Edgar Filing: ALASKA AIR GROUP INC

ALK Q2 2011 10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)



T	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011



£	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 1-8957

ALASKA AIR GROUP, INC.

(Exact name of registrant as specified in its charter)



Delaware		91-1292054
(State or other jurisdiction of incorporation or organization		(I.R.S. Employer Identification No.)

19300 International Boulevard, Seattle, Washington 98188

(Address of principal executive offices)

Registrant's telephone number, including area code: (206) 392-5040

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 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

The registrant has 36,006,026 common shares, par value $1.00, outstanding at July 31, 2011.

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ALASKA AIR GROUP, INC.

Quarterly Report on Form 10-Q for the three months ended June 30, 2011

TABLE OF CONTENTS



PART I. FINANCIAL INFORMATION			4
	ITEM I.	CONDENSED CONSOLIDATED FINANCIAL STATEMENTS	4
	ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	20
	ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK	35
	ITEM 4.	CONTROLS AND PROCEDURES	36
PART II. OTHER INFORMATION			37
	ITEM 1.	LEGAL PROCEEDINGS	37
	ITEM 1A.	RISK FACTORS	37
	ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	37
	ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	37
	ITEM 4.	OTHER INFORMATION	37
	ITEM 5.	EXHIBITS	37
SIGNATURES			38
EXHIBIT INDEX			39

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As used in this Form 10-Q, 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.”

Cautionary Note Regarding Forward-Looking Statements

In addition to historical information, this Form 10-Q 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. Some of the things that could cause our actual results to differ from our expectations are:


•	changes in our operating costs, primarily fuel, which can be volatile;


•	general economic conditions, including the impact of those conditions on customer travel behavior;


•	the competitive environment in our industry;


•	our significant indebtedness;


•	our ability to meet our cost reduction goals;


•	an aircraft accident or incident;


•	labor disputes and our ability to attract and retain qualified personnel;


•	operational disruptions;


•	the concentration of our revenue from a few key markets;


•	actual or threatened terrorist attacks, global instability and potential U.S. military actions or activities;


•	our reliance on automated systems and the risks associated with changes made to those systems;


•	changes in laws and regulations.

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, see Item 1A "Risk Factors” of the Company’s annual report on Form 10-K for the year ended December 31, 2010. Please consider our forward-looking statements in light of those risks as you read this report.

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PART I.	FINANCIAL INFORMATION


ITEM 1.	CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

Alaska Air Group, Inc.



(in millions)	June 30, 2011		December 31, 2010
ASSETS
Current Assets
Cash and cash equivalents	$	67.0	$	89.5
Marketable securities	1,086.5		1,118.7
Total cash and marketable securities	1,153.5		1,208.2
Receivables – net	167.8		120.1
Inventories and supplies – net	52.6		45.1
Deferred income taxes	126.4		120.5
Fuel hedge contracts	71.4		61.4
Prepaid expenses and other current assets	104.0		106.7
Total Current Assets	1,675.7		1,662.0

Property and Equipment
Aircraft and other flight equipment	4,065.8		3,807.6
Other property and equipment	621.7		616.5
Deposits for future flight equipment	165.5		202.5
	4,853.0		4,626.6
Less accumulated depreciation and amortization	1,603.1		1,509.5
Total Property and Equipment – Net	3,249.9		3,117.1

Fuel Hedge Contracts	84.9		69.9

Other Assets	223.3		167.6

Total Assets	$	5,233.8	$	5,016.6

See accompanying notes to condensed consolidated financial statements.

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CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

Alaska Air Group, Inc.



(in millions except share amounts)	June 30, 2011			December 31, 2010
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable	$	71.3		$	60.2
Accrued aircraft rent	28.1			43.1
Accrued wages, vacation and payroll taxes	136.2			176.6
Other accrued liabilities	544.0			501.2
Air traffic liability	594.5			422.4
Current portion of long-term debt	253.9			221.2
Total Current Liabilities	1,628.0			1,424.7

Long-Term Debt, Net of Current Portion	1,154.9			1,313.0
Other Liabilities and Credits
Deferred income taxes	347.9			279.9
Deferred revenue	386.7			403.5
Obligation for pension and postretirement medical benefits	361.2			367.1
Other liabilities	148.6			123.0
	1,244.4			1,173.5
Commitments and Contingencies
Shareholders' Equity
Preferred stock, $1 par value Authorized: 5,000,000 shares, none issued or outstanding	—			—
Common stock, $1 par value Authorized: 100,000,000 shares, Issued: 2011 – 37,689,589 shares; 2010 – 37,010,140 shares	37.7			37.0
Capital in excess of par value	838.9			815.5
Treasury stock (common), at cost: 2011 –1,626,547 shares; 2010 – 1,086,172 shares	(79.2		)	(46.0		)
Accumulated other comprehensive loss	(260.0		)	(267.2		)
Retained earnings	669.1			566.1
	1,206.5			1,105.4
Total Liabilities and Shareholders' Equity	$	5,233.8		$	5,016.6

See accompanying notes to condensed consolidated financial statements.

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

Alaska Air Group, Inc.



	Three Months Ended June 30,						Six Months Ended June 30,
(in millions except per share amounts)	2011			2010			2011			2010
Operating Revenues
Passenger
Mainline	$	819.9		$	702.3		$	1,522.3		$	1,289.3
Regional	194.3			183.5			370.8			348.9
Total passenger revenue	1,014.2			885.8			1,893.1			1,638.2
Freight and mail	29.1			28.1			54.0			51.1
Other – net	66.9			62.3			128.3			116.5
Total Operating Revenues	1,110.2			976.2			2,075.4			1,805.8

Operating Expenses
Wages and benefits	242.8			239.6			492.1			478.9
Variable incentive pay	17.9			21.6			34.3			39.5
Aircraft fuel, including hedging gains and losses	397.5			255.0			592.0			462.3
Aircraft maintenance	49.1			53.8			102.4			110.8
Aircraft rent	29.0			35.4			59.5			72.4
Landing fees and other rentals	59.9			57.9			117.8			113.8
Contracted services	46.6			41.1			90.1			80.7
Selling expenses	45.8			38.2			85.6			71.8
Depreciation and amortization	61.7			58.0			122.0			114.2
Food and beverage service	17.1			14.3			32.2			26.6
Other	58.2			48.2			118.9			96.0
Fleet transition costs	26.8			3.4			36.9			3.4
Total Operating Expenses	1,052.4			866.5			1,883.8			1,670.4
Operating Income	57.8			109.7			191.6			135.4

Nonoperating Income (Expense)
Interest income	6.3			7.7			13.9			15.1
Interest expense	(20.0		)	(26.3		)	(43.4		)	(51.9		)
Interest capitalized	1.6			1.6			3.4			3.3
Other – net	1.3			1.3			2.2			2.3
	(10.8		)	(15.7		)	(23.9		)	(31.2		)
Income before income tax	47.0			94.0			167.7			104.2
Income tax expense	18.2			35.4			64.7			40.3
Net Income	$	28.8		$	58.6		$	103.0		$	63.9

Basic Earnings Per Share:	$	0.80		$	1.64		$	2.86		$	1.79
Diluted Earnings Per Share:	$	0.78		$	1.60		$	2.80		$	1.74
Shares used for computation:
Basic	35.983			35.698			35.988			35.683
Diluted	36.737			36.697			36.775			36.631

See accompanying notes to condensed consolidated financial statements.

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CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (unaudited)

Alaska Air Group, Inc.



(in millions)	Common Shares Outstanding		Common Stock		Capital in Excess of Par Value		Treasury Stock, at Cost			Accumulated Other Comprehensive Loss			Retained Earnings		Total
Balances at December 31, 2010	35.924		$	37.0	$	815.5	$	(46.0	)	$	(267.2	)	$	566.1	$	1,105.4
Net income for the six months ended June 30, 2011													103.0		103.0
Other comprehensive income (loss):
Related to marketable securities:
Change in fair value										1.7
Reclassification to earnings										(1.5		)
Income tax effect										(0.2		)
										—					—

Related to employee benefit plans:										12.7
Income tax effect										(4.8		)
										7.9					7.9

Related to interest rate derivative instruments:
Change in fair value										(1.1		)
Income tax effect										0.4
										(0.7		)			(0.7		)
Total comprehensive income															110.2
Purchase of treasury stock	(0.543	)	—		—		(33.3		)						(33.3		)
Stock-based compensation	—		—		7.3		—								7.3
Treasury stock issued under stock plans	0.003		—		—		0.1								0.1
Stock issued for employee stock purchase plan	0.033		0.1		1.2		—								1.3
Stock issued under stock plans	0.646		0.6		14.9		—								15.5
Balances at June 30, 2011	36.063		$	37.7	$	838.9	$	(79.2	)	$	(260.0	)	$	669.1	$	1,206.5

See accompanying notes to condensed consolidated financial statements.

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

Alaska Air Group, Inc.



	Six Months Ended June 30,
(in millions)	2011				2010
Cash flows from operating activities:
Net income	$	103.0			$	63.9
Adjustments to reconcile net income to net cash provided by operating activities:
Fleet transition costs	36.9				3.4
Depreciation and amortization	122.0				114.2
Stock-based compensation	7.3				8.7
Increase in air traffic liability	172.1				162.7
Decrease in other assets and liabilities – net	(72.6		)		(19.3		)
Net cash provided by operating activities	368.7				333.6

Cash flows from investing activities:
Property and equipment additions:
Aircraft and aircraft purchase deposits	(214.8		)		(45.3		)
Other flight equipment	(11.1		)		(52.6		)
Other property and equipment	(15.2		)		(13.9		)
Total property and equipment additions	(241.1		)		(111.8		)
Proceeds from disposition of assets	12.4				3.3
Purchases of marketable securities	(427.7		)		(578.1		)
Sales and maturities of marketable securities	459.0				446.2
Increase in receivable related to Terminal 6 at LAX airport	(44.6		)	—	—
Restricted deposits and other	0.1			0.5	0.5
Net cash used in investing activities	(241.9		)		(239.9		)

Cash flows from financing activities:
Long-term debt payments	(125.4		)		(130.9		)
Purchase of treasury stock	(33.3		)		(26.3		)
Proceeds and tax benefit from issuance of common stock	14.9				21.0
Other financing activities	(5.5		)		(13.6		)
Net cash used in financing activities	(149.3		)		(149.8		)

Net change in cash and cash equivalents	(22.5		)		(56.1		)
Cash and cash equivalents at beginning of year	89.5				164.2
Cash and cash equivalents at end of period	$	67.0			$	108.1
Supplemental disclosure of cash paid during the period for:
Interest (net of amount capitalized)	$	39.7			$	47.5
Income taxes	0.1				(4.8		)

See accompanying notes to condensed consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Alaska Air Group, Inc.

June 30, 2011

NOTE 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Alaska Air Group, Inc. (Air Group or the Company) include the accounts of the parent company, Alaska Air Group, Inc., and its principal subsidiaries, Alaska Airlines, Inc. (Alaska) and Horizon Air Industries, Inc. (Horizon), through which the Company conducts substantially all of its operations. These interim condensed consolidated financial statements are unaudited and should be read in conjunction with the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. In the opinion of management, all adjustments have been made that are necessary to present fairly the Company’s financial position as of June 30, 2011, as well as the results of operations for the three and six months ended June 30, 2011 and 2010. The adjustments made were of a normal recurring nature.

The Company’s interim condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). In preparing these statements, the Company is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities, as well as the reported amounts of revenues and expenses. Significant estimates made include assumptions used to record expenses and revenues associated with the Company’s Mileage Plan; assumptions used in the calculations of pension expense in the Company’s defined-benefit plans; and the amounts of certain accrued liabilities. Actual results may differ from the Company’s estimates.

Reclassifications

Certain reclassifications have been made to conform the prior year’s data to the current format. The Company has also reclassified fuel costs of $3.7 million related to third-party contract flying from contracted services, as reported in the Company's earnings press release issued in Form 8-K on July 21, 2011, to aircraft fuel expense.

New and Prospective Accounting Pronouncements

The Financial Accounting Standards Board (FASB) has issued a number of Accounting Standards Updates (ASUs). Those ASUs are as follows:

•

In September 2009, the FASB issued ASU 2009-13, Multiple Deliverable Revenue Arrangements - A Consensus of the FASB Emerging Issues Task Force. This update provides application guidance on whether multiple deliverables exist, how the deliverables should be separated and how the consideration should be allocated to one or more units of accounting. This guidance also eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. This accounting standard was effective for the Company for revenue arrangements entered into or materially modified in fiscal years beginning on January 1, 2011. It primarily impacts the accounting for recognition of revenue associated with frequent flyer credits. There was no immediate significant impact of this new standard on the Company's consolidated financial statements and there will be no impact until the Company materially modifies or enters into new contracts associated with its frequent flyer program.

•

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement - Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The standard revises guidance for fair value measurement and expands the disclosure requirements. It is effective for fiscal years beginning after December 15, 2011. The Company is currently evaluating the impact that the adoption of this standard will have on the Company's consolidated financial statements.

•

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income - Presentation of Comprehensive Income. The standard revises guidance for the presentation and prominence of the items reported in other comprehensive income. It is effective for fiscal years beginning after December 15, 2011. The Company is currently evaluating the impact that the adoption of this standard will have on the presentation of the Company's consolidated financial statements.

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The FASB has issued a number of proposed ASUs. Those proposed ASUs are as follows:


•	Proposed ASU - Revenue Recognition - was issued in June 2010 and continues to evolve. We believe that a new revenue recognition standard could significantly impact the Company's accounting for the Company's Mileage Plan frequent flyer credits earned by passengers who fly on us or our partners, or miles sold to third parties.

•

Proposed ASU - Leases - was issued in August 2010 and continues to evolve. This proposed standard overhauls accounting for leases and would apply a “right-of-use” model in accounting for nearly all leases. For lessees, this would result in recognizing an asset representing the lessee's right to use the leased asset for the lease term and a liability to make lease payments. This proposed standard eliminates the operating lease concept from an accounting perspective, thereby eliminating rent expense from the income statement. This proposed standard, if adopted, would significantly impact the Company's consolidated financial statements. For example, we estimate the capitalized value of airplane leases to be approximately $850 million using a seven times annual rent factor.

These proposed ASUs are subject to change and no effective dates have been assigned.

NOTE 2. FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair Value Measurements

Accounting standards define fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The standards also establish a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:

Level 1 - Quoted prices in active markets for identical assets or liabilities.

Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

No significant transfers between Level 1 and Level 2 occurred during the six months ended June 30, 2011.

Cash, Cash Equivalents and Marketable Securities

The Company uses the “market approach” in determining the fair value of its cash, cash equivalents and marketable securities. The securities held by the Company are valued based on observable prices in active markets.

Amounts measured at fair value as of June 30, 2011 are as follows (in millions):



	Level 1		Level 2		Level 3		Total
Cash and cash equivalents	$	55.3	$	11.7	$	—	$	67.0
Marketable securities	168.5		918.0		—		1,086.5
Total	$	223.8	$	929.7	$	—	$	1,153.5

All of the Company’s marketable securities are classified as available-for-sale. The securities are carried at fair value, with the unrealized gains and losses reported in shareholders’ equity under the caption “accumulated other comprehensive loss” (AOCL). Realized gains and losses are included in other nonoperating income (expense) in the condensed consolidated statements of operations.

The cost of securities sold is based on the specific identification method. Interest and dividends on marketable securities are included in interest income in the condensed consolidated statements of operations.

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The Company’s overall investment strategy has a primary goal of maintaining and securing its investment principal. The Company’s investment portfolio is managed by well-known financial institutions and continually reviewed to ensure that the investments are aligned with the Company’s documented strategy.

Marketable securities consisted of the following (in millions):



	June 30, 2011		December 31, 2010
Amortized Cost:
U.S. government securities	$	363.6	$	514.8
Asset-backed obligations	165.7		176.8
Other corporate obligations	544.1		414.2
	$	1,073.4	$	1,105.8
Fair value:
U.S. government securities	$	368.1	$	518.5
Asset-backed obligations	165.2		176.7
Other corporate obligations	553.2		423.5
	$	1,086.5	$	1,118.7

Of the marketable securities on hand at June 30, 2011, 12% mature in 2011, 30% in 2012, and 58% thereafter. Gross gains and losses for the six months ended June 30, 2011 and 2010 were not material to the condensed consolidated financial statements.

Some of the Company’s asset-backed securities held at June 30, 2011 had credit losses, as defined in the accounting standards. Credit losses of $2.2 million were recorded through earnings in 2009 and represent the difference between the present value of future cash flows at the time and the amortized cost basis of the affected securities. No additional credit losses have been recorded since then.

Management does not believe the securities associated with the remaining $2.0 million net unrealized losses recorded in AOCL are “other-than-temporarily” impaired, as defined in the accounting standards, based on the current facts and circumstances. Management currently does not intend to sell these securities prior to their recovery nor does it believe that it will be more-likely-than-not that the Company would need to sell these securities for liquidity or other reasons.

Gross unrealized gains and losses at June 30, 2011 are presented in the table below (in millions):



			Unrealized Losses
	Unrealized Gains in AOCL		Less than 12 months			Greater than 12 months			Total Unrealized Losses			Less: Credit Loss Previously Recorded in Earnings			Net Unrealized Losses in AOCL			Net Unrealized Gains/(Losses) in AOCL			Fair Value of Securities with Unrealized Losses
U.S. Government Securities	$	4.6	$	(0.1	)	$	—		$	(0.1	)	$	—		$	(0.1	)	$	4.5		$	18.1
Asset-backed obligations	1.1		(0.6		)	(3.2		)	(3.8		)	(2.2		)	(1.6		)	(0.5		)	56.8
Other corporate obligations	9.4		(0.3		)	—			(0.3		)	—			(0.3		)	9.1			109.2
Total	$	15.1	$	(1.0	)	$	(3.2	)	$	(4.2	)	$	(2.2	)	$	(2.0	)	$	13.1		$	184.1

Fair Value of Financial Instruments

The majority of the Company’s financial instruments are carried at fair value. Those include cash, cash equivalents and marketable securities (Note 2), restricted deposits (Note 7), fuel hedge contracts (Note 3), and interest rate swap agreements (Note 3). The Company’s long-term fixed-rate debt is not carried at fair value.

The estimated fair value of the Company’s long-term debt was as follows (in millions):



	Carrying Amount		Fair Value
Long-term debt at June 30, 2011	$	1,408.8	$	1,397.6
Long-term debt at December 31, 2010	$	1,534.2	$	1,531.0

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The fair value of cash equivalents approximates carrying values due to the short maturity of these instruments. The fair value of marketable securities is based on market prices. The fair value of fuel hedge contracts is based on commodity exchange prices. The fair value of restricted deposits approximates the carrying amount. The fair value of interest rate swap agreements is based on quoted market swap rates. The fair value of long-term debt is based on a discounted cash flow analysis using the Company’s current borrowing rate.

NOTE 3. DERIVATIVE INSTRUMENTS

Fuel Hedge Contracts

The Company’s operations are inherently dependent upon the price and availability of aircraft fuel. To manage economic risks associated with fluctuations in aircraft fuel prices, the Company periodically enters into call options for crude oil and swap agreements for jet fuel refining margins, among other initiatives. The Company records these instruments on the balance sheet at their fair value. Changes in the fair value of these fuel hedge contracts are recorded each period in aircraft fuel expense.

The following table summarizes the components of aircraft fuel expense for the three and six months ended June 30, 2011 and 2010 (in millions):



	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011			2010
Raw or “into-plane” fuel cost	$	343.1	$	222.9	$	632.1		$	418.1
(Gains) or losses in value and settlements of fuel hedge contracts	54.4		32.1		(40.1		)	44.2
Aircraft fuel expense	$	397.5	$	255.0	$	592.0		$	462.3

Cash received, net of premiums expensed, for hedges that settled during the three and six month periods ended June 30, 2011 was $16.5 million and $29.0 million, respectively. Cash received, net of premiums expensed, for hedges that settled during the three and six month periods ended June 30, 2010 was $5.5 million and $5.9 million, respectively.

The Company uses the “market approach” in determining the fair value of its hedge portfolio. The Company’s fuel hedging contracts consist of over-the-counter contracts, which are not traded on an exchange. The fair value of these contracts is determined based on observable inputs that are readily available in active markets or can be derived from information available in active, quoted markets. Therefore, the Company has categorized these contracts as Level 2 in the fair value hierarchy described in Note 2.

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Outstanding fuel hedge positions as of August 3, 2011 are as follows:



	Approximate % of Expected Fuel Requirements		Gallons Hedged (in millions)	Approximate Crude Oil Price per Barrel	Approximate Premium Price per Barrel
Third Quarter 2011	50	%	51.9	$86	$11
Fourth Quarter 2011	50	%	48.6	$86	$11
Remainder of 2011	50	%	100.5	$86	$11
First Quarter 2012	50	%	48.6	$88	$12
Second Quarter 2012	50	%	51.2	$93	$13
Third Quarter 2012	50	%	53.0	$94	$13
Fourth Quarter 2012	44	%	44.5	$93	$13
Full Year 2012	49	%	197.3	$92	$13
First Quarter 2013	33	%	32.6	$93	$14
Second Quarter 2013	27	%	28.6	$92	$15
Third Quarter 2013	22	%	24.0	$95	$15
Fourth Quarter 2013	16	%	17.1	$97	$15
Full Year 2013	24	%	102.3	$94	$14
First Quarter 2014	11	%	11.5	$100	$15
Second Quarter 2014	6	%	6.0	$99	$15
Full Year 2014	4	%	17.5	$99	$15

The Company pays a premium to enter into crude oil option contracts. In order to receive economic benefit from the contract, the market price of crude oil must exceed the total of the contract strike price and the premium cost per barrel at the time of contract settlement.

The Company also has financial swap agreements in place to fix the refining margin component for approximately 50% of third quarter 2011 estimated jet fuel purchases at an average price of 75 cents per gallon and approximately 11% of fourth quarter 2011 estimated jet fuel purchases at an average price of 84 cents per gallon.

As of June 30, 2011 and December 31, 2010, the net fair values of the Company's fuel hedge positions were as follows (in millions):



	June 30, 2011		December 31, 2010
Crude oil call options or “caps”	$	153.6	$	129.3
Refining margin swap contracts	2.7		2.0
Total	$	156.3	$	131.3

The balance sheet amounts include capitalized premiums paid to enter into the contracts of $122.5 million and $108.6 million at June 30, 2011 and December 31, 2010, respectively.

Interest Rate Swap Agreements

The Company has interest rate swap agreements with a third party designed to hedge the volatility of the underlying variable interest rate in the Company's aircraft lease agreements for six B737-800 aircraft. The agreements stipulate that the Company pay a fixed interest rate over the term of the contract and receive a floating interest rate. All significant terms of the swap agreement match the terms of the lease agreements, including interest-rate index, rate reset dates, termination dates and underlying notional values. The agreements expire from September 2020 through March 2021 to coincide with the lease termination dates.

The Company has formally designated these swap agreements as hedging instruments and records the effective portion of the hedge as an adjustment to aircraft rent in the consolidated statement of operations in the period of contract settlement. The effective portion of the changes in fair value for instruments that settle in the future is recorded in AOCL in the condensed consolidated balance sheets.

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At June 30, 2011, the Company had a liability of $10.0 million associated with these contracts, $6.2 million of which is expected to be reclassified into earnings within the next twelve months. The fair value of these contracts is determined based on the difference between the fixed interest rate in the agreements and the observable LIBOR-based interest forward rates at period end, multiplied by the total notional value. As such, the Company places these contracts in Level 2 of the fair value hierarchy.

NOTE 4. LONG-TERM DEBT

Long-term debt obligations were as follows (in millions):



	June 30, 2011		December 31, 2010
Fixed-rate notes payable due through 2024	$	1,148.0	$	1,233.6
Variable-rate notes payable due through 2024	260.8		300.6
Long-term debt	1,408.8		1,534.2
Less current portion	253.9		221.2
	$	1,154.9	$	1,313.0

During the first six months of 2011, the Company had no new debt borrowings and made scheduled debt payments of $73.6 million. In addition, the Company prepaid the full debt balance on two outstanding aircraft debt agreements totaling $51.8 million. Subsequent to June 30, 2011, the Company borrowed approximately $106 million for six of the Q400 aircraft delivered in the first six months of 2011. The Company plans to use the proceeds to pay down an equivalent amount of existing debt and has prepaid $85.5 million subsequent to the end of the second quarter through the date of this filing. The Company expects to prepay another $12 million to $15 million in the fourth quarter. In connection with the debt prepayment, we expect to incur costs of approximately $6 million.

Bank Lines of Credit

The Company has two $100 million credit facilities. Both facilities have variable interest rates based on LIBOR plus a specified margin. Borrowings on one of the $100 million facilities, which expires in March 2013, are secured by aircraft. Borrowings on the other $100 million facility, which expires in March 2014, are secured by certain accounts receivable, spare engines, spare parts and ground service equipment. The Company has no immediate plans to borrow using either of these facilities. These facilities have a requirement to maintain a minimum unrestricted cash and marketable securities balance of $500 million. The Company is in compliance with this covenant at June 30, 2011.

NOTE 5. COMMON STOCK REPURCHASE

In June 2011, the Board of Directors authorized the Company to repurchase up to $50 million of its common stock. Through June 30, 2011 the Company had repurchased 31,500 shares of its common stock for $2.1 million under this program. This $50 million authorization was in addition to an earlier $50.0 million authorization that was completed in April 2011. The Company repurchased 511,800 shares in the first six months of 2011 under that program for $31.2 million. Since 2007, the Company has repurchased approximately 7.6 million shares of its common stock under such programs.

NOTE 6. EMPLOYEE BENEFIT PLANS

Pension Plans - Qualified Defined Benefit

Net pension expense for the three and six months ended June 30, 2011 and 2010 included the following components (in millions):



	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Service cost	$	9.0		$	8.1		$	18.0		$	16.2
Interest cost	18.3			16.9			36.6			33.8
Expected return on assets	(22.1		)	(17.7		)	(44.2		)	(35.4		)
Amortization of prior service cost	(0.2		)	(0.2		)	(0.4		)	(0.4		)
Actuarial loss	6.1			5.5			12.2			11.0
Net pension expense	$	11.1		$	12.6		$	22.2		$	25.2

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The Company contributed $11.1 million and $22.2 million to its qualified defined-benefit plans during the three and six months ended June 30, 2011, respectively. There is no minimum required contribution in 2011, although the Company expects to contribute an additional $11.1 million to these plans during the remainder of 2011. The Company contributed $15.2 million and $30.4 million to its qualified defined-benefit pension plans during the three and six months ended June 30, 2010, respectively.

On June 20, 2011, the Board of Directors authorized the Company to amend its defined-benefit pension plans for salaried employees such that participants' benefits will freeze effective January 1, 2014. Active participants in the defined-benefit plan will receive a higher Company contribution to the defined-contribution plan beginning on the same date. The Company will remeasure the projected benefit obligation and will record any curtailment gain or loss from the amendments when executed. Management does not expect the gain or loss to be material to the financial statements.

Pension Plans - Nonqualified Defined Benefit

Net pension expense for the unfunded, noncontributory defined-benefit plans was $0.9 million and $0.8 million for the three months ended June 30, 2011 and 2010 was $1.8 million and $1.6 million for the six months ended June 30, 2011 and 2010. Similar to the amendment to the qualified plan, the Board of Directors amended the nonqualified defined-benefit plan such that participants' benefits will be frozen effective January 1, 2014.

Post-retirement Medical Benefits

Net periodic benefit cost for the post-retirement medical plans for the three months ended June 30, 2011 and 2010 was $3.7 million and $3.1 million, respectively. The net periodic benefit cost for the six months ended June 30, 2011 and 2010 was $7.4 million and $6.2 million, respectively.

NOTE 7. OTHER ASSETS

Other assets consisted of the following (in millions):



	June 30, 2011		December 31, 2010
Restricted deposits (primarily restricted investments)	$	83.6	$	83.6
Long-term receivable related to Terminal 6 at LAX airport	75.9		31.3
Deferred costs and other^(a)	63.8		52.7
	$	223.3	$	167.6

^(a) Deferred costs and other includes deferred financing costs, long-term prepaid rent, lease deposits and other items.

In 2009, the Company announced plans to move from Terminal 3 to Terminal 6 at Los Angeles International Airport (LAX). As part of this move, the Company agreed to manage and fund up to $175 million of the project during the design and construction phase. The total project is estimated to cost approximately $250 million and is expected to be completed in 2012. On April 19, 2011, the Company signed a funding agreement with the City of Los Angeles and Los Angeles World Airports, which would reimburse the Company for the majority of the construction costs either during the course of, or upon the completion of, construction. The Company anticipates that its proprietary non-reimbursable share of the total cost of the project will be approximately $25 million. As of June 30, 2011, the Company recorded $75.9 million associated with this project in other assets, which represents total reimbursable project costs to date. In addition, the Company recorded $5.2 million for the proprietary share of this project in property and equipment as of June 30, 2011.

At June 30, 2011, the Company's restricted deposits were primarily restricted investments used to guarantee various letters of credit and workers compensation self-insurance programs. The restricted investments consist of highly liquid securities with original maturities of three months or less. They are carried at cost, which approximates fair value.

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NOTE 8. MILEAGE PLAN

Alaska's Mileage Plan deferrals and liabilities are included under the following balance sheet captions (in millions):



	June 30, 2011		December 31, 2010
Current Liabilities:
Other accrued liabilities	$	286.1	$	278.0
Other Liabilities and Credits:
Deferred revenue	367.0		382.1
Other liabilities	14.1		13.8
Total	$	667.2	$	673.9

Alaska's Mileage Plan revenue is included under the following condensed consolidated statement of operations captions for the three and six months ended June 30, 2011 and 2010 (in millions):



	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
Passenger revenues	$	54.2	$	51.0	$	104.5	$	92.1
Other-net revenues	51.6		48.6		97.2		90.6
Total Mileage Plan revenues	$	105.8	$	99.6	$	201.7	$	182.7

NOTE 9. STOCK-BASED COMPENSATION PLANS

The Company has stock awards outstanding under a number of long-term incentive equity plans, one of which actively provides for the grant of stock awards to directors, officers and employees of the Company and its subsidiaries. Compensation expense is recorded over the shorter of the vesting period or the period between the grant date and the date the employee becomes retirement-eligible as defined in the applicable plan. All stock-based compensation expense is recorded in wages and benefits in the condensed consolidated statements of operations.

Stock Options

During the six months ended June 30, 2011, the Company granted 70,080 options with a weighted-average grant-date fair value of $32.99 per share. During the same period in the prior year, the Company granted 129,970 options with a weighted-average grant-date fair value of $18.05 per share.

The Company recorded stock-based compensation expense related to stock options of $0.5 million and $1.0 million for the three months ended June 30, 2011 and 2010 respectively. The Company recorded expense of $2.0 million and $2.8 million for the six months ended June 30, 2011 and 2010, respectively. As of June 30, 2011, $2.8 million of compensation cost associated with unvested stock option awards attributable to future service had not yet been recognized. This amount will be recognized as expense over a weighted-average period of 2.0 years.

As of June 30, 2011, options to purchase 750,718 shares of common stock were outstanding with a weighted-average exercise price of $33.40. Of that total, 273,752 were exercisable at a weighted-average exercise price of $33.80.

Restricted Stock Awards

During the six months ended June 30, 2011, the Company awarded 74,096 restricted stock units (RSUs) to certain employees, with a weighted-average grant date fair value of $61.31. This amount reflects the value of the total RSU awards at the grant date based on the closing price of the Company's common stock.

The Company recorded stock-based compensation expense related to RSUs of $1.1 million and $1.3 million for the three month period ended June 30, 2011 and 2010, respectively, and $3.8 million and $3.8 million for the six months ended June 30, 2011 and 2010, respectively.

As of June 30, 2011 $5.8 million of compensation cost associated with unvested restricted stock awards attributable to future service had not yet been recognized. This amount will be recognized as expense over a weighted-average period of 1.9 years.

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Performance Stock Awards

From time to time, the Company issues performance stock unit awards (PSUs) to certain executives. PSUs vest based on performance or market performance measures.

Currently outstanding PSUs were issued in 2010 and 2011. There are several tranches of PSUs that vest based on differing performance conditions including a market condition tied to the Company's total shareholder return relative to an airline peer group, and based on certain performance goals established by the Compensation Committee of the Board of Directors. The total grant-date fair value of PSUs issued during the six months ended June 30, 2011 was $2.3 million.

The Company recorded $0.6 million and $1.1 million of compensation expense related to PSUs in the three months ended June 30, 2011 and 2010, respectively, and $1.0 million and $1.7 million for the six months ended June 30, 2011 and 2010, respectively.

Deferred Stock Awards

In the second quarter of 2011, the Company awarded 4,208 Deferred Stock Unit awards (DSUs) to members of its Board of Directors as a portion of their retainers. The underlying common shares are issued upon retirement from the Board, but require no future service period. As a result, the entire intrinsic value of the awards on the date of grant was expensed in the quarter granted. The total amount of compensation expense recorded in the second quarter of 2011 was $0.3 million.

The Company awarded 6,328 DSUs and recorded compensation expense of $0.3 million in the second quarter of 2010.

Employee Stock Purchase Plan

Compensation expense recognized under the Employee Stock Purchase Plan was $0.2 million for the three months ended June 30, 2011 and was $0.2 million and $0.1 million for the six months ended June 30, 2011 and 2010, respectively. There was no compensation expense recorded in the second quarter of 2010.

Summary of Stock-Based Compensation

The table below summarizes the components of total stock-based compensation for the three and six months ended June 30 (in millions):



	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
Stock options	$	0.5	$	1.0	$	2.0	$	2.8
Restricted stock units	1.1		1.3		3.8		3.8
Performance share units	0.6		1.1		1		1.7
Deferred stock awards	0.3		0.3		0.3		0.3
Employee stock purchase plan	0.2		—		0.2		0.1
Total stock-based compensation	$	2.7	$	3.7	$	7.3	$	8.7

NOTE 10. FLEET TRANSITION

Horizon Fleet Transition to All-Q400 Fleet

Horizon's long-term goal has been to transition to an all-Q400 fleet. During the first six months of 2011, the Company removed the final 13 CRJ-700 aircraft from its fleet through sublease to a third-party carrier. The total charge associated with removing these aircraft from operations was $30.9 million for the six months ended June 30, 2011. During the first six months of 2010, the Company recorded a charge of $3.4 million related to the removal of a CRJ-700 aircraft through a sublease. The charges represent the discounted expected cash flows from the sublease arrangement and the expected maintenance costs that management expects to pay for Horizon's share of the first maintenance event for each aircraft.

Horizon has 16 Q200 aircraft that are subleased to a third-party carrier, for which an accrual related to the estimated sublease loss has been recorded in previous periods. The Company evaluated the associated liability in the second quarter of 2011 and determined that the ultimate loss associated with these aircraft will likely be higher than the original estimate. As such, the Company recorded an additional $6 million in the first six months of 2011 associated with these aircraft.

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NOTE 11. OPERATING SEGMENT INFORMATION

Effective January 1, 2011, Horizon's business model changed such that 100% of its capacity is sold to Alaska under a capacity purchase agreement (CPA). As is typical for similar arrangements, certain costs such as landing fees and aircraft rents, selling and distribution costs, and fuel costs directly related to regional flights operated by Horizon are now recorded by Alaska. Also, based on the terms of the new agreement, Horizon's revenues and Alaska's regional revenues have changed significantly on a year over year basis. All inter-company revenues and expenses are eliminated in consolidation, and these changes have no impact on the consolidated results.

Operating segment information for Alaska and Horizon for the three and six months ended June 30 were as follows (in millions):



	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Operating revenues:
Alaska—mainline passenger^(a)	$	819.9		$	702.3		$	1,522.3		$	1,289.3
Alaska—regional passenger^(a)	194.3			82.6			370.8			158.7
Total Alaska passenger revenues	$	1,014.2		$	784.9		$	1,893.1		$	1,448.0
Alaska—other revenues	94.1			87.6			178.0			162.1
Total Alaska operating revenues	$	1,108.3		$	872.5		$	2,071.1		$	1,610.1
Horizon—brand flying^(b)	—			100.9			—			190.2
Horizon—CPA	93.5			67.4			188.1			133.8
Horizon—other revenues	1.9			2.8			4.3			5.5
Total Horizon operating revenues	$	95.4		$	171.1		$	192.4		$	329.5
Elimination of inter-company revenues	(93.5		)	(67.4		)	(188.1		)	(133.8		)
Consolidated operating revenues	$	1,110.2		$	976.2		$	2,075.4		$	1,805.8

Operating expenses:
Alaska—mainline, excluding fuel	$	498.4		$	476.4		$	996.1		$	941.7
Alaska—mainline fuel	356.1			214.5			512.5			386.2
Alaska—regional	179.5			74.3			350.5			146.8
Total Alaska operating expenses	$	1,034.0		$	765.2		$	1,859.1		$	1,474.7
Horizon^(c)	110.6			167.5			210.9			327.5
Other^(d)	1.3			1.2			1.9			2.0
Elimination of inter-company expenses	(93.5		)	(67.4		)	(188.1		)	(133.8		)
Consolidated operating expenses	$	1,052.4		$	866.5		$	1,883.8		$	1,670.4

Nonoperating expenses:
Alaska	$	(6.9	)	$	(10.8	)	$	(15.8	)	$	(21.7	)
Horizon^(c)	(4.2		)	(4.8		)	(8.1		)	(9.4		)
Other^(d)	0.3			(0.1		)	—			(0.1		)
Consolidated nonoperating expenses	$	(10.8	)	$	(15.7	)	$	(23.9	)	$	(31.2	)

Income (loss) before income tax:
Alaska—mainline	$	51.8		$	87.6		$	173.9		$	100.9
Alaska—regional	15.6			8.9			22.3			12.8
Total Alaska	$	67.4		$	96.5		$	196.2		$	113.7
Horizon^(c)	(19.4		)	(1.2		)	(26.6		)	(7.4		)
Other^(d)	(1.0		)	(1.3		)	(1.9		)	(2.1		)
Consolidated income before income tax	$	47.0		$	94.0		$	167.7		$	104.2

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	June 30, 2011			December 31, 2010
Total assets at end of period:
Alaska	$	4,888.3		$	4,610.2
Horizon	816.2			747.2
Other^(d)	1,509.5			1,375.6
Elimination of inter-company accounts	(1,980.2		)	(1,716.4		)
Consolidated	$	5,233.8		$	5,016.6

^(a)Alaska mainline passenger revenue represents revenue from passengers aboard Alaska jets. Alaska regional passenger revenue represents revenue earned by Alaska on capacity provided by Horizon, SkyWest Airlines and another small third-party carrier in the state of Alaska under capacity purchase arrangements.

^(b) As 100% of Horizon's capacity is sold to Alaska under the CPA, Horizon no longer has brand flying revenue.

^(c) Includes special charges of $26.8 million and $36.9 million for the three and six months ended June 30, 2011 related to fleet transition charges at Horizon.

^(d) Includes parent company results and its investments in Alaska and Horizon, which are eliminated in consolidation.

NOTE 12. CONTINGENCIES

The Company is a party to routine litigation matters incidental to its business and with respect to which no material liability is expected. Management believes the ultimate disposition of the matters is not likely to materially affect the Company's 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 arbitrators, judges and juries.

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ITEM 2.	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 our Company, our operations and our present business environment. MD&A is provided as a supplement to - and should be read in conjunction with - our condensed 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 the Company's filings with the Securities and Exchange Commission, including those listed in Item 1A "Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010. This overview summarizes MD&A, which includes the following sections:

· Second Quarter in Review - highlights from the second quarter of 2011 outlining some of the major events that happened during the period and how they affected our financial performance.

· Results of Operations - an in-depth analysis of the results of operations for the three and six months ended June 30, 2011. We believe this analysis will help the reader better understand our condensed consolidated statements of operations. This section also includes forward-looking statements regarding our view of the remainder of 2011.

· Critical Accounting Estimates - a discussion of our accounting estimates that involve significant judgment and uncertainties.

· Liquidity and Capital Resources - an analysis of cash flows, sources and uses of cash, contractual obligations, and commitments, and an overview of financial position.

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 accessible free of charge at www.alaskaair.com. The information contained on our website is not a part of this quarterly report on Form 10-Q.

SECOND QUARTER IN REVIEW

Our consolidated pretax income was $47.0 million during the second quarter of 2011 compared to $94.0 million in the second quarter of 2010. The decline in our pretax earnings was primarily due to the $142.5 million increase in aircraft fuel along with increases in other operating costs, partially offset by a $134.0 million increase in operating revenues.

•

Economic fuel averaged $3.28 per gallon in the second quarter of 2011, compared to $2.30 per gallon in 2010. This resulted in an $109.2 million increase in our economic fuel expense compared to the second quarter of 2010. Also, both periods reported mark-to-market losses associated with our fuel hedge positions, although the loss in the second quarter of 2011 was $33.3 million larger than the loss reported in the same period of 2010.


•	Consolidated unit revenues increased 6.0% compared to the second quarter of 2010, from increases in both the ticket yield and load factors. More detail regarding these increases can be found in the "Comparison of the Three Months Ended June 30, 2011 to the Three Months Ended June 30, 2010 " section below.

Excluding the mark-to-market adjustment and fleet transition charges, we reported record second quarter net income of $89.6 million for the three months ended June 30, 2011 compared to $84.0 million for the same period in 2010. Please refer to our reconciliation of these non-GAAP measures to the most directly comparable GAAP measure our pretax income in the "Comparison of the Three Months Ended June 30, 2011 to the Three Months Ended June 30, 2010 " section below.

Other significant developments during the second quarter of 2011 and through the filing of this Form 10-Q are described below.

Customer Satisfaction Award

For the fourth year in a row, Alaska Airlines ranked "Highest in Customer Satisfaction among Traditional Network Carriers" in 2011 by J.D. Power & Associates.

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Horizon Fleet Transition

Horizon's long-term goal has been to transition to an all-Q400 fleet. During the second quarter of 2011, we removed the final nine CRJ-700 aircraft from Horizon's operations through sublease to a third party carrier, resulting in a charge of $20.8 million. Five of the nine aircraft removed during the second quarter are now being flown by SkyWest Airlines on behalf of Alaska Airlines pursuant to a capacity purchase agreement.

Horizon recorded a charge of $6 million in the second quarter of 2011 related to its 16 non-operational Q200 aircraft currently subleased to a third-party carrier. We evaluated the associated liability in the second quarter of 2011 and determined the ultimate loss for these aircraft will be higher than the original estimate.

Operational Performance

Alaska's operational results continue to be among the best in the industry. Alaska Airlines held the No. 1 spot on the U.S. Department of Transportation on-time performance among the 10 largest U.S. airlines for the last twelve months ending in May. According to FlightStats.com, Alaska once again came out on top among the top 10 carriers. Furthermore, Alaska and Horizon ranked in second and third place among all U.S.-based carriers in June that FlightStats tracks. Horizon has also seen significant improvements in on-time arrival performance in recent months.

New Markets

Alaska began daily regional non-stop seasonal service between Portland and Billings, and between Portland and Missoula in June 2011 and recently announced daily service between San Diego and Honolulu beginning November 17, 2011.

Stock Repurchase

In April 2011, the Company completed the $50 million share repurchase program authorized by the Board of Directors in June 2010. Under this program, 866,800 total shares were repurchased, 77,800 during the second quarter of 2011. In June 2011, the Board of Directors authorized the Company to repurchase another $50 million of its common stock. Through June 30, 2011 the Company had repurchased 31,500 shares of its common stock for $2.1 million under this program. Since 2007, the Company has repurchased nearly 7.6 million shares of its common stock under such programs.

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 has been and continues to be a focus on optimizing revenue through our network planning and, to a lesser extent, the way we merchandise fares and ancillary products and services on our website and through mobile applications.

As we look to the remainder of 2011, there are some concerns that the economy is softening and the ability of the airlines to raise ticket prices will be enough to cover higher fuel costs. We will be monitoring passenger demand and advance bookings closely and will be diligent in our efforts to continue to match capacity with demand. As of the date of this report, however, our advance bookings for the third quarter are strong. Advance booked load factors are in line with prior year for the third quarter compared to 2010 on a 5% expected increase in capacity.

RESULTS OF OPERATIONS

COMPARISON OF THREE MONTHS ENDED JUNE 30, 2011 TO THREE MONTHS ENDED JUNE 30, 2010

Our consolidated net income for the second quarter of 2011 was $28.8 million, or $0.78 per diluted share, compared to net income of $58.6 million, or $1.60 per diluted share, in the second quarter of 2010. Significant items impacting the comparability between the periods are as follows:


•	Both periods include adjustments to reflect the timing of net unrealized mark-to-market gains or losses related to our fuel hedge positions. In the second quarter of 2011 we recognized net mark-to-market losses of $70.9 million ($44.1 million after tax, or $1.21 per share) compared to losses of $37.6 million ($23.3 million after tax, or $0.63 per share) in the second quarter of 2010.

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•	The second quarter of 2011 includes Horizon fleet transition costs of $26.8 million ($16.7 million after tax, or $0.45 per share) compared to $3.4 million ($2.1 million, or $0.06 per share) in the second quarter of 2010.

We believe disclosure of the impact of these individual charges is useful information to investors and other readers because:


•	Along with our GAAP results, we also present this information in our quarterly earnings press releases and discuss this information in our quarterly earnings conference call;


•	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, and thus the information allows investors to better understand the changes in variable incentive pay expense in our condensed 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 mark-to-market adjustments and other noted items shown in the following table, our adjusted consolidated net income for the second quarter of 2011 was $89.6 million, or $2.44 per diluted share, compared to an adjusted consolidated net income of $84.0 million, or $2.29 per share, in the second quarter of 2010.



	Three Months Ended June 30,
	2011						2010
(in millions except per share amounts)	Dollars			Diluted EPS			Dollars			Diluted EPS
Net income and diluted EPS, excluding noted items	$	89.6		$	2.44		$	84.0		$	2.29
Fleet transition costs, net of tax	(16.7		)	(0.45		)	(2.1		)	(0.06		)
Adjustments to reflect the timing of gain or loss recognition resulting from mark-to-market fuel-hedge accounting, net of tax	(44.1		)	(1.21		)	(23.3		)	(0.63		)
Net income and diluted EPS as reported	$	28.8		$	0.78		$	58.6		$	1.60

Table of Contents



OPERATING STATISTICS SUMMARY (unaudited)
Alaska Air Group, Inc.

	Three Months Ended June 30,									Six Months Ended June 30,
	2011			2010			Change			2011			2010			Change
Consolidated:^(a)
Revenue passengers (000)	6,246			5,875			6.3		%	11,998			11,100			8.1		%
Revenue passenger miles (RPM) (000,000)	6,293			5,706			10.3		%	12,146			10,754			12.9		%
Available seat miles (ASM) (000,000)	7,469			6,965			7.2		%	14,581			13,315			9.5		%
Revenue passenger load factor	84.3		%	81.9		%	2.4		pts	83.3		%	80.8		%	2.5		pts
Operating revenue per ASM (RASM)	14.86		¢	14.02		¢	6.0		%	14.23		¢	13.56		¢	4.9		%
Passenger revenue per ASM (PRASM)	13.58		¢	12.72		¢	6.8		%	12.98		¢	12.3		¢	5.5		%
Operating expense per ASM (CASM), excluding fuel and CRJ-700 fleet transition costs^(b)	8.41		¢	8.73		¢	(3.7	)	%	8.61		¢	9.05		¢	(4.9	)	%
Economic fuel cost per gallon^(b)	$	3.28		$	2.30		42.6		%	$	3.08		$	2.28		35.1		%
Fuel gallons (000,000)	99.7			94.3			5.7		%	196.0			180.8			8.4		%
Average number of full-time equivalent employees	11,807			11,717			0.8		%	11,846			11,707			1.2		%
Operating fleet at period-end	166			173			(7	)	a/c	166			173			(7	)	a/c

Mainline Jet Operating Statistics:
Revenue passengers (000)	4,533			4,170			8.7		%	8,640			7,811			10.6		%
RPM (000,000)	5,697			5,072			12.3		%	10,976			9,544			15.0		%
ASM (000,000)	6,702			6,112			9.7		%	13,055			11,653			12.0		%
Revenue passenger load factor	85.0		%	83.0		%	2.0		pts	84.1		%	81.9		%	2.2		pts
Yield per passenger mile	14.39		¢	13.85		¢	3.9		%	13.87		¢	13.51		¢	2.7		%
PRASM	12.23		¢	11.49		¢	6.4		%	11.66		¢	11.06		¢	5.4		%
CASM, excluding fuel^(b)	7.44		¢	7.79		¢	(4.5	)	%	7.63		¢	8.08		¢	(5.6	)	%
Economic fuel cost per gallon^(b)	$	3.27		$	2.30		42.2		%	$	3.07		$	2.28		34.6		%
Fuel gallons (000,000)	87.1			79.6			9.4		%	170.2			151.9			12.0		%
Average number of full-time equivalent employees	8,899			8,621			3.2		%	8,892			8,579			3.6		%
Aircraft utilization (blk hrs/day)	10.5			10			5.0		%	10.5			9.7			8.2		%
Average aircraft stage length (miles)	1,104			1,076			2.6		%	1,111			1,072			3.6		%
Mainline operating fleet at period-end	117			116			1		a/c	117			116			1		a/c

Regional Operating Statistics:^(c)
RPM (000,000)	596			634			(6.0	)	%	1,170			1,210			(3.3	)	%