOCIATES.   
 
WHERE YOU CAN FIND MORE INFORMATION
 
Our filings with the Securities and Exchange Commission, including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports are available on our website at www.alaskaair.com, free of charge, as soon as reasonably practicable after the electronic filing of these reports with the Securities and Exchange Commission. The information contained on our website is not a part of this annual report on Form 10-K.
 
OUR AIRLINES
 
ALASKA
 
Alaska Airlines is an Alaska corporation that was organized in 1932 and incorporated in 1937. We offer extensive north/south service within the western U.S., Canada and Mexico, and passenger and dedicated cargo services to and within the state of Alaska. We also provide long-haul east/west service to Hawaii and thirteen cities in the mid-continental and eastern U.S., primarily from Seattle, where we have our largest concentration of departures; although we do offer long-haul departures from other cities as well.
 
In 2010, we carried over 16.5 million revenue passengers in our mainline operations, and we carry more passengers between Alaska and the U.S. mainland than any other airline. Based on the number of passengers carried in 2010, Alaska’s leading airports are Seattle, Los Angeles, Anchorage and Portland. Based on 2010 revenues, the leading nonstop routes are Seattle-Anchorage, Seattle-Los Angeles, and Seattle-Las Vegas. At December 31, 2010, Alaska’s operating fleet consisted of 114 jet aircraft, compared to 115 aircraft as of December 31, 2009.
 

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Alaska’s passenger traffic by market is presented below:
 
2010
 
2009
West Coast
33
%
 
36
%
Within Alaska and between Alaska and the U.S. mainland
19
%
 
21
%
Transcon/midcon
24
%
 
23
%
Hawaii
14
%
 
9
%
Mexico
8
%
 
9
%
Canada
2
%
 
2
%
Total
100
%
 
100
%
 
HORIZON
 
Horizon Air Industries is a Washington corporation that first began service and was incorporated in 1981. Horizon was acquired by Air Group in 1986. It is the largest regional airline in the Pacific Northwest and serves a number of cities in six states, five destinations in Canada, and two destinations in Mexico.
 
In 2010, Horizon carried over 6.8 million revenue passengers. Approximately 91% of Horizon’s revenue passenger miles in 2010 were flown domestically, primarily in the states of Washington, Oregon, Idaho and California, compared to 90% in 2009. The Canada markets accounted for 8% of revenue passenger miles in both 2010 and 2009. Flying to Mexico accounted for about 1% of total traffic in 2010 compared to about 2% in 2009.
 
Based on 2010 passenger enplanements, Horizon’s leading airports are Seattle, Portland, Spokane, and Boise. Based on revenues in 2010, the leading nonstop routes are Portland-Seattle, Spokane-Seattle, and Portland-San Francisco. At December 31, 2010, Horizon’s operating fleet consisted of 13 jets and 41 turboprop aircraft. Horizon flights are listed under Alaska's designator code in airline reservation systems.
 
Alaska and Horizon integrate their flight schedules to provide convenient, competitive connections between most points served by their systems. In 2010 and 2009, approximately 29% and 22%, respectively, of Horizon’s passengers connected to flights operated by Alaska. Beginning January 1, 2011, Horizon will operate 100% of its flights under a capacity purchase arrangement with Alaska, whereby Alaska will pay Horizon an agreed-upon rate based on the operated capacity.
 
INDUSTRY CONDITIONS
 
GENERAL
 
The airline industry is highly competitive and has historically been characterized by low profit margins and high fixed costs, primarily for wages, aircraft fuel, aircraft ownership, and facilities rents. Because expenses of a flight do not vary significantly with the number of passengers carried, a relatively small change in the number of passengers or in pricing has a disproportionate effect on an airline’s operating and financial results. In other words, a minor shortfall in expected revenue levels could cause a disproportionately negative impact on our results of operations. Passenger demand and ticket prices are, to a large measure, influenced by the general state of the economy, current global economic and political events and total available airline seat capacity.
 
2010
 
2010 was a banner year in the industry in many respects. Many in the industry, including us, reported record earnings and passenger load factors. The year was characterized by industry capacity discipline with an increase in passenger traffic. This allowed for better pricing performance and stronger earnings. In order to maximize revenue, airlines continued to add or increase ancillary fees for checked baggage, buy-on-board items, ticket fees, etc.  These fees have significantly helped lift the industry out of its downturn and into the current recovery. One significant area of concern, however, is the rising cost of fuel toward the latter half of the year and into the first part of 2011.
 
During 2010, our key initiative was to optimize revenue. We continued to redeploy capacity to better match demand, and the new markets we have entered are performing well. Our revenue initiatives, combined with lower non-fuel unit costs, our continued focus on customer service and our strong operational performance resulted in record financial results that again were among the best in the industry.

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OUR REVENUE INITIATIVES, COMBINED WITH LOWER NON-FUEL UNIT COSTS, OUR CONTINUED FOCUS ON CUSTOMER SERVICE AND OUR STRONG OPERATIONAL PERFORMANCE RESULTED IN 2010 RECORD FINANCIAL RESULTS THAT WERE AGAIN AMONG THE BEST IN THE INDUSTRY.
 
FUEL
 
Our business and financial results are highly affected by the price and, potentially, the availability of jet fuel. Fuel prices have been extremely volatile over the past few years. The price of crude oil spiked in 2008 with a high of nearly $150 per barrel in July 2008 and dropped significantly to an average of $62 per barrel in 2009. We saw upward pressure on fuel prices again in 2010 with an average crude oil price of just over $80 per barrel and currently over $85. For us, a $1 per barrel increase in the price of oil equates to approximately $9 million of additional fuel cost annually. Said another way, a one-cent change in our fuel price per gallon will impact our expected annual fuel cost by approximately $4 million per year.
 
We refer to the price we pay for fuel at the airport, including applicable taxes, as our “raw” fuel price. Raw fuel prices are impacted by world oil prices and refining costs, which can vary by region in the U.S. Generally, West Coast jet fuel prices are somewhat higher and more volatile than prices in the Gulf Coast or on the East Coast, putting our airlines at a slight competitive disadvantage. Historically, fuel costs have generally represented 10% to 15% of an airline’s operating costs, but due to volatility in prices over the past few years, fuel costs have been in the range of 20% to 40% of total operating costs. Both the crude oil and refining cost components of jet fuel are volatile and outside of our control, and they can have a significant and immediate impact on our operating results.
 
Our average raw fuel cost per gallon increased 27% in 2010, declined 43% in 2009, and increased 42% in 2008.
 
We use crude oil call options and jet fuel refining margin swap contracts as hedges to decrease our exposure to the volatility of jet fuel prices. Call options effectively cap our pricing on the crude oil component of fuel prices, limiting our exposure to increasing fuel prices for about half of our planned fuel consumption. With these call option contracts, we still benefit from the decline in crude oil prices, as there is no future cash exposure above the premiums we pay to enter into the contracts.
 
OUR AIRCRAFT ARE AMONG THE MOST FUEL-EFFICIENT IN THEIR RESPECTIVE CLASSES.
 
We believe that operating fuel-efficient aircraft is the best hedge against high fuel prices. Alaska operates an all-Boeing 737 fleet. Horizon is currently undergoing a transition to an all-Q400 turboprop fleet, with expected completion in 2011. Because of these changes, Alaska’s fuel burn expressed in available seat miles flown per gallon (ASMs/g) improved from 65.9 ASMs/g in 2006 to 76.5 ASMs/g in 2010. Similarly, Horizon’s fuel burn has improved from 51.7 ASMs/g in 2006 to 56.1 ASMs/g in 2010.
 
These reductions have not only reduced our fuel cost, but also the amount of greenhouse gases and other pollutants that our operations emit.
 
MARKETING AND COMPETITION
 
ALLIANCES WITH OTHER AIRLINES
 
We have marketing alliances with a number of airlines that provide reciprocal frequent flyer mileage credit and redemption privileges as well as code sharing on certain flights as shown in the table below. Alliances are an important part of our strategy and enhance our revenues by:
 
•    
offering our customers more travel destinations and better mileage credit/redemption opportunities;
 
•    
giving our Mileage Plan program a competitive advantage because of our partnership with carriers from two major global alliances (Oneworld and Skyteam);
 
•    
giving us access to more connecting traffic from other airlines; and
 
•    
providing members of our alliance partners’ frequent flyer programs an opportunity to travel on Alaska and Horizon while earning mileage credit in our partners’ programs.
 
Most of our codeshare relationships are free-sell codeshares, where the marketing carrier sells seats on the operating carrier’s flights from the operating carrier’s inventory, but takes no inventory risk. Our marketing agreements have various termination

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dates, and at any time, one or more may be in the process of renegotiation.
 
Our marketing alliances with other airlines as of December 31, 2010 are as follows:
 
 
Frequent
Flyer
Agreement
 
Codeshare—
Alaska
Flight #
on Flights
Operated by
Other Airline
 
Codeshare—
Other Airline
Flight # On
Flights
Operated by
Alaska/
Horizon
Major U.S. or International Airlines
 
 
 
 
 
 
American Airlines/American Eagle
 
Yes
 
Yes
 
Yes
Air France
 
Yes
 
No
 
Yes
British Airways
 
Yes
 
No
 
No
Cathay Pacific Airways
 
Yes
 
No
 
Yes
Delta Air Lines/DeltaConnection (1)
 
Yes
 
Yes
 
Yes
Icelandair
 
Yes
 
No
 
Yes
KLM
 
Yes
 
No
 
Yes
Korean Air
 
Yes
 
No
 
Yes
Lan S.A.
 
Yes
 
No
 
Yes
Air Pacific (2)
 
Yes
 
No
 
Yes
Qantas
 
Yes
 
No
 
Yes
Regional Airlines
 
 
 
 
 
 
Era Alaska (2)
 
Yes
 
Yes
 
No
PenAir (2)
 
Yes
 
Yes
 
No
Kenmore Air (2)
 
Yes
 
No
 
No
(1)    
Alaska has codeshare agreements with the Delta Connection carriers Skywest, ASA, Pinnacle, Mesaba, Comair and Compass as part of its agreement with Delta.  
(2)    
These airlines do not have their own frequent flyer program. However, Alaska’s Mileage Plan members can earn and redeem miles on these airlines’ route systems.
 
COMPETITION
 
Competition in the airline industry is intense. We believe the principal competitive factors in the industry that are important to customers are:
 
•    
safety record and reputation,
 
•    
fares,
 
•    
flight schedules,
 
•    
customer service,
 
•    
routes served,
 
•    
frequent flyer programs,
 
•    
on-time arrivals,
 
•    
baggage handling,
 
•    
on-board amenities,
 
•    
type of aircraft, and
 

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•    
code-sharing relationships.
 
Together, Alaska and Horizon carry approximately 3.7% of all U.S. domestic passenger traffic. We compete with one or more domestic or foreign airlines on most of our routes, including Southwest Airlines, United Airlines, Delta Air Lines, American Airlines, US Airways, jetBlue Airways, Virgin America, Allegiant and regional affiliates associated with some of these carriers.
 
Due to its short-haul markets, Horizon also competes with ground transportation in many markets, including train, bus and automobile transportation.  Both carriers, to some extent, also compete with technology such as video conferencing and internet-based meeting tools that have changed the need or frequency of face-to-face business meetings.
 
TICKET DISTRIBUTION
 
Airline tickets are distributed through three primary channels:
 
•    
Alaskaair.com: It is less expensive for us to sell through this direct channel and, as a result, we continue to take steps to drive more business to our website. In addition, we believe this channel is preferable from a branding and customer-relationship standpoint in that we can establish ongoing communication with the customer and tailor offers accordingly.
 
•    
Traditional and online travel agencies: Both traditional and online travel agencies typically use Global Distribution Systems (GDS), such as Sabre, to obtain their fare and inventory data from airlines. Bookings made through these agencies result in a fee that is charged to the airline. Many of our large corporate customers require us to use these agencies. Some of our competitors do not use this distribution channel and, as a result, have lower ticket distribution costs.
 
•    
Reservation call centers: These call centers are located in Phoenix, AZ, Kent, WA, and Boise, ID. We generally charge a $15 fee for booking reservations through these call centers.
 
Our sales by channel are as follows: 
 
2010
 
2009
Alaskaair.com
48
%
 
48
%
Traditional and online travel agencies
43
%
 
42
%
Reservation call centers
8
%
 
9
%
All other channels
1
%
 
1
%
Total
100
%
 
100
%
 
EMPLOYEES
 
Labor costs have historically made up 30% to 40% of an airline’s total operating costs. Most major airlines, including ours, have employee groups that are covered by collective bargaining agreements. Airlines with unionized work forces have higher labor costs than carriers without unionized work forces, and they may not have the ability to adjust labor costs downward quickly enough to respond to new competition. New entrants into the U.S. airline industry generally do not have unionized work forces, which can be a competitive advantage for those airlines.
 
We had 12,039 (9,013 at Alaska and 3,026 at Horizon) active full-time and part-time employees at December 31, 2010, compared to 12,440 (9,046 at Alaska and 3,394 at Horizon) at December 31, 2009. Wages, salaries and benefits (including variable incentive pay) represented approximately 43% of our total non-fuel operating expenses in both 2010 and 2009.
 
At December 31, 2010, labor unions represented 82% of Alaska’s and 47% of Horizon’s employees. Our relations with our U.S. labor organizations are governed by the Railway Labor Act (RLA). Under this act, collective bargaining agreements do not expire but instead become amendable as of a stated date. If either party wishes to modify the terms of any such agreement, it must notify the other party in the manner prescribed by the RLA and/or described in the agreement. After receipt of such notice, the parties must meet for direct negotiations, and if no agreement is reached, either party may request the National Mediation Board (NMB) to initiate a process including mediation, arbitration, and a potential “cooling off” period that must be followed before either party may engage in self-help.

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Alaska’s union contracts at December 31, 2010 were as follows:
Union
 
Employee Group
 
Number of
Active Employees
 
Contract Status
Air Line Pilots Association International (ALPA)
 
Pilots
 
1,286
 
 
Amendable 4/1/2013
Association of Flight Attendants (AFA)
 
Flight attendants
 
2,397
 
 
Amendable 4/27/2012
International Association of Machinists and Aerospace Workers (IAM)
 
Ramp service and stock clerks
 
674
 
 
Amendable 7/17/2012
IAM
 
Clerical, office and passenger service
 
2,302
 
 
Amendable 1/1/2014
Aircraft Mechanics FraternalAssociation (AMFA)
 
Mechanics, inspectors and cleaners
 
623
 
 
Amendable 10/17/2011
Mexico Workers Association of Air Transport
 
Mexico airport personnel
 
81
 
 
Amendable 12/28/2011
Transport Workers Union of America (TWU)
 
Dispatchers
 
36
 
 
In Negotiations
 
 Horizon’s union contracts at December 31, 2010 were as follows:
Union
 
Employee Group
 
Number of
Active Employees
 
Contract Status
International Brotherhood of Teamsters (IBT)
 
Pilots
 
536
 
 
Amendable 12/14/2015
AFA
 
Flight attendants
 
493
 
 
Amendable 12/21/2011
IBT
 
Mechanics and related classifications
 
320
 
 
Amendable 12/16/2014
TWU
 
Dispatchers
 
14
 
 
Amendable 8/26/2014
National Automobile, Aerospace, Transportation and General Workers
 
Station personnel in Vancouver and Victoria, BC, Canada
 
53
 
 
Expires 2/13/2013
 
EXECUTIVE OFFICERS
 
The executive officers of Alaska Air Group, Inc. and executive officers of Alaska and Horizon who have significant decision-making responsibilities, their positions and their respective ages (as of February 1, 2011) are as follows: 
Name
 
Position
 
Age
 
Air Group
or Subsidiary
Officer Since
William S. Ayer
 
Chairman, President and Chief Executive Officer of Alaska Air Group, Inc., Chairman and Chief Executive Officer of Alaska Airlines, Inc. and Chairman and Chief Executive Officer of Horizon Air Industries, Inc.
 
56
 
 
1985
 
 
 
 
 
 
 
Brandon S. Pedersen
 
Vice President/Finance and Chief Financial Officer of Alaska Air Group, Inc. and Alaska Airlines, Inc.
 
44
 
 
2003
 
 
 
 
 
 
 
Keith Loveless
 
Vice President/Legal and Corporate Affairs, General Counsel and Corporate Secretary of Alaska Air Group, Inc. and Alaska Airlines, Inc.
 
54
 
 
1996
 
 
 
 
 
 
 
Bradley D. Tilden
 
President of Alaska Airlines, Inc.
 
50
 
 
1994
 
 
 
 
 
 
 
Glenn S. Johnson
 
President of Horizon Air Industries, Inc.
 
52
 
 
1991
 
 
 
 
 
 
 
Benito Minicucci
 
Executive Vice President/Operations and Chief Operating Officer of Alaska Airlines, Inc.
 
44
 
 
2004
 
 
 
 
 
 
 
Kelley Dobbs
 
Vice President/Human Resources and Labor Relations of Alaska Airlines, Inc.
 
44
 
 
2004
 
Mr. Ayer has been Air Group's President since February 2003 and became Chairman and Chief Executive Officer in May 2003. He has also served as Alaska Airlines’ Chairman since February 2003, as Chief Executive Officer since January 2002 and was President from November 1997 to December 2008. He has served as Horizon Air Industries' Chairman and Chief Executive Officer since June 2010. Prior to that, he was Sr. Vice President/Customer Service, Marketing and Planning of Alaska Airlines from January 1997, and Vice President/Marketing and Planning from August 1995. Prior thereto, he served as Sr. Vice President/Operations of Horizon Air Industries from January 1995. Mr. Ayer serves on the boards of Alaska Airlines, Puget

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Energy, Inc., the Alaska Airlines Foundation, Angel Flight West, Inc., and the Museum of Flight. He also serves on the University of Washington Business School Advisory Board, and as a director of the Seattle branch of the Federal Reserve Board.
 
Mr. Pedersen joined Alaska Airlines in 2003 as Staff Vice President/Finance and Controller of Alaska Air Group and Alaska Airlines and was elected Vice President/Finance and Controller for both entities in 2006. He was elected Vice President/Finance and Chief Financial Officer of Alaska Air Group and Alaska Airlines in June 2010. He is a member of Air Group's Management Executive Committee.
 
Mr. Loveless became Corporate Secretary and Assistant General Counsel of Alaska Air Group and Alaska Airlines in 1996. In 1999, he was named Vice President/Legal and Corporate Affairs, General Counsel and Corporate Secretary of Alaska Air Group and Alaska Airlines. He is a member of Air Group’s Management Executive Committee.
 
Mr. Tilden joined Alaska Airlines in 1991, became Controller of Alaska Air Group and Alaska Airlines in 1994, Chief Financial Officer in February 2000, Executive Vice President/Finance in January 2002, Executive Vice President/Finance and Planning in 2007, and President of Alaska Airlines in December 2008. He is a member of Air Group’s Management Executive Committee and was elected to the Air Group board in late 2010.
 
Mr. Johnson joined Alaska Airlines in 1982, became Vice President/Controller and Treasurer of Horizon Air Industries in 1991 and Vice President/Customer Services in 2002. He returned to Alaska Airlines in 2003 where he has served in several roles, including Vice President/Finance and Controller and Vice President/Finance and Treasurer. He served as Senior Vice President/Customer Service – Airports from January 2006 through April 2007 and in April 2007, he was elected Executive Vice President/Airports and Maintenance and Engineering. He was elected Executive Vice President/Finance and Chief Financial Officer of Alaska Air Group and Alaska Airlines in December 2008. He was elected President of Horizon Air Industries in June 2010. He is a member of Air Group’s Management Executive Committee.
 
Mr. Minicucci joined Alaska Airlines in 2004 as Staff Vice President of Maintenance and Engineering and was promoted to Vice President of Seattle Operations in June 2008. In December 2008 he was elected Executive Vice President/Operations and Chief Operating Officer of Alaska Airlines. He is a member of Air Group’s Management Executive Committee.
 
Ms. Dobbs joined Alaska Airlines in 1987, became Staff Vice President/Human Resources – Staffing and Development in 2004, Vice President/Human Resources – Strategy, Culture and Inclusion in June 2007, and Vice President/Human Resources and Labor Relations in 2009. She is a member of Air Group’s Management Executive Committee.
 
REGULATION
 
GENERAL
 
The airline industry is highly regulated.
 
The Department of Transportation (DOT), the Federal Aviation Administration (FAA) and the Transportation Security Administration (TSA) exercise significant regulatory authority over air carriers.
 
•    
DOT: In order to provide passenger and cargo air transportation in the U.S., a domestic airline is required to hold a certificate of public convenience and necessity issued by the DOT. Subject to certain individual airport capacity, noise and other restrictions, this certificate permits an air carrier to operate between any two points in the U.S. Certificates do not expire, but may be revoked for failure to comply with federal aviation statutes, regulations, orders or the terms of the certificates. In addition, the DOT has jurisdiction over the approval of international codeshare agreements, alliance agreements between domestic major airlines, international route authorities and certain consumer protection matters, such as advertising, denied boarding compensation and baggage liability. International treaties may also contain restrictions or requirements for flying outside of the U.S.
 
•    
FAA: The FAA, through Federal Aviation Regulations (FARs), generally regulates all aspects of airline operations, including establishing personnel, maintenance and flight operation standards. Domestic airlines are required to hold a valid air carrier operating certificate issued by the FAA. Pursuant to these regulations we have established, and the FAA has approved, our operations specifications and a maintenance program for each type of aircraft we operate. The maintenance program provides for the ongoing maintenance of such aircraft, ranging from frequent routine inspections to major overhauls. From time to time the FAA issues airworthiness directives (ADs) that must be incorporated into our aircraft maintenance program and operations. All airlines are subject to enforcement actions that are brought by the FAA

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from time to time for alleged violations of FARs or ADs. At this time, we are not aware of any enforcement proceedings that could either materially affect our financial position or impact our authority to operate.
 
•    
TSA: Airlines serving the U.S. must hold a TSA-approved Aircraft Operator Standard Security Program (AOSSP), and comply with TSA Security Directives (SDs) and regulations. Airlines are subject to enforcement actions that are brought by the TSA from time to time for alleged violations of the AOSSP, SDs or security regulations. We are not aware of any enforcement proceedings that could either materially affect our financial position or impact our authority to operate. We are also required to collect a September 11 Security Fee of $2.50 per enplanement from passengers and remit that sum to the government to fund aviation security measures. Carriers also pay the TSA a security infrastructure fee to cover passenger and property screening costs. These security infrastructure fees amounted to $12.6 million each year in 2010, 2009 and 2008.
 
The Department of Justice and DOT have jurisdiction over airline antitrust matters. The U.S. Postal Service has jurisdiction over certain aspects of the transportation of mail and related services. Labor relations in the air transportation industry are regulated under the Railway Labor Act. To the extent we continue to fly to foreign countries and pursue alliances with international carriers, we may be subject to certain regulations of foreign agencies.
 
AIRLINE FARES
 
Airlines are permitted to establish their own domestic fares without governmental regulation, and the industry is characterized by vigorous price competition. The DOT maintains authority over international (generally outside of North America) fares, rates and charges. International fares and rates are also subject to the jurisdiction of the governments of the foreign countries we serve. Although air carriers are required to file and adhere to international fare and rate tariffs, substantial commissions, overrides and discounts given to travel agents, brokers and wholesalers characterize many international markets.
 
ENVIRONMENTAL MATTERS
 
We are subject to various laws and government regulations concerning environmental matters and employee safety and health in the U.S. and other countries. U.S. federal laws that have a particular effect on us include the Airport Noise and Capacity Act of 1990, the Clean Air Act, the Resource Conservation and Recovery Act, the Clean Water Act, the Safe Drinking Water Act, and the Comprehensive Environmental Response, Compensation and Liability Act, or Superfund Act. We are also subject to the oversight of the Occupational Safety and Health Administration (OSHA) concerning employee safety and health matters. The U.S. Environmental Protection Agency, OSHA, and other federal agencies have been authorized to create and enforce regulations that have an impact on our operations. In addition to these federal activities, various states have been delegated certain authorities under these federal statutes. Many state and local governments have adopted environmental and employee safety and health laws and regulations. We maintain our safety, health and environmental programs in order to meet or exceed these requirements.
 
It is expected that there will be legislation in the future to reduce carbon and other greenhouse gas emissions. Alaska and Horizon have transitioned or are transitioning to more fuel-efficient aircraft fleets, thereby greatly reducing our total emissions.
 
The Airport Noise and Capacity Act recognizes the rights of airport operators with noise problems to implement local noise abatement programs so long as they do not interfere unreasonably with interstate or foreign commerce or the national air transportation system. Authorities in several cities have established aircraft noise reduction programs, including the imposition of nighttime curfews. We believe we have sufficient scheduling flexibility to accommodate local noise restrictions.
 
Although we do not currently anticipate that these regulatory matters, individually or collectively, will have a material effect on our financial condition, results of operations or cash flows, new regulations or compliance issues that we do not currently anticipate could have the potential to harm our financial condition, results of operations or cash flows in future periods.
 
CUSTOMER SERVICE
 
Along with other domestic airlines, we have implemented a customer service commitment plan to address a number of service goals and regulatory requirements, including, but not limited to, goals relating to lowest fare availability, delays, cancellations and diversions, baggage delivery and liability, guaranteed fares and ticket refunds. As a testament to our service, Alaska has won the JD Power and Associates award for "Highest in Customer Satisfaction Among Traditional Network Carriers" for the past three years.
 
In December 2009, the DOT adopted new rules effective in April 2010 that set fines of as much as $27,500 per violation when

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airlines leave passengers on the aircraft for more than three hours while on the ground or violate other rules aimed at consumer protection.  These new rules are in response to recent incidents involving other airlines that resulted in lengthy tarmac delays. Bills have been introduced in several states, including the state of Washington, which propose to regulate airlines when operating in those specific states. However, we believe these bills would be preempted by federal law.
 
MILEAGE PLAN PROGRAM
 
All major airlines have developed frequent flyer programs as a way of increasing passenger loyalty. Alaska’s Mileage Plan allows members to earn mileage by flying on Alaska, Horizon and other participating airlines and by using the services of non-airline partners, which include a credit card partner, a telephone company, hotels, car rental agencies, and other businesses. Alaska is paid by non-airline partners for the miles it credits to member accounts. With advance notice, Alaska has the ability to change the Mileage Plan terms, conditions, partners, mileage credits, and award levels or to terminate the program.
 
Mileage can be redeemed for free or discounted travel and for various other awards. Mileage Plan accounts are generally deleted after two years of inactivity in a member’s account. Over 88% of the free flight awards on Alaska and Horizon in 2010 were subject to capacity-controlled seating.
 
As of December 31, 2010 and 2009, approximately 2.9 million and 3.0 million, respectively, round-trip flight awards were eligible for redemption by Mileage Plan members. Of those eligible awards, we estimate that approximately 88% will ultimately be redeemed. For the years 2010, 2009 and 2008, approximately 1,666,000, 1,451,000 and 527,000 one-way flight awards were redeemed and flown on Alaska and Horizon. In addition, approximately 566,000 round-trip awards were redeemed and flown on Alaska and Horizon in 2008. These awards represent approximately 9%, 8%, and 9% for 2010, 2009, and 2008, respectively, of the total passenger miles flown on Alaska and Horizon. For the years 2010, 2009, and 2008, approximately 167,000, 181,000, and 214,000, respectively, round-trip flight awards were redeemed and flown on airline partners. In November 2008, we began charging a $25 administrative fee for awards redeemed on our airline partners.
 
We also have awards that allow members to redeem miles to purchase a ticket at a discounted fare. Our members redeemed approximately 430,000, 730,000, and 620,000 one-way equivalent awards under this program in 2010, 2009, and 2008, respectively.
 
We sell mileage credits to our non-airline partners, the vast majority of which are sold to our affinity credit card bank partner. We defer a majority of the sales proceeds and recognize revenue when award transportation is provided.
 
OTHER INFORMATION
 
SEASONALITY AND OTHER FACTORS
 
Our results of operations for any interim period are not necessarily indicative of those for the entire year because our business is subject to seasonal fluctuations. Our profitability is generally lowest during the first and fourth quarters due principally to lower traffic. It typically increases in the second quarter and then reaches its highest level during the third quarter as a result of vacation travel, including increased activity in the state of Alaska. However, we have taken steps over the past few years to reduce the seasonality of our operations by adding flights to leisure destinations in Hawaii and Mexico.
 
In addition to passenger loads, factors that could cause our quarterly operating results to vary include:  
 
•    
general economic conditions and resulting changes in passenger demand,
 
•      pricing initiatives by us and our competitors,
 
•    
changes in fuel costs,
 
•    
the timing and amount of maintenance expenditures (both planned and unplanned),
 
•    
increases or decreases in passenger and volume-driven variable costs, and
 
•    
labor actions.
 
In addition to those factors listed above, seasonal variations in traffic, the timing of various expenditures and adverse weather conditions may affect our operating results from quarter to quarter. Many of the markets we serve experience inclement

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weather conditions in the winter, causing increased costs associated with deicing aircraft, canceled flights and reaccommodation of displaced passengers. Due to our geographic area of operations, we can be more susceptible to adverse weather conditions (particularly in the state of Alaska and the Pacific Northwest) than some of our competitors, who may be better able to spread weather-related risks over larger route systems.
 
No material part of our business or that of our subsidiaries is dependent upon a single customer, or upon a few high-volume customers.
 
INSURANCE
 
We carry Airline Hull, Spares and Comprehensive Legal Liability Insurance in amounts and of the type generally consistent with industry practice to cover damage to aircraft, spare parts and spare engines, as well as bodily injury and property damage to passengers and third parties. Since the September 11, 2001 attacks, this insurance program excludes coverage for War and Allied Perils, including hijacking, terrorism, malicious acts, strikes, riots, civil commotion and other identified perils. So, like other airlines, the company has purchased war risk coverage for such events through the U.S. government.
 
We believe that our emphasis on safety and our state-of-the-art flight deck safety technology help to control the cost of aviation insurance.
 
ITEM 1A. RISK FACTORS
 
If any of the following occurs, our business, financial condition and results of operations could suffer. In such case, the trading price of our common stock could also decline. We operate in a continually changing business environment. In this environment, new risks may emerge and already identified risks may vary significantly in terms of impact and likelihood of occurrence. Management cannot predict such developments, nor can it assess the impact, if any, on our business of such new risk factors or of events described in any forward-looking statements.
 
We have adopted an enterprise Risk Analysis and Oversight Program designed to identify the various risks faced by the organization, assign responsibility for managing those risks to individual executives within management ranks as well as align these risks with appropriate board level oversight. These enterprise level identified risks have been aligned to the risk factors discussed below.
 
SAFETY, COMPLIANCE AND OPERATIONAL EXCELLENCE
 
Our reputation and financial results could be harmed in the event of an airline accident or incident.
 
An accident or incident involving one of our aircraft could involve a significant loss of life and result in a loss of confidence in our airlines by the flying public. We could experience significant potential claims from injured passengers and surviving relatives, as well as costs for the repair or replacement of a damaged aircraft and its consequential temporary or permanent loss from service. We maintain liability insurance in amounts and of the type generally consistent with industry practice. However, the amount of such coverage may not be adequate to fully cover all claims and we may be forced to bear substantial losses from an accident. Substantial claims resulting from an accident in excess of our related insurance coverage would harm our business and financial results. Moreover, any aircraft accident or incident, even if fully insured and even if it does not involve one of our airlines, could cause a public perception that our airlines or the equipment they fly is less safe or reliable than other transportation alternatives, which would harm our business.
 
Changes in government regulation imposing additional requirements and restrictions on our operations or on the airports at which we operate could increase our operating costs and result in service delays and disruptions.
 
Airlines are subject to extensive regulatory and legal requirements, both domestically and internationally, that involve significant compliance costs. In the last several years, Congress has passed laws, and the U.S. DOT, the TSA and the FAA have issued regulations that have required significant expenditures relating to the maintenance and operation of airlines. Similarly, many aspects of an airline’s operations are subject to increasingly stringent federal, state and local laws protecting the environment.
 
Because of significantly higher security and other costs incurred by airports since September 11, 2001, many airports have increased their rates and charges to air carriers. Additional laws, regulations, taxes, and airport rates and charges have been proposed from time to time that could significantly increase the cost of airline operations or reduce the demand for air travel.

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Although lawmakers may impose these additional fees and view them as “pass-through” costs, we believe that a higher total ticket price will influence consumer purchase and travel decisions and may result in an overall decline in passenger traffic, which would harm our business.
 
The airline industry continues to face potential security concerns and related costs.
 
The terrorist attacks of September 11, 2001 and their aftermath negatively affected the airline industry, including our company. Additional terrorist attacks, the fear of such attacks or other hostilities involving the U.S. could have a further significant negative effect on the airline industry, including us, and could:
 
•    
significantly reduce passenger traffic and yields as a result of a potentially dramatic drop in demand for air travel;
 
•    
significantly increase security and insurance costs;
 
•    
make war risk or other insurance unavailable or extremely expensive;
 
•    
increase fuel costs and the volatility of fuel prices;
 
•    
increase costs from airport shutdowns, flight cancellations and delays resulting from security breaches and perceived safety threats; and
 
•    
result in a grounding of commercial air traffic by the FAA.
 
The occurrence of any of these events would harm our business, financial condition and results of operations.
 
Our operations are often affected by factors beyond our control, including delays, cancellations, and other conditions, which could harm our financial condition and results of operations.
 
Like other airlines, our operations often are affected by delays, cancellations and other conditions caused by factors largely beyond our control.
 
Other conditions that might impact our operations include:
 
•    
air traffic congestion at airports or other air traffic control problems;
 
•    
adverse weather conditions;
 
•    
increased security measures or breaches in security;
 
•    
international or domestic conflicts or terrorist activity; and
 
•    
other changes in business conditions.
 
Due to our geographic area of operations, we believe a large portion of our operation is more susceptible to adverse weather conditions than that of many of our competitors. A general reduction in airline passenger traffic as a result of any of the above-mentioned factors could harm our business, financial condition and results of operations.
 
STRATEGY
 
We depend on a few key markets to be successful.
 
Our strategy is to focus on serving a few key markets, including Seattle, Portland, Los Angeles and Anchorage. A significant portion of our flights occurs to and from our Seattle hub. In 2010, passengers to and from Seattle accounted for 63% of our total passengers.
 
We believe that concentrating our service offerings in this way allows us to maximize our investment in personnel, aircraft, and ground facilities, as well as to gain greater advantage from sales and marketing efforts in those regions. As a result, we remain highly dependent on our key markets. Our business could be harmed by any circumstances causing a reduction in demand for air transportation in our key markets. An increase in competition in our key markets could also cause us to reduce fares or take

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other competitive measures that could harm our business, financial condition and results of operations.
 
We rely on third-party vendors for certain critical activities.
 
We have historically relied on outside vendors for a variety of services and functions critical to our business, including airframe and engine maintenance, ground handling, fueling, computer reservation system hosting and software maintenance. As part of our cost-reduction efforts, our reliance on outside vendors has increased and may continue to do so in the future. In recent years, Alaska has subcontracted its heavy aircraft maintenance, fleet service, facilities maintenance, and ground handling services at certain airports, including Seattle-Tacoma International Airport, to outside vendors.
 
Our use of outside vendors increases our exposure to several risks. In the event that one or more vendors goes into bankruptcy, ceases operation or fails to perform as promised, replacement services may not be readily available at competitive rates, or at all. If one of our vendors fails to perform adequately we may experience increased costs, delays, maintenance issues, safety issues or negative public perception of our airline. Vendor bankruptcies, unionization, regulatory compliance issues or significant changes in the competitive marketplace among suppliers could adversely affect vendor services or force Alaska to renegotiate existing agreements on less favorable terms. These events could result in disruptions in Alaska’s operations or increases in its cost structure.
 
We are dependent on a limited number of suppliers for aircraft and parts.
 
Alaska is dependent on Boeing as its sole supplier for aircraft and many aircraft parts. Horizon is similarly dependent on Bombardier. Additionally, each carrier is dependent on sole suppliers for aircraft engines. As a result, we are more vulnerable to any problems associated with the supply of those aircraft and parts, including design defects, mechanical problems, contractual performance by the manufacturers, or adverse perception by the public that would result in customer avoidance or in actions by the FAA resulting in an inability to operate our aircraft.
 
We rely on partner airlines for codeshare and frequent flyer marketing arrangements.
 
Alaska and Horizon are parties to marketing agreements with a number of domestic and international air carriers, or “partners," including, but not limited to, American Airlines and Delta Air Lines. These agreements provide that certain flight segments operated by us are held out as partner “codeshare” flights and that certain partner flights are held out for sale as Alaska codeshare flights. In addition, the agreements generally provide that members of Alaska’s Mileage Plan program can earn miles on or redeem miles for partner flights and vice versa. We receive a significant amount of revenue from flights sold under codeshare arrangements. In addition, we believe that the frequent flyer arrangements are an important part of our Mileage Plan program. The loss of a significant partner or certain partner flights could have a negative effect on our revenues or the attractiveness of our Mileage Plan, which we believe is a source of competitive advantage.
 
FINANCIAL CONDITION AND FINANCIAL MARKETS
 
Our failure to successfully meet cost reduction goals could harm our business.
 
We continue to strive toward aggressive cost-reduction goals that are an important part of our business strategy of offering the best value to passengers through competitive fares while achieving acceptable profit margins and return on capital. If we are unable to reduce our non-fuel unit costs over the long-term and achieve sustained targeted return on invested capital, we will likely not be able to grow our business in the future and therefore our financial results may suffer.
 
Our business, financial condition, and results of operations are substantially exposed to the volatility of jet fuel prices. Increases in jet fuel costs would harm our business.
 
Fuel costs constitute a significant portion of our total operating expenses, accounting for 27% and 21% of total operating expenses for the years ended December 31, 2010 and 2009, respectively. Significant increases in average fuel costs during the past several years have negatively affected our results of operations.
 
Future increases in the price of jet fuel will harm our financial condition and results of operations, unless we are able to increase fares or add additional ancillary fees to attempt to recover increasing fuel costs.
 
Economic uncertainty or another recession would likely impact demand for our product and could harm our financial condition and results of operations.
 

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The 2008 and 2009 economic recession resulted in a decline in demand for air travel. If a similar situation recurs, we will likely need to adjust our capacity plans, which could harm our business, financial condition and results of operations.
 
Our indebtedness and other fixed obligations could increase the volatility of earnings and otherwise restrict our activities and potentially lead to liquidity constraints.
 
Although we have reduced our long-term debt balance significantly over the past year, we have, and will continue to have for the foreseeable future, a significant amount of debt. Due to our high fixed costs, including aircraft lease commitments and debt service, a decrease in revenues results in a disproportionately greater decrease in earnings.
 
Our outstanding long-term debt and other fixed obligations could have important consequences. For example, they could:
 
•    
limit our ability to obtain additional financing to fund our future capital expenditures, acquisitions, working capital or other purposes;
 
•    
require us to dedicate a material portion of our operating cash flow to fund lease payments and interest payments on indebtedness, thereby reducing funds available for other purposes; and
 
•    
limit our ability to withstand competitive pressures and reduce our flexibility in responding to changing business and economic conditions, including reacting to the current economic slowdown.
 
Although we have historically been able to generate sufficient cash flow from our operations to pay our debt and other fixed obligations as they become due, we cannot ensure we will be able to do so in the future. If we fail to do so, our business could be harmed.
 
Alaska is required to comply with specific financial covenants in certain agreements. We cannot be certain that Alaska will be able to comply with these covenants or provisions or that these requirements will not limit our ability to finance our future operations or capital needs.
 
See “Liquidity and Capital Resources” for more detailed information about our obligations and commitments.
 
Our continuing obligation to fund our traditional defined-benefit pension plans could negatively affect our ability to compete in the marketplace.
 
Our defined-benefit pension plan assets are subject to market risk. If market returns are poor in the future, any future obligation to make additional cash contributions in accordance with the Pension Protection Act of 2006 could increase and harm our liquidity. Poor market returns also lead to higher pension expense in our statement of operations. The calculation of pension expense is dependent on many assumptions that are more fully described in “Critical Accounting Estimates” and Note 1 to our consolidated financial statements.
 
Increases in insurance costs or reductions in insurance coverage would harm our business, financial condition and results of operations.
 
Aviation insurers could increase their premiums in the event of additional terrorist attacks, hijackings, airline accidents or other events adversely affecting the airline industry. Furthermore, the full hull and liability war risk insurance provided by the government is currently mandated through September 30, 2011. Although the government may again extend the deadline for providing such coverage, we cannot be certain that any extension will occur, or if it does, for how long the extension will last. It is expected that, should the government stop providing such coverage to the airline industry, the premiums charged by aviation insurers for this coverage will be substantially higher than the premiums currently charged by the government and the coverage will be much more limited, including smaller aggregate limits and shorter cancellation periods. Significant increases in insurance premiums would adversely affect our business, financial condition and results of operations.
 
INFORMATION TECHNOLOGY
 
We rely heavily on automated systems to operate our business, and a failure of these systems or by their operators could harm our business.
 
We depend on automated systems to operate our business, including our airline reservation system, our telecommunication systems, our website, our maintenance systems, our kiosk check-in terminals, and other systems. Substantially all of our tickets

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are issued to passengers as electronic tickets and the majority of our customers check in using our website or our airport kiosks. We depend on our reservation system to be able to issue, track and accept these electronic tickets. In order for our operations to work efficiently, our website, reservation system, and check-in systems must be able to accommodate a high volume of traffic, maintain secure information, and deliver important flight information. Substantial or repeated website, reservations system or telecommunication systems failures could reduce the attractiveness of our services and cause our customers to purchase tickets from another airline. In addition, we rely on other automated systems for crew scheduling, flight dispatch, and other operational needs. Disruption in, changes to, or a breach of these systems could result in the loss of important data, an increase of our expenses and a possible temporary cessation of our operations.
 
If we do not maintain the privacy and security of customer-related information, we could damage our reputation, incur substantial additional costs and become subject to litigation.
 
We receive, retain, and transmit certain personal information about our customers. In addition, our online operations at alaskaair.com depend on the secure transmission of confidential information over public networks, including credit card information. A compromise of our security systems or those of other business partners that results in our customers’ personal information being obtained by unauthorized persons could adversely affect our reputation with our customers and others, as well as our operations, results of operations, financial position and liquidity, and could result in litigation against us or the imposition of penalties. In addition, a security breach could require that we expend significant additional resources related to the security of information systems and could result in a disruption of our operations, particularly our online sales operations.
 
Additionally, the use of individually identifiable data by our business and our business partners is regulated at the international, federal and state levels. Privacy and information security laws and regulations change, and compliance with them may result in cost increases due to necessary systems changes and the development of new administrative processes.
 
BRAND AND REPUTATION
 
The rebranding of the Horizon brand may result in some loss of brand recognition.
 
With this change in structure in 2011, the external Horizon brand will be phased out and the Horizon fleet will be rebranded with Alaska livery. As the Q400 fleet begins flying into new markets, such as in the state of Alaska, we may be subject to certain operational disruptions or subject to severe weather conditions that does not impact jet operation as heavily. Furthermore, with the Horizon brand phase out, there is a potential that we may lose some brand recognition from our customers in areas that Horizon has historically served.
 
LABOR RELATIONS AND LABOR STRATEGY
 
A significant increase in labor costs or change in key personnel could adversely affect our business and results of operations.
 
We compete against the major U.S. airlines and other businesses for labor in many highly skilled positions. If we are unable to hire, train and retain qualified employees at a reasonable cost, or if we lose the services of key personnel, we may be unable to grow or sustain our business. In such case, our operating results and business prospects could be harmed. We may also have difficulty replacing management or other key personnel who leave and, therefore, the loss of any of these individuals could harm our business.
 
Labor costs are a significant component of our total expenses, accounting for approximately 31% and 34% of our total operating expenses in 2010 and 2009, respectively. As of December 31, 2010, labor unions represented approximately 82% of Alaska’s and 47% of Horizon’s employees. Each of our represented employee groups has a separate collective bargaining agreement, and could make demands that would increase our operating expenses and adversely affect our financial performance if we agree to them. Although we have been successful in negotiating new contracts or extending existing contracts with all of our represented groups in recent years, future uncertainty around open contracts could be a distraction to many employees, reduce employee engagement in our business and divert management’s attention from other projects and issues.
 
 

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ITEM 1B.     UNRESOLVED STAFF COMMENTS
 
None
 
ITEM 2.      PROPERTIES
 
AIRCRAFT
 
The following tables describe the aircraft we operate and their average age at December 31, 2010: 
Aircraft Type
 
Passenger
Capacity
 
Owned
 
Leased
 
Total
 
Average
Age in
Years
Alaska Airlines
 
 
 
 
 
 
 
 
 
 
Boeing: 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
737-400
 
144
 
 
3
 
 
21
 
 
24
 
 
15.0
 
737-400C*
 
72
 
 
5
 
 
—
 
 
5
 
 
18.3
 
737-400F*
 
—
 
 
1
 
 
—
 
 
1
 
 
11.8
 
737-700
 
124
 
 
17
 
 
—
 
 
17
 
 
10.5
 
737-800
 
157
 
 
45
 
 
10
 
 
55
 
 
3.1
 
737-900
 
172
 
 
12
 
 
—
 
 
12
 
 
8.4
 
Total
 
 
 
 
83
 
 
31
 
 
114
 
 
8.0
 
 
 
 
 
 
 
 
 
 
 
 
Horizon Air
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Bombardier: 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Q400
 
76
 
 
25
 
 
16
 
 
41
 
 
6.1
 
CRJ-700
 
70
 
 
2
 
 
11
 
 
13
 
 
8.0
 
Total
 
 
 
 
27
 
 
27
 
 
54
 
 
6.5
 
* C=Combination freighter/passenger; F=Freighter
 
Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations," discusses future orders and options for additional aircraft.
 
Most of our owned aircraft secure long-term debt arrangements or collateralize our revolving credit facility.  See further discussion in “Liquidity and Capital Resources."
 
Alaska’s leased 737-400 and 737-800 aircraft have lease expiration dates between 2012 and 2016, and between 2015 and 2021, respectively. Horizon’s leased Q400 and CRJ-700 aircraft have expiration dates in 2018 and between 2018 and 2020, respectively. Horizon also has a Q400 aircraft on short-term lease which expires in May 2011. Horizon also has 16 leased Q200 aircraft and 3 leased CRJ-700 aircraft that are subleased to third-party carriers. Alaska and Horizon have the option to extend most of the leases for additional periods, or the right to purchase the aircraft at the end of the lease term, usually at the then-fair-market value of the aircraft.
 
Alaska completed its transition to an all-Boeing operating fleet during 2008. Horizon expects to complete its transition to an all-Q400 operating fleet by June of 2011. The remaining 13 CRJ-700 aircraft will be leased or sub-leased to a third-party carrier upon removal from the operating fleet.
 

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The following table displays the currently anticipated fleet counts for Alaska and Horizon as of the end of each quarter in 2011:   
 
31-Mar-11
 
 
30-Jun-11
 
 
30-Sep-11
 
 
31-Dec-11
 
Alaska Airlines
 
 
 
 
 
 
 
737-400
24
 
 
24
 
 
24
 
 
24
 
737-400C*
5
 
 
5
 
 
5
 
 
5
 
737-400F*
1
 
 
1
 
 
1
 
 
1
 
737-700
17
 
 
17
 
 
17
 
 
17
 
737-800
58
 
 
58
 
 
58
 
 
58
 
737-900
12
 
 
12
 
 
12
 
 
12
 
Totals
117
 
 
117
 
 
117
 
 
117
 
 
 
 
 
 
 
 
 
Horizon Air
 
 
 
 
 
 
 
 
 
 
 
Q400
46
 
 
48
 
 
48
 
 
48
 
CRJ-700
9
 
 
—
 
 
—
 
 
—
 
Totals
55
 
 
48
 
 
48
 
 
48
 
* C=Combination freighter/passenger; F=Freighter
 
In January 2011, Alaska announced an agreement with Boeing for 15 new B737 aircraft with deliveries in 2012 through 2014. See further discussion in "Aircraft Purchase Commitments" under "Contractual Obligations and Commitments".
 
GROUND FACILITIES AND SERVICES
 
Alaska and Horizon lease ticket counters, gates, cargo and baggage space, office space, and other support areas at the majority of the airports they serve. Alaska also owns terminal buildings in various cities in the state of Alaska.
 
Alaska has centralized operations in several buildings located at or near Seattle-Tacoma International Airport (Sea-Tac) near Seattle, WA. These include a five-bay hangar and shops complex (used primarily for line maintenance), a flight operations and training center, an air cargo facility, an information technology office and datacenter, an office building, and corporate headquarters complex. Alaska also leases a stores warehouse, and office space for a customer service and reservation facility in Kent, WA. Alaska’s major facilities outside of Seattle include a regional headquarters building, an air cargo facility and a hangar/office facility in Anchorage, AK, as well as leased reservations facilities in Phoenix, AZ. and Boise, ID. Alaska uses its own employees for ground handling services at most of our airports in the state of Alaska. At other airports throughout our system, those services are contracted to various third-party vendors.
 
Horizon owns its Seattle corporate headquarters building. It leases an operations, training, and aircraft maintenance facility in Portland as well as line maintenance stations in Boise, Spokane, Eugene, Los Angeles, Seattle, Redmond, and Medford.
 
ITEM 3.         LEGAL PROCEEDINGS
 
We are a party to routine litigation matters incidental to our business. Management believes the ultimate disposition of these matters is not likely to materially affect our financial position or results of operations.  This forward-looking statement is based on management’s current understanding of the relevant law and facts, and it is subject to various contingencies, including the potential costs and risks associated with litigation and the actions of judges and juries.
 
The Securities and Exchange Commission is conducting an inquiry into trading in the securities of Puget Energy Inc. ("PSE") by Donald Smith & Co., an investment firm. William Ayer, our Chief Executive Officer, serves on the board of PSE. Mr. Ayer and the Company are cooperating voluntarily in that inquiry. Mr. Ayer has stated that he never provided any non-public information about PSE to Donald Smith & Co.
 
ITEM 4.       REMOVED AND RESERVED
 
None
 

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PART II
 
ITEM 5.    MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
 
As of December 31, 2010, there were 35,923,968 shares of common stock of Alaska Air Group, Inc. issued and outstanding and 3,235 shareholders of record. We also held 1,086,172 treasury shares at a cost of $46.0 million. We have not paid dividends on the common stock since 1992 and have no plans to do so in the immediate future. Our common stock is listed on the New York Stock Exchange (symbol: ALK).
 
The following table shows the trading range of Alaska Air Group, Inc. common stock on the New York Stock Exchange. 
 
2010
 
2009
 
High
 
Low
 
High
 
Low
First Quarter
$
42.59
 
 
$
31.24
 
 
$
30.95
 
 
$
13.61
 
Second Quarter
54.13
 
 
37.03
 
 
22.08
 
 
14.53
 
Third Quarter
54.66
 
 
42.00
 
 
27.99
 
 
17.93
 
Fourth Quarter
59.59
 
 
44.86
 
 
36.48
 
 
24.91
 
 
SALES OF NON-REGISTERED SECURITIES
 
None
 
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
 
 
Total Number of
Shares Purchased
 
Average Price
Paid per Share
 
Total Number of Shares (or units) Purchased as Part of Publicly Announced Plans or Programs
 
Maximum remaining
dollar value of shares
that can be purchased
under the plan
October 1, 2010 – October 31, 2010 (1)
42,000
 
 
48.88
 
 
42,000
 
 
 
November 1, 2010 – November 30, 2010 (1)
57,000
 
 
54.33
 
 
57,000
 
 
 
December 1, 2010 – December 31, 2010 (1)
154,000
 
 
56.50
 
 
154,000
 
 
 
Total
253,000
 
 
$
54.75
 
 
253,000
 
 
$
31,190,995
 
(1) Purchased pursuant to a $50 million repurchase plan authorized by the Board of Directors in June 2010. The plan expires in June 2011.
 

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PERFORMANCE GRAPH
 
The following graph compares our cumulative total stockholder return since December 31, 2005 with the S&P 500 Index and the Dow Jones U.S. Airlines Index. The graph assumes that the value of the investment in our common stock and each index (including reinvestment of dividends) was $100 on December 31, 2005.
 

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ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2010
 
2009
 
2008
 
2007
 
2006
 
2005
 
CONSOLIDATED OPERATING RESULTS (audited)
 
 
 
 
 
 
 
 
 
 
 
 
Year Ended December 31 (in millions, except per share amounts):
 
 
 
 
 
 
 
 
 
 
 
 
Operating Revenues
$
3,832.3
 
 
$
3,399.8
 
 
$
3,662.6
 
 
$
3,506.0
 
 
$
3,334.4
 
 
$
2,975.3
 
 
Operating Expenses
3,360.7
 
 
3,132.4
 
 
3,834.8
 
 
3,295.1
 
 
3,424.6
 
 
2,808.8
 
 
Operating Income (Loss)
471.6
 
 
267.4
 
 
(172.2
)
 
210.9
 
 
(90.2
)
 
166.5
 
 
Nonoperating income (expense), net of interest capitalized (a)
(65.7
)
 
(64.5
)
 
(41.0
)
 
(10.4
)
 
(0.5
)
 
(29.3
)
 
Income (loss) before income tax and accounting change
405.9
 
 
202.9
 
 
(213.2
)
 
200.5
 
 
(90.7
)
 
137.2
 
 
Income (loss) before accounting change
251.1
 
 
121.6
 
 
(135.9
)
 
124.3
 
 
(54.5
)
 
84.5
 
 
Net Income (Loss)
$
251.1
 
 
$
121.6
 
 
$
(135.9
)
 
$
124.3
 
 
$
(54.5
)
 
$
(5.9
)
 
Average basic shares outstanding
35.822
 
 
35.815
 
 
36.343
 
 
40.125
 
 
37.939
 
 
27.609
 
 
Average diluted shares outstanding
36.786
 
 
36.154
 
 
36.343
 
 
40.424
 
 
37.939
 
 
33.917
 
 
Basic earnings (loss) per share before accounting change
$
7.01
 
 
$
3.39
 
 
$
(3.74
)
 
$
3.10
 
 
$
(1.44
)
 
$
3.06
 
 
Basic earnings (loss) per share
7.01
 
 
3.39
 
 
(3.74
)
 
3.10
 
 
(1.44
)
 
(0.21
)
 
Diluted earnings (loss) per share before accounting change
6.83
 
 
3.36
 
 
(3.74
)
 
3.07
 
 
(1.44
)
 
2.65
 
 
Diluted earnings (loss) per share
6.83
 
 
3.36
 
 
(3.74
)
 
3.07
 
 
(1.44
)
 
(0.01
)
 
CONSOLIDATED FINANCIAL POSITION (audited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At End of Period (in millions, except ratio):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
$
5,016.6
 
 
$
4,996.2
 
 
$
4,835.6
 
 
$
4,490.9
 
 
$
4,077.1
 
 
$
3,792.0
 
 
Long-term debt and capital lease obligations, net of current portion
1,313.0
 
 
1,699.2
 
 
1,596.3
 
 
1,124.6
 
 
1,031.7
 
 
969.1
 
 
Shareholders' equity
1,105.4
 
 
872.1
 
 
661.9
 
 
1,025.4
 
 
886.5
 
 
827.6
 
 
Ratio of earnings to fixed charges (b) (unaudited)
2.87
 
 
1.92
 
 
(0.10
)
 
1.83
 
 
0.40
 
 
1.72
 
 
STATISTICS (unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Alaska Airlines Mainline Operating Data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue passengers (000)
16,514
 
 
15,561
 
 
16,809
 
 
17,558
 
 
17,165
 
 
16,759
 
 
Revenue passenger miles (RPM) (000,000)
20,350
 
 
18,362
 
 
18,712
 
 
18,451
 
 
17,822
 
 
16,915
 
 
Available seat miles (ASM) (000,000)
24,434
 
 
23,144
 
 
24,218
 
 
24,208
 
 
23,278
 
 
22,292
 
 
Revenue passenger load factor
83.3
 
%
79.3
 
%
77.3
 
%
76.2
 
%
76.6
 
%
75.9
 
%
Yield per passenger mile
13.58
 
¢
13.28
 
¢
14.13
 
¢
13.81
 
¢
13.76
 
¢
12.91
 
¢
Operating revenues per ASM
12.66
 
¢
11.74
 
¢
12.06
 
¢
11.52
 
¢
11.50
 
¢
10.76
 
¢
Operating expenses per ASM
10.96
 
¢
10.78
 
¢
12.54
 
¢
10.55
 
¢
11.93
 
¢
10.14
 
¢
Operating expenses per ASM, excluding fuel and noted items (d)
7.85
 
¢
8.26
 
¢
7.49
 
¢
7.50
 
¢
7.76
 
¢
7.90
 
¢
Average number of full-time equivalent employees
8,651
 
 
8,915
 
 
9,628
 
 
9,679
 
 
9,322
 
 
9,065
 
 
Operating fleet at period-end
114
 
 
115
 
 
110
 
 
115
 
 
114
 
 
110
 
 
Horizon Air Operating Data (c):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue passengers (000)
6,820
 
 
6,759
 
 
7,390
 
 
7,552
 
 
6,860
 
 
6,481
 
 
Revenue passenger miles (RPM) (000,000)
2,450
 
 
2,408
 
 
2,635
 
 
2,918
 
 
2,691
 
 
2,475
 
 
Available seat miles (ASM) (000,000)
3,235
 
 
3,292
 
 
3,617
 
 
3,978
 
 
3,632
 
 
3,400
 
 
Revenue passenger load factor
75.7
 
%
73.1
 
%
72.9
 
%
73.4
 
%
74.1
 
%
72.8
 
%
Yield per passenger mile
27.30
 
¢
26.73
 
¢
27.43
 
¢
24.30
 
¢
23.53
 
¢
21.98
 
¢
Operating revenues per ASM
21.02
 
¢
19.88
 
¢
20.29
 
¢
18.06
 
¢
17.73
 
¢
16.36
 
¢
Operating expenses per ASM
20.27
 
¢
18.64
 
¢
21.42
 
¢
18.07
 
¢
17.41
 
¢
15.50
 
¢
Operating expenses per ASM, excluding fuel and noted items (d)
15.52
 
¢
15.33
 
¢
14.52
 
¢
14.58
 
¢
14.20
 
¢
13.36
 
¢
Average number of full-time equivalent employees
3,045
 
 
3,308
 
 
3,699
 
 
3,897
 
 
3,611
 
 
3,456
 
 
Operating fleet at period-end
54
 
 
58
 
 
59
 
 
70
 
 
69
 
 
65
 
 
(a)  Includes capitalized interest of $6.2 million, $7.6 million, $23.2 million, $27.8 million, $24.7 million, $8.9 million, $1.7 million, $2.3 million, $2.7 million, $10.6 million, and $17.7 million for 2010, 2009, 2008, 2007, 2006, 2005, 2004, 2003, 2002, 2001, and 2000, respectively.
 
(b)  For 2008, 2006, 2004, 2002, 2001, and 2000 earnings are inadequate to cover fixed charges by $236.4 million, $115.4 million, $17.4 million, $99.5 million, $69.1 million, and $44.6 million, respectively.   See Exhibit 12.1 to this Form 10-K.

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ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA - (continued)
 
 
 
 
 
 
 
 
 
 
 
 
2004
 
2003
 
2002
 
2001
 
2000
 
CONSOLIDATED OPERATING RESULTS (audited)
 
 
 
 
 
 
 
 
 
 
Year Ended December 31 (in millions, except per share amounts):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating Revenues
$
2,723.8
 
 
$
2,444.8
 
 
$
2,224.1
 
 
$
2,152.8
 
 
$
2,194.0
 
 
Operating Expenses
2,718.1
 
 
2,455.9
 
 
2,317.3
 
 
2,279.1
 
 
2,227.1
 
 
Operating Income (Loss)
5.7
 
 
(11.1
)
 
(93.2
)
 
(126.3
)
 
(33.1
)
 
Nonoperating income (expense), net of interest capitalized (a)
(26.3
)
 
40.1
 
 
(8.6
)
 
62.8
 
 
6.2
 
 
Income (loss) before income tax and accounting change
(20.6
)
 
29.0
 
 
(101.8
)
 
(63.5
)
 
(26.9
)
 
Income (loss) before accounting change
(15.3
)
 
13.5
 
 
(67.2
)
 
(43.4
)
 
(20.4
)
 
Net Income (Loss)
$
(15.3
)
 
$
13.5
 
 
$
(118.6
)
 
$
(43.4
)
 
$
(67.2
)
 
Average basic shares outstanding
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average diluted shares outstanding
26.859
 
 
26.648
 
 
26.546
 
 
26.499
 
 
26.440
 
 
Basic earnings (loss) per share before accounting change
26.859
 
 
26.730
 
 
26.546
 
 
26.499
 
 
26.440
 
 
Basic earnings (loss) per share
$
(0.57
)
 
$
0.51
 
 
$
(2.53
)
 
$
(1.64
)
 
$
(0.77
)
 
Diluted earnings (loss) per share before accounting change
(0.57
)
 
0.51
 
 
(4.47
)
 
(1.64
)
 
(2.54
)
 
Diluted earnings (loss) per share
(0.57
)
 
0.51
 
 
(2.53
)
 
(1.64
)
 
(0.77
)
 
CONSOLIDATED FINANCIAL POSITION(audited)
(0.57
)
 
0.51
 
 
(4.47
)
 
(1.64
)
 
(2.54
)
 
At End of Period (in millions, except ratio):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
$
3,335.0
 
 
$
3,259.2
 
 
$
2,880.7
 
 
$
2,950.5
 
 
$
2,528.1
 
 
Long-term debt and capital lease obligations, net of current portion
989.6
 
 
906.9
 
 
856.7
 
 
852.2
 
 
509.2
 
 
Shareholders' equity
664.8
 
 
674.2
 
 
655.7
 
 
851.3
 
 
895.1
 
 
Ratio of earnings to fixed charges (b) (unaudited)
0.89
 
 
1.22
 
 
0.28
 
 
0.48
 
 
0.66
 
 
STATISTICS(unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Alaska Airlines Mainline Operating Data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue passengers (000)
16,295
 
 
15,047
 
 
14,154
 
 
13,668
 
 
13,525
 
 
Revenue passenger miles (RPM) (000,000)
16,231
 
 
14,554
 
 
13,186
 
 
12,249
 
 
11,986
 
 
Available seat miles (ASM) (000,000)
22,276
 
 
20,804
 
 
19,360
 
 
17,919
 
 
17,315
 
 
Revenue passenger load factor
72.9
 
%
70.0
 
%
68.1
 
%
68.4
 
%
69.2
 
%
Yield per passenger mile
12.47
 
¢
12.65
 
¢
12.65
 
¢
13.12
 
¢
13.56
 
¢
Operating revenues per ASM
10.02
 
¢
9.74
 
¢
9.47
 
¢
9.84
 
¢
10.20
 
¢
Operating expenses per ASM
10.07
 
¢
9.81
 
¢
9.87
 
¢
10.24
 
¢
10.35
 
¢
Operating expenses per ASM, excluding fuel and noted items (d)
7.92
 
¢
8.34
 
¢
8.52
 
¢
8.73
 
¢
8.54
 
¢
Average number of full-time equivalent employees
9,968
 
 
10,040
 
 
10,142
 
 
10,115
 
 
9,611
 
 
Operating fleet at period-end
108
 
 
109
 
 
102
 
 
101
 
 
95
 
 
Horizon Air Operating Data (c):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue passengers (000)
5,930
 
 
4,934
 
 
4,815
 
 
4,668
 
 
5,044
 
 
Revenue passenger miles (RPM) (000,000)
2,155
 
 
1,640
 
 
1,514
 
 
1,350
 
 
1,428
 
 
Available seat miles (ASM) (000,000)
3,107
 
 
2,569
 
 
2,428
 
 
2,148
 
 
2,299
 
 
Revenue passenger load factor
69.3
 
%
63.9
 
%
62.4
 
%
62.8
 
%
62.1
 
%
Yield per passenger mile
22.61
 
¢
26.96
 
¢
26.02
 
¢
28.15
 
¢
29.82
 
¢
Operating revenues per ASM
16.20
 
¢
18.06
 
¢
17.29
 
¢
19.02
 
¢
19.27
 
¢
Operating expenses per ASM
15.57
 
¢
17.79
 
¢
17.87
 
¢
21.02
 
¢
19.53
 
¢
Operating expenses per ASM, excluding fuel and noted items (d)
13.58
 
¢
15.80
 
¢
15.99
 
¢
18.48
 
¢
16.48
 
¢
Average number of full-time equivalent employees
3,423
 
 
3,361
 
 
3,476
 
 
3,764
 
 
3,795
 
 
Operating fleet at period-end
65
 
 
62
 
 
63
 
 
60
 
 
62
 
 
(c) Includes Horizon services operated as Frontier JetExpress in 2004 through 2007 and flights operated under the Capacity Purchase Agreement with Alaska in 2007 through 2010.
 
(d) See reconciliation of this measure to the most directly related GAAP measure in the "Results of Operations" section for both Alaska and Horizon.

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Table of Contents        
 

ITEM 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
OVERVIEW
 
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help the reader understand the Company, our operations and our present business environment. MD&A is provided as a supplement to – and should be read in conjunction with – our consolidated financial statements and the accompanying notes. All statements in the following discussion that are not statements of historical information or descriptions of current accounting policy are forward-looking statements. Please consider our forward-looking statements in light of the risks referred to in this report’s introductory cautionary note and the risks mentioned in Part I, “Item 1A. Risk Factors.” This overview summarizes the MD&A, which includes the following sections:
 
•    
Year in Review—highlights from 2010 outlining some of the major events that happened during the year and how they affected our financial performance.
 
•    
Results of Operations—an in-depth analysis of the results of operations of Alaska and Horizon for the three years presented in our consolidated financial statements. We believe this analysis will help the reader better understand our consolidated statements of operations. Financial and statistical data for Alaska and Horizon are also included here. This section includes forward-looking statements regarding our view of 2011.
 
•    
Critical Accounting Estimates—a discussion of our accounting estimates that involve significant judgment and uncertainties.
 
•    
Prospective Accounting Pronouncements—a discussion of recently issued and proposed accounting pronouncements.
 
•    
Liquidity and Capital Resources—an analysis of cash flows, sources and uses of cash, contractual obligations, commitments and off-balance sheet arrangements, an overview of financial position and the impact of inflation and changing prices.
 
YEAR IN REVIEW
 
Our 2010 consolidated pretax income was $405.9 million compared to $202.9 million in 2009. The $203.0 million improvement in our pretax earnings was primarily due to the $432.5 million increase in operating revenues, partially offset by a $242.8 million increase in aircraft fuel expense. The increase in operating revenues was driven by a 9.8% increase in passenger traffic on relatively flat yield for the year. Fuel cost increased over the prior year primarily due to to a 27% increase in our raw fuel cost per gallon on relatively flat consumption for the year.
 
See “Results of Operations” below for further discussion of changes in revenues and operating expenses for both Alaska and Horizon.
 
Accomplishments and Highlights
 
Accomplishments and highlights from 2010 include:
 
•    
We reported record earnings for 2010.
 
•    
Both companies continued their excellent operational performance again in 2010 as measured by on-time arrivals and completion rate as reported to the Department of Transportation (DOT). At Alaska, we led the ten largest carriers in on-time performance for the year.  
 
•    
For the third year in a row, Alaska Airlines ranked “Highest in Customer Satisfaction among Traditional Network Carriers” in 2010 by J.D. Power and Associates. Alaska was also named "Top Performing Airline" by Aviation Week magazine, and recognized for having the "Best Loyalty Credit Card" in North America in 2010 at the Frequent Travel Awards.
 
•    
Alaska Airlines announced an agreement to purchase 15 new Boeing 737 aircraft, including 13 B737-900ER aircraft, for deliver in 2012 through 2014. In addition, Horizon Air announced its final transition to all-Q400 fleet in 2011.

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Table of Contents        
 

 
•    
During the year, we reached agreements with several of our labor groups that provide for improved productivity and a common gain-sharing formula. See “Update on Labor Negotiations” below for further discussion.
 
•    
For the year, our employees earned $92.0 million in incentive pay for meeting certain operational and financial goals. We also contributed $145.6 million to Alaska’s defined benefit pension plans.
 
Aircraft Purchase Commitments
 
In January 2011, we entered into an aircraft purchase agreement with Boeing to purchase 15 new B737 aircraft, including two B737-800 aircraft and 13 B737-900ER aircraft, with deliveries beginning in late 2012 and continuing through 2014. The agreement also includes options to purchase 15 additional B737-900ER aircraft with delivery positions in 2016 and 2017. Based on the current list prices, the total value of this contract is approximately $1.3 billion.
 
Update on Labor Negotiations
 
Both Alaska and Horizon have had success recently with amended bargaining agreements or contract extensions with a number of labor unions. All of the new agreements or extensions ratified in 2010 include participation by the represented employees in Air Group’s Performance-Based Pay (PBP) incentive plan as approved by the Compensation Committee of the Board of Directors. PBP is described in Note 6 to the consolidated financial statements. With these recent contracts, virtually all of our employees now participate in PBP.
 
Alaska Labor Contracts
Alaska reached a tentative agreement in December 2010 on a three-year contract with its largest represented group—the clerical, office and passenger service employees. This agreement was ratified in the first quarter of 2011 and included participation in the PBP incentive plan, a $1,500 signing bonus per employee and annual wage increases.
 
Horizon Labor Contracts
In the fourth quarter of 2010, Horizon reached labor agreements with its pilots and mechanics. Both agreements include participation in the PBP plan for represented employees. The pilot agreement includes a contract signing bonus and a provision for wage arbitration on the first and third anniversary date of the contract.
 
Horizon Restructuring and Fleet Transition
 
In 2010, we made several structural changes to the Horizon business as follows:
 
•    
We outsourced the remaining heavy maintenance functions for Horizon aircraft in the third quarter of 2010. We believe this change will result in approximately $3 million in cost savings annually. This resulted in the reduction of approximately 100 mechanics and other personnel through voluntary furlough or early retirement. We recorded a $2.9 million charge associated with related separation pay, all of which was paid during the third quarter of 2010.
 
•    
We are completing our transition to an all-Q400 fleet. In 2010, Horizon transferred five CRJ-700 aircraft to third parties through either sublease or lease assignment. We recorded a charge of $10.3 million associated with these transactions. We have 13 CRJ-700 aircraft remaining in our operating fleet as of December 31, 2010. We have signed a letter of intent to dispose of eight of the remaining CRJ-700 aircraft in 2011 through either sublease or lease assignment to a third-party carrier. The remaining five aircraft will be flown by SkyWest Airlines on behalf of Alaska Airlines pursuant to a capacity purchase arrangement. We expect charges of up to $3 million at the cease-use date per aircraft for each of those 13 aircraft.
 

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Table of Contents        
 

New Markets
 
In 2010, Alaska added several new cities and non-stop routes to our overall network as follows:
New Non-Stop Routes Between
 
Frequency (Weekly)
 
Start Date
San Jose and Maui
 
3 x weekly
 
3/11/2010
San Jose and Kona
 
4 x weekly
 
3/12/2010
Sacramento and Maui
 
Daily
 
3/26/2010
Portland and Honolulu
 
Daily
 
9/20/2010
San Diego and Maui
 
Daily
 
10/1/2010
San Diego and Puerto Vallarta
 
Daily (seasonal)
 
11/12/2010
Portland and Kona
 
4 x weekly (seasonal)
 
11/12/2010
San Jose and Los Cabos
 
2 x weekly
 
12/4/2010
Seattle and St. Louis
 
Daily
 
9/27/2010
San Jose and Guadalajara
 
4 x weekly
 
12/15/2010
Sacramento and Guadalajara
 
3 x weekly
 
12/16/2010
 
In addition to these markets, Alaska began daily service between Bellingham and Honolulu in January 7, 2011 and will begin daily service between San Jose and Kauai and between Oakland and Kauai in March 2011.
 
Horizon also expanded service to include new non-stop routes between Bellingham and Portland six times weekly beginning on June 18, 2010 and non-stop routes between between Los Angeles and San Jose three times weekly beginning on August 23, 2010.
 
The changes above, when combined with the significant number of network changes over the last few years, have diversified our network and made us less dependent on our historical markets in the State of Alaska and up and down the West Coast. We believe our smaller size makes us more nimble than some of our larger competitors, gives us a closer connection with our customers and allows us to identify and respond to market opportunities quickly.
 
Stock Repurchase
 
In June 2009, our Board of Directors authorized the Company to repurchase up to $50 million of our common stock. Under this program, we repurchased 1,970,326 shares of our common stock. This program expired in June 2010.
 
In June 2010, our Board of Directors authorized the Company to repurchase up to $50 million of our common stock. Through December 31, 2010, we repurchased 355,000 shares of common stock for approximately $18.8 million under this program. This program will expire in June 2011.
 
Outlook
 
Our primary focus every year is to run safe, compliant and reliable operations at our airlines. In addition to our primary objective, our key initiative in 2011 is to maintain our focus on optimizing revenue. Our specific focus will be on the way we merchandise fares and ancillary products and services on our website and through mobile applications.  
 
Our biggest concern for 2011 is the rising cost of fuel. However, with our fuel-efficient aircraft and our fuel hedge portfolio, we believe we are better prepared to handle those rising costs than others in the industry.
 
For the first quarter of 2011, our advance booked load factors are up slightly compared to 2010 on significant increases in capacity.
 
RESULTS OF OPERATIONS
 
2010 COMPARED WITH 2009
 
Our consolidated net income for 2010 was a record $251.1 million, or $6.83 per diluted share, compared to net income of

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$121.6 million, or $3.36 per share, in 2009. Items that impact the comparability between the periods are as follows:
 
•    
Both periods include adjustments to reflect timing of gain and loss recognition resulting from mark-to-market fuel hedge accounting. For 2010, we recognized net mark-to-market losses of $5.3 million ($3.3 million after tax, or $0.09 per share), compared to net gains of $88.8 million ($55.2 million after tax, or $1.53 per share) in 2009.
 
•    
2010 included Horizon restructuring and fleet transition costs of $13.2 million ($8.2 million after tax, or $0.22 per share).
 
•    
2009 included the new Alaska pilot contract transition costs of $35.8 million ($22.3 million after tax, or $0.62 per share).
 
ADJUSTED (NON-GAAP) RESULTS AND PER-SHARE AMOUNTS
 
We believe disclosure of earnings excluding the impact of these individual charges is useful information to investors because:
 
•    
It is consistent with how we present information in our quarterly earnings press releases;
 
•    
We believe it is the basis by which we are evaluated by industry analysts;
 
•    
Our results excluding these items are most often used in internal management and board reporting and decision-making;
 
•    
Our results excluding these adjustments serve as the basis for our various employee incentive plans, thus the information allows investors to better understand the changes in variable incentive pay expense in our consolidated statements of operations; and
 
•    
It is useful to monitor performance without these items as it improves a reader’s ability to compare our results to those of other airlines.
 
Although we are presenting these non-GAAP amounts for the reasons above, investors and other readers should not necessarily conclude that these amounts are non-recurring, infrequent, or unusual in nature.
 
Excluding the items noted above, and as shown in the following table, our consolidated net income for 2010 was a record $262.6 million, or $7.14 per diluted share, compared to $88.7 million, or $2.45 per diluted share, in 2009.
 
 
Years Ended December 31
 
 
2010
 
2009
(in millions except per share amounts)
 
Dollars
 
Diluted EPS
 
Dollars
 
Diluted EPS
Net income and diluted EPS, excluding noted items
 
$
262.6
 
 
$
7.14
 
 
$
88.7
 
 
$
2.45
 
New pilot contract transition costs, net of tax
 
—
 
 
—
 
 
(22.3
)
 
(0.62
)
Horizon restructuring and CRJ-700 fleet transition costs, net of tax
 
(8.2
)
 
(0.22
)
 
—
 
 
—
 
Mark-to-market fuel hedge adjustments, net of tax
 
(3.3
)
 
(0.09
)
 
55.2
 
 
1.53
 
Net income and diluted EPS as reported
 
$
251.1
 
 
$
6.83
 
 
$
121.6
 
 
$
3.36
 
 
INDIVIDUAL SUBSIDIARY RESULTS 
 
Our consolidated results are primarily driven by the results of our two operating carriers. Alaska and Horizon reported pretax income of $401.6 million and $7.6 million, respectively, in 2010. Financial and statistical data and an in-depth discussion of the results of Alaska and Horizon are on the following pages. For a reconciliation of these subsidiary results to the consolidated results of Air Group, see Note 12 in the consolidated financial statements.
 
 
 
 
 
 
 
 

28
Table of Contents        
 

ALASKA AIRLINES FINANCIAL AND STATISTICAL DATA
 
Three Months Ended December 31
 
Year Ended December 31
 
Financial Data (in millions):
2010
 
2009
 
% Change
 
2010
 
2009
 
% Change
 
2008
 
% Change
 
Operating Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Passenger
694.9
 
 
$
594.5
 
 
16.9
 
 
2,763.4
 
 
$
2,438.8
 
 
13.3
 
 
$
2,643.7
 
 
(7.8
)
 
Freight and mail
24.6
 
 
22.5
 
 
9.3
 
 
101.9
 
 
91.5
 
 
11.4
 
 
99.3
 
 
(7.9
)
 
Other - net
57.3
 
 
50.8
 
 
12.8
 
 
228.8
 
 
187.3
 
 
22.2
 
 
135.2
 
 
38.5
 
 
Change in Mileage Plan terms
—
 
 
—
 
 
NM
 
 
—
 
 
—
 
 
NM
 
 
42.3
 
 
NM
 
 
Total mainline operating revenues
776.8
 
 
667.8
 
 
16.3
 
 
3,094.1
 
 
2,717.6
 
 
13.9
 
 
2,920.5
 
 
(6.9
)
 
Passenger - purchased capacity
83.6
 
 
77.0
 
 
8.6
 
 
332.5
 
 
288.4
 
 
15.3
 
 
300.8
 
 
(4.1
)
 
Total Operating Revenues
860.4
 
 
744.8
 
 
15.5
 
 
3,426.6
 
 
3,006.0
 
 
14.0
 
 
3,221.3
 
 
(6.7
)
 
Operating Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Wages and benefits
191.3
 
 
197.7
 
 
(3.2
)
 
767.2
 
 
792.6
 
 
(3.2
)
 
742.7
 
 
6.7
 
 
Variable incentive pay
23.0
 
 
17.6
 
 
30.7
 
 
75.0
 
 
61.6
 
 
21.8
 
 
15.8
 
 
289.9
 
 
Aircraft fuel, including hedging gains and losses
186.3
 
 
143.1
 
 
30.2
 
 
760.6
 
 
549.0
 
 
38.5
 
 
1,162.4
 
 
(52.8
)
 
Aircraft maintenance
34.9
 
 
40.5
 
 
(13.8
)
 
159.1
 
 
169.9
 
 
(6.4
)
 
150.6
 
 
12.8
 
 
Aircraft rent
22.9
 
 
27.2
 
 
(15.8
)
 
97.1
 
 
109.0
 
 
(10.9
)
 
106.2
 
 
2.6
 
 
Landing fees and other rentals
43.6
 
 
42.4
 
 
2.8
 
 
173.3
 
 
166.8
 
 
3.9
 
 
167.7
 
 
(0.5
)
 
Contracted services
33.0
 
 
31.8
 
 
3.8
 
 
127.1
 
 
124.9
 
 
1.8
 
 
130.2
 
 
(4.1
)
 
Selling expenses
30.8
 
 
27.9
 
 
10.4
 
 
124.5
 
 
104.7
 
 
18.9
 
 
116.0
 
 
(9.7
)
 
Depreciation and amortization
47.9
 
 
45.9
 
 
4.4
 
 
188.5
 
 
178.5
 
 
5.6
 
 
165.9
 
 
7.6
 
 
Food and beverage service
14.7
 
 
12.8