UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended ~~September~~June 30, ~~2006~~2007.

¨	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 AIRLINES, INC.

(Exact name of registrant as specified in its charter)

Alaska

91-0009235

(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 x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ¨ No x

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

The registrant has 500 common shares, par value $1.00, outstanding at ~~September~~June 30, ~~2006~~2007.

ALASKA AIRLINES, INC.

Quarterly Report on Form 10-Q for the three months ended June 30, 2007

TABLE OF CONTENTS

~~PART I. FINANCIAL INFORMATION~~	PART I. FINANCIAL INFORMATION
Item 1.	Condensed Financial Statements	34
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2021
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3642
Item 4.	Controls and Procedures	3743
~~PART II. OTHER INFORMATION~~	PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	3843
Item 1A.	Risk Factors	3844
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39
Item 5.	Other Information	44
Item 3.	Defaults upon Senior Securities	39
Item 6.	Exhibits	45
Item 4.	Submission of Matters to a Vote of Security Holders	39
Signatures		45
Item 5.	Other Information	39
Item 6.	Exhibits	39
Signatures		40

Cautionary Note regarding Forward-Looking Statements

In addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking statements subject to the safe harbor protection provided by Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements relate to future events and involve known and unknown risks and uncertainties that may cause actual outcomes to be materially different from those indicated by any forward-looking statements. Some of the things that could cause our actual results to differ from our expectations are: the competitive environment and other trends in our industry; changes in our operating costs including fuel, which can be volatile; our ability to meet our cost reduction goals; our inability to achieve or maintain profitability and fluctuations in our quarterly results; our significant indebtedness; the implementation of our growth strategy; the timing of the MD-80 fleet disposal and the amounts of potential lease termination payments with lessors and sublease payments from sublessees; compliance with our financial covenants; potential downgrades of our credit ratings and the availability of financing; the concentration of our revenue from a few key markets; general economic conditions, as well as economic conditions in the geographic regions we serve; actual or threatened terrorist attacks; global instability and potential U.S. military actions or activities; insurance costs; labor disputes; our ability to attract and retain qualified personnel; an aircraft accident or incident; liability and other claims asserted against us; operational disruptions; increases in government fees and taxes; changes in laws and regulations; our reliance on automated systems; and our reliance on third-party vendors and partners. For a discussion of these and other risk factors, see Item 1A, “Risk Factors” of this Form 10-Q and Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2005. All of the forward-looking statements are qualified in their entirety by reference to the risk factors discussed therein. These risk factors may not be exhaustive. We operate in a continually changing business environment, and new risk factors emerge from time to time. Management cannot predict such new risk factors, nor can it assess the impact, if any, of such new risk factors on our business or events described in any forward-looking statements. We disclaim any obligation to publicly update or revise any forward-looking statements after the date of this report to conform them to actual results. 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.

As used in this Form 10-Q, the terms “Alaska,” “our,” “we” and “the Company” refer to Alaska Airlines, Inc. unless the context indicates otherwise.

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:

•

the competitive environment and other trends in our industry;

•

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

•

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

•

the amounts of potential lease termination payments to lessors for our remaining MD-80 leased aircraft and related sublease payments from sublessees, if applicable;

•

our significant indebtedness;

•

compliance with our financial covenants;

•

potential downgrades of our credit ratings and the availability of financing;

•

the implementation of our growth strategy;

•

our ability to meet our cost reduction goals;

•

operational disruptions;

•

general economic conditions, as well as economic conditions in the geographic regions we serve;

•

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;

•

insurance costs;

•

changes in laws and regulations;

•

increases in government fees and taxes;

•

our inability to achieve or maintain profitability;

•

fluctuations in our quarterly results;

•

an aircraft accident or incident;

•

liability and other claims asserted against us;

•

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

•

our reliance on third-party vendors and partners.

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, 2006. Please consider our forward-looking statements in light of those risks as you read this report.

PART I. FINANCIAL INFORMATION

~~ITEM~~ Item 1.: Condensed Financial Statements

BALANCE ~~SHEETS~~SHEET (unaudited)

Alaska Airlines, Inc.

ASSETS

(In Millions)	September 30,2006		December 31,2005
(In millions)	June 30,2007		December 31,2006
Current Assets
Cash and cash equivalents	$	~~152~~158.34	$	73230.38
Marketable securities		~~955~~829.45		~~909~~783.02
Securities lending collateral		111.4		112.0
Total cash and marketable securities		987.9		1,014.0
Receivables from related companies		63.1		51.1
Securities lending collateral		104.9		111.3
Receivables - net		136.3		113.5
Receivables from related companies		278.9		59.1
Inventories and supplies - net		23.8		18.6
Receivables-net		176.3		118.9
Deferred income taxes		113.2		86.1
Inventories and supplies-net		24.4		18.8
Fuel hedge contracts		47.4		88.2
Deferred income taxes		138.0		128.0
Prepaid expenses and other current assets		48.3		35.5
Fuel hedge contracts		45.9		39.5
Total Current Assets		1,651.2		1,487.3
Prepaid expenses and other current assets		37.4		38.0
Total Current Assets		1,793.7		1,527.6
Property and Equipment
Aircraft and other flight equipment		12,~~902~~216.54		2,~~086~~057.38
Other property and equipment		~~438~~475.07		~~403~~449.45
Deposits for future flight equipment		~~375~~374.61		~~276~~362.27
		2,716.1		2,765.9
		3,066.2		2,870.0
Less accumulated depreciation and amortization		~~727~~816.97		~~915~~788.48
Total Property and Equipment - Net		12,~~988~~249.25		12,~~850~~081.52
Intangible Assets Related to Additional Minimum Pension Liability		33.6		33.6
Fuel Hedge Contracts		15.8		19.6
Fuel Hedge Contracts		22.8		45.2
Other Assets		77.0		83.6
Other Assets		82.0		95.3
Total Assets	$	4,136.0	$	3,712.0
Total Assets	$	3,777.8	$	3,511.9

See accompanying notes to condensed financial statements.

BALANCE SHEETS (unaudited)

Alaska Airlines, Inc.

LIABILITIES AND SHAREHOLDER’S EQUITY

(In Millions)	September 30,2006			December 31,2005
(In millions)	June 30,2007			December 31,2006
Current Liabilities
Accounts payable	$	6875.41		$	6270.72
Payables to related companies		35.5			218.0
Payable to related companies		81.1			71.8
Accrued aircraft rent		48.65			6551.12
Accrued wages, vacation and payroll taxes		~~116~~85.79			89121.08
Other accrued liabilities		~~405~~401.43			~~379~~356.37
Air traffic liability		~~357~~492.59			~~291~~310.05
Securities lending obligation		~~111~~104.49			~~112~~111.03
Current portion of long-term debt		~~198~~102.73			~~109~~114.42
Total Current Liabilities		1,~~342~~392.20			1,~~326~~207.57
Long-Term Debt, Net of Current Portion		~~875~~1,111.23			~~762~~963.65
Other Liabilities and Credits
Deferred income taxes		~~135~~122.10			~~136~~95.35
Deferred revenue		~~312~~347.94			~~285~~328.83
Other liabilities		~~366~~437.0			~~373~~444.85
		814.0			795.9
		906.4			868.3
Commitments and Contingencies
Shareholder’s Equity
Common stock, $1 par value Authorized: 1,000 shares Issued: 2006 and 2005 - 500 shares		—			—
Preferred stock, $1 par valueAuthorized: 1,000 shares, none issued or outstanding		—			—
Capital in excess of par value		615.5			457.1
Common stock, $1 par valueAuthorized: 1,000 sharesIssued: 2007 and 2006 - 500 shares		—			—
Deferred stock-based compensation		—			(6.7	)
Capital in excess of par value		621.9			617.5
Accumulated other comprehensive loss		(~~130~~188.24	)		(~~132~~191.04	)
Retained earnings		~~261~~292.18			~~308~~246.54
		746.4			626.9
		726.3			672.5
Total Liabilities and Shareholder’s Equity	$	34,~~777~~136.80		$	3,~~511~~712.90

See accompanying notes to condensed financial statements.

CONDENSED STATEMENTS OF OPERATIONS (unaudited)

Alaska Airlines, Inc.

(In Millions)


Three Months Ended June 30 (In millions)	2007			2006
Operating Revenues
Passenger	$	663.3		$	647.3
Passenger - regional flying		71.0			4.4
Freight and mail		26.3			25.6
Other - net		34.5			33.1

Total Operating Revenues		795.1			710.4

Operating Expenses
Wages and benefits		185.6			186.9
Variable incentive pay		2.1			7.6
Aircraft fuel, including hedging gains and losses		193.4			173.7
Aircraft maintenance		34.5			41.9
Aircraft rent		27.9			28.9
Landing fees and other rentals		42.2			40.5
Regional flying costs		74.1			4.0
Contracted services		30.2			30.2
Selling expenses		33.4			38.5
Depreciation and amortization		35.6			32.2
Food and beverage service		12.0			11.9
Other		43.2			39.4
Restructuring charges and adjustments		—			3.8

Total Operating Expenses		714.2			639.5

Operating Income		80.9			70.9

Nonoperating Income (Expense)
Interest income		16.6			14.8
Interest expense		(22.1	)		(17.8	)
Interest capitalized		6.0			5.1
Other - net		(0.5	)		(0.5	)

		—			1.6

Income Before Income Tax	$	80.9		$	72.5

Income tax expense		30.8			23.3

Net Income	$	50.1		$	49.2

	Three Months EndedSeptember 30						Nine Months EndedSeptember 30
	2006			2005			2006			2005
Operating Revenues
Passenger	$	698.4		$	624.1		$	1,882.5		$	1,656.6
Freight and mail		25.7			25.2			71.8			68.4
Other - net		35.8			40.0			106.0			103.9
Total Operating Revenues		759.9			689.3			2,060.3			1,828.9
Operating Expenses
Wages and benefits		190.3			171.7			552.9			548.7
Variable incentive pay		3.3			2.8			17.3			7.5
Contracted services		32.3			27.6			98.4			87.0
Aircraft fuel, including hedging gains and losses		251.5			121.8			567.2			283.6
Aircraft maintenance		32.4			43.2			118.6			143.5
Aircraft rent		26.4			29.5			84.6			87.2
Food and beverage service		12.6			13.0			36.1			36.0
Selling expenses		36.8			35.6			110.0			102.2
Depreciation and amortization		35.2			31.9			99.6			92.9
Landing fees and other rentals		40.5			38.8			117.9			117.2
Other		40.8			39.6			118.4			118.9
Fleet transition costs		58.4			—			189.5			—
Restructuring charges and adjustments		28.6			(1.4	)		32.4			20.7
Total Operating Expenses		789.1			554.1			2,142.9			1,645.4
Operating Income (Loss)		(29.2	)		135.2			(82.6	)		183.5
Nonoperating Income (Expense)
Interest income		14.6			9.2			41.2			23.1
Interest expense		(19.9	)		(13.0	)		(53.5	)		(36.9	)
Interest capitalized		6.1			2.6			15.5			4.5
Other - net		0.5			(1.0	)		(0.7	)		(3.7	)
		1.3			(2.2	)		2.5			(13.0	)
Income (loss) before income tax and accounting change		(27.9	)		133.0			(80.1	)		170.5
Income tax expense (benefit)		(7.8	)		50.7			(32.7	)		66.0
Income (loss) before accounting change		(20.1	)		82.3			(47.4	)		104.5
Cumulative effect of accounting change, net of tax		—			—			—			(80.1	)
Net Income (Loss)	$	(20.1	)	$	82.3		$	(47.4	)	$	24.4

See accompanying notes to condensed financial statements.

CONDENSED ~~STATEMENT~~STATEMENTS OF ~~SHAREHOLDER’S~~OPERATIONS ~~EQUITY~~ (unaudited)

Alaska Airlines, Inc.

(In Millions)	CommonStock			Capital inExcess ofPar Value				DeferredStock-BasedCompensation			AccumulatedOtherComprehensiveLoss			RetainedEarnings			Total
Six Months Ended June 30 (In millions)	2007				2006
Balances at December 31, 2005	$	0.0		$	457.1			$	(6.7	)	$	(132.0	)	$	308.5		$	626.9
Operating Revenues
Net loss for the nine months ended September 30, 2006															(47.4	)		(47.4	)
Passenger	$	1,209.2			$	1,184.1
Other comprehensive income (loss):
Passenger - regional flying		128.3				8.8
Related to marketable securities:
Freight and mail		47.0				46.1
Change in fair value												3.4
Other - net		70.4				61.4
Reclassification to earnings												—
Total Operating Revenues		1,454.9				1,300.4
Income tax effect												(1.3	)
Operating Expenses
												2.1						2.1
Wages and benefits		372.9				362.6
Related to fuel hedges:
Variable incentive pay		9.8				14.0
Reclassification to earnings												(0.5	)
Aircraft fuel, including hedging gains and losses		351.0				315.7
Income tax effect												0.2
Aircraft maintenance		68.8				86.2
												(0.3	)					(0.3	)
Aircraft rent		54.2				58.2
Total comprehensive loss																		(45.6	)
Landing fees and other rentals		84.0				77.4
Contribution from parent					160.2													160.2
Regional flying costs		141.5				7.9
Implementation of SFAS 123R					(6.7	)			6.7									—
Contracted services		59.6				58.2
Stock-based compensation					4.9													4.9
Selling expenses		65.0				73.2
Balances at September 30, 2006	$	0.0		$	615.5			$	0.0		$	(130.2	)	$	261.1		$	746.4
Depreciation and amortization		71.0				64.4
Food and beverage service		22.6				22.7
Other		83.0				78.4
Fleet transition costs		—				131.1
Restructuring charges and adjustments		—				3.8
Total Operating Expenses		1,383.4				1,353.8
Operating Income (loss)		71.5				(53.4	)
Nonoperating Income (Expense)
Interest income		32.5				26.6
Interest expense		(42.5	)			(33.6	)
Interest capitalized		12.3				9.4
Other - net		(0.4	)			(1.2	)
		1.9				1.2
Income (loss) before income tax	$	73.4			$	(52.2	)
Income tax expense		27.0				(24.9	)
Net Income (Loss)	$	46.4			$	(27.3	)

See accompanying notes to condensed financial statements.

CONDENSED STATEMENTS OF SHAREHOLDER’S EQUITY (unaudited)

Alaska Airlines, Inc.


(In millions)	Common Stock		Capital in Excess of Par Value		Accumulated Other Comprehensive Loss			Retained Earnings		Total
Balances at December 31, 2006	$	0.0	$	617.5	$	(191.4	)	$	246.4	$	672.5

Net income for the six months ended June 30, 2007									46.4		46.4
Other comprehensive income (loss):
Related to marketable securities:
Change in fair value						(3.6	)
Reclassification to earnings						(0.4	)
Income tax effect						1.5

						(2.5	)				(2.5	)

Adjustments related to employee benefit plans:						8.8
Income tax effect						(3.3	)

						5.5					5.5

Total comprehensive income											49.4

Stock-based compensation				4.4							4.4

Balances at June 30, 2007	$	0.0	$	621.9	$	(188.4	)	$	292.8	$	726.3

See accompanying notes to condensed financial statements.

CONDENSED STATEMENTS OF CASH FLOWS (unaudited)

Alaska Airlines, Inc.

Nine Months Ended September 30 (In Millions)	2006			2005
Six Months Ended June 30 (In millions)	2007			2006
Cash flows from operating activities:
Net income (loss)	$	~~(47~~46.4	)	$	24(27.43	)
Adjustments to reconcile net income to net cash provided by operating activities:
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Cumulative effect of accounting change, net of tax effect		—			80.1
Restructuring charges and adjustments		—			3.8
Restructuring charges and adjustments		32.4			20.7
Impairment of aircraft		—			131.1
Fleet transition costs		189.5			—
Depreciation and amortization		71.0			64.4
Depreciation and amortization		99.6			92.9
Stock-based compensation		4.4			3.2
Stock-based compensation		4.9			1.1
Changes in fair values of open fuel hedge contracts		(2.6	)		12.2
Changes in fair values of open fuel hedge contracts		62.7			(109.2	)
Changes in deferred income taxes		29.4			(20.2	)
Loss on sale of assets		0.6			2.6
Gain on sale of assets		(1.2	)		—
Changes in deferred income taxes		(29.4	)		62.1
Increase in receivables (including from related companies)		(277.2	)		(103.1	)
Increase in receivables - net		(61.8	)		(30.2	)
Increase in prepaid expenses and other current assets		(4.2	)		(29.4	)
Increase in prepaid expenses and other current assets		(20.0	)		(14.6	)
Increase in air traffic liability		182.4			139.4
Increase in air traffic liability		66.5			70.2
Increase in other current liabilities		18.8			44.3
Increase (decrease) in other current liabilities		24.2			(15.0	)
Increase (decrease) in deferred revenue and other-net		22.5			(16.4	)
Increase in deferred revenue and other-net		17.3			3.9
Net cash provided by operating activities		89.7			202.0
Net cash provided by operating activities		339.1			189.0
Cash flows from investing activities:
Proceeds from disposition of assets		—53.9			~~2.2~~—
Purchases of marketable securities		(~~591~~679.69	)		(~~908~~339.73	)
Sales and maturities of marketable securities		~~549~~630.20			~~1,036~~286.78
Securities lending collateral		0.6			(76.5	)
Securities lending obligation		(0.6	)		76.5
Property and equipment additions:
Aircraft and aircraft purchase deposits		(~~369~~253.75	)		(~~225~~193.40	)
Other flight equipment		(2319.89	)		(2925.32	)
Other property and equipment		(2819.85	)		(216.85	)
Restricted deposits and other		15(9.21	)		(90.73	)
Net cash used in investing activities		(~~449~~298.50	)		(~~156~~277.05	)
Cash flows from financing activities:
Proceeds from issuance of long-term debt, net		~~228~~196.01			—169.8
Long-term debt and capital lease payments		(38.6	)		(34.3	)
Long-term debt payments		(60.2	)		(27.1	)
Net cash provided by (used in) financing activities		189.4			(34.3	)
Net cash provided by financing activities		135.9			142.7
Net change in cash and cash equivalents		79(72.04	)		(167.32	)
Cash and cash equivalents at beginning of period		73.3			27.8
Cash and cash equivalents at beginning of year		230.8			73.3
Cash and cash equivalents at end of period	$	~~152~~158.34		$	26140.5
Supplemental disclosure of cash paid (refunded) during the period for:
Supplemental disclosure of cash paid (received) during the period for:
Interest (net of amount capitalized)	$	3327.16		$	2822.93
Income taxes		10.29			(10.81	)
Noncash investing and financing activities:
Equity contribution from parent company (see note 12)		160.2			—
Equity contribution from parent company		—			160.2
Reduction in intercompany receivables and payables (see note 12)		40.2			—
Reduction in intercompany receivables and payable		—			40.2
Debt assumed in purchase of MD-80 aircraft		11.6			—
Net change in discounts and premiums on long-term debt		0.9			—
Credit received for flight deposits deferred in other liabilities		—			9.7

See accompanying notes to condensed financial statements.

NOTES TO CONDENSED FINANCIAL STATEMENTS (unaudited)

Alaska Airlines, Inc.

Note 1. Basis of Presentation and Significant Accounting Policies

Organization and Basis of Presentation

The accompanying unaudited condensed financial statements of Alaska Airlines, Inc. (Alaska or the Company) should be read in conjunction with the financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2005~~2006. Alaska Airlines, Inc., an Alaska corporation, is a wholly-owned subsidiary of Alaska Air Group, Inc. (Air Group), a Delaware corporation. In the opinion of management, all adjustments have been made which are necessary to present fairly the Company’s financial position as of ~~September~~ June 30, ~~2006~~2007, as well as the results of operations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2006~~2007 and ~~2005~~2006. The adjustments made were of a normal recurring nature.

The Company’s condensed financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). In preparing these condensed financial 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 liabilities,; expenses and revenues associated with the Company’s Mileage Plan,; amounts paid to lessors upon aircraft lease terminations,; the fair market value of surplus or impaired aircraft, engines and parts,; 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

The Company has ~~reclassified~~made ~~all~~certain ~~of its fuel hedging gains and losses from other nonoperating income (expense) to aircraft fuel, including hedging gains and losses, for all periods presented (see Note 4). Certain other~~ reclassifications ~~have~~ ~~been made~~ to conform the prior year’s data to the current format.

Securities Lending

The Company lends certain marketable securities to third parties for a ~~time~~ period of less than one year. During the ~~time~~ period in which these securities are loaned to the third parties, the Company requires cash collateral for 102% of the daily market value of the loaned securities. As of ~~September~~June 30, ~~2006~~2007, the Company had $~~109~~102.28 million of securities on loan under the program. These affected securities are included as marketable securities under current assets on the condensed balance sheets.

~~Recent~~New Accounting Pronouncements

In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes - —an interpretation of of FASB Statement No. 109 (FIN 48), which clarifies the accounting and disclosure for uncertainty in tax positions, as defined in that statement. The purpose of FIN 48 is to clarify certain aspects of the recognition and measurement related to to accounting for income tax uncertainties. This interpretation iswas effective for ~~fiscal~~the ~~years~~Company ~~beginning~~as ~~after~~of ~~December~~January 151, ~~2006~~2007. ~~The~~See ~~Company~~Note ~~does~~11 ~~not~~for ~~believe~~a ~~this~~discussion ~~interpretation~~of ~~will~~the ~~have a material~~ impact onof ~~its~~the ~~results~~adoption ~~from~~of ~~operations~~this ~~or financial position~~interpretation.

to the Company’s financial statements. SAB 108 is effective for fiscal years ending after November 15, 2006. Management is evaluating the impact of this interpretation and does expect to have an adjustment to shareholder’s equity, although the adjustment is not expected to be material.

In September 2006, the FASB issued Statement No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R) (SFAS 158). SFAS 158 requires recognition of the overfunded or underfunded status of an entity’s defined benefit postretirement plan as an asset or liability in the financial statements, requires the measurement of defined benefit postretirement plan assets and obligations as of the end of the employer’s fiscal year, and requires recognition of the funded status of defined benefit postretirement plans in other comprehensive income. SFAS 158 is effective for fiscal years ending after December 15, 2006. Based on current assumptions, which are likely to change, the Company expects the impact on its shareholder’s equity to be in the range of $75 million to $100 million. The Company believes the adoption of this statement will not have a material impact on its results from operations or cash flows.

Note 2. Fleet Transition

In March 2006, the Company’s Board approved a plan to accelerate the retirement of its MD-80 fleet (15 owned and 11 leased aircraft) and remove those aircraft from service by the end of 2008, which is earlier than the original retirement schedule. The Company expects to use firm orders, options and additional purchase rights under its existing order of B737-800 aircraft to replace the capacity lost from the early retirement of the MD-80s.

As a result of this decision, the Company evaluated impairment as required by SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” and concluded that the carrying value of the MD-80 fleet was no longer recoverable when compared to the estimated remaining future cash flows. Accordingly, during the first quarter of 2006, the Company recorded an impairment charge totaling $131.1 million (pretax) to write down the fleet to its estimated fair market value.

The estimated fair value of the Company’s aircraft was derived using third-party appraisals and market data compiled by a third-party consultant, adjusted for certain factors deemed appropriate by management, such as the position of each aircraft in its maintenance cycle. During the third quarter, the Company received multiple offers to purchase the aircraft. This information did not indicate a need for further impairment as of September 30, 2006. In conjunction with the fair value determination, the Company has reassessed the useful lives and residual values of the fleet and related spare equipment and will depreciate the remaining carrying values through the estimated date that each aircraft will be retired or sold. The estimate of residual salvage value is highly judgmental and is primarily based on the estimated selling price of the aircraft. Actual proceeds upon sale of the aircraft may differ materially from the fair value estimate used for the impairment analysis and the offers received to date.

During the third quarter, the Company purchased five MD-80 aircraft from lessors and, in conjunction with the purchases, terminated the leases for those five aircraft. The total purchase price for the five aircraft was $80.9 million, including assumed debt of $11.6 million. Immediately upon purchase of the aircraft, the Company evaluated impairment and concluded that the carrying value was not recoverable. Therefore, the Company recorded a $58.4 million charge in the third quarter for the impairment, including the write-off of $1.8 million of leasehold improvements related to those aircraft. The charge was offset by the reduction of $7.5 million of deferred rent associated with the acquired aircraft. Similar to the

impairment analysis discussed above, the Company derived the estimated fair value of the five purchased aircraft using a letter of intent from a third-party to purchase the aircraft, third-party appraisals and other market data. The charge is recorded as fleet transition costs in the accompanying statement of operations.

The Company had signed a letter of intent with a prospective buyer for its 20 owned MD-80s, although the Company is uncertain as to whether this transaction will close. The Company is continuing to negotiate with other prospective buyers, but the timing of any sale of its MD-80s is uncertain at this time.

The Company leases six additional MD-80 aircraft. The current expiration dates on these leases range from January 2007 to October 2013. The Company expects to cease operation of four of these aircraft prior to the lease expiration date through lease buy-outs, lease agreement restructuring, subleasing of the aircraft, or storing the aircraft at a long-term storage facility. At such time as one of these actions is taken on the aircraft, the Company expects to have an associated charge that will be recorded in the statements of operations.

In the second quarter of 2004, the Company announced its intention to accelerate the retirement of Alaska’s B737-200 fleet and remove those aircraft from service. On July 7, 2006, the Company entered into a purchase and sale agreement to sell six B737-200 aircraft to a third party. The Company’s seventh (and remaining) B737-200 aircraft will be donated to an aviation museum in Alaska. The six aircraft will be sold and delivered at various intervals through April 2007. The total purchase price for the six aircraft exceeded their aggregate net book value as of September 30, 2006. One of the six aircraft was transferred to the buyer in the third quarter and there was an associated gain on the sale of approximately $0.4 million. The Company expects to record similar gains as the remaining aircraft are transferred.

Note 3. Restructuring Charges

In July 2006, Alaska reached new four-year agreements with the approximately 3,700 clerical, office and passenger service employees and the ramp service and stores agents, all represented by the International Association of Machinists. These agreements included a signing bonus, in aggregate, of $1.9 million paid in July 2006, which is included in wages and benefits in our statement of operations and an immediate 2% wage increase. Additionally, the agreements included a severance package offered to employees in the top four wage-scale steps that includes cash payments based on years of service, one year of medical coverage after the severance date, and continued travel privileges for a period of time. The total amount of the charge was $28.6 million and is recorded as restructuring charges in the statement of operations, which includes a $0.3 million pension curtailment loss resulting from the expected change in the number of participants in the pension plan. The charge was calculated based on the actual employees that had accepted the Company’s severance package as of September 30, 2006, with such acceptance resulting in an obligation for the Company. However, there is a period whereby the employee can unilaterally choose to withdraw their acceptance of the package. The Company does anticipate a number of employees will withdraw their acceptance, although the number and related accrual adjustment are not known at this time. Any such adjustment is expected to be recorded in the fourth quarter of 2006.

A new four-year contract with the Association of Flight Attendants for Alaska’s approximately 2,500 flight attendants was ratified on April 26, 2006. Under this agreement, the Company paid a signing bonus, in aggregate, of $2.7 million in May 2006, which is included in wages and benefits in the statement of operations. The new agreement also included an immediate 3% pay increase. Additionally, Alaska offered a voluntary severance package to a number of flight attendants that included, among other things, a lump-sum payment of $2,000 per year of service up to a maximum of 25 years and continuing travel privileges. During the quarter ended June 30, 2006, the Company recorded a restructuring charge of $3.8 million related to the severance amounts, the majority of which was paid in the third quarter.

~~During~~In June 2006, the ~~second~~FASB ~~quarter~~ratified ofthe ~~2005~~consensus reached on Emerging Issues Task Force (EITF) Issue No. 06-03, ~~Alaska~~How Sales ~~contracted~~Taxes ~~out~~Collected ~~ramp~~from ~~services~~Customers atand Remitted to Governmental Authorities Should Be Presented in the ~~Seattle-Tacoma~~Income ~~International~~Statement ~~Airport~~(that is, Gross Versus Net Presentation). ~~This event~~The ~~resulted~~EITF inreached a ~~reduction~~consensus that the presentation of ~~approximately~~taxes ~~475~~on ~~employees~~either ina ~~Seattle~~gross or net basis is an accounting policy decision that requires disclosure. ~~Severance~~EITF ~~and~~06-03 ~~related~~was ~~costs~~effective ~~associated~~for ~~with~~and ~~this~~adopted ~~restructuring~~by ~~were~~the ~~originally~~Company ~~estimated~~on atJanuary 1, ~~$16~~2007.1 ~~million~~Taxes collected from the Company’s passengers, which ~~was~~include ~~recorded~~sales intaxes, ~~the~~excise ~~second~~taxes, airport ~~quarter~~and ofsecurity ~~2005~~fees and other fees, are and have been recorded on a net basis.

~~The~~In ~~following~~September ~~table~~2006, ~~displays~~ the ~~activity~~FASB ~~and~~issued ~~balance~~Statement of Financial Accounting Standards No.157, Fair Value Measurements. This standard defines fair value, establishes a framework for measuring fair value in accounting principles generally accepted in the ~~severance~~United States of America, and ~~related~~expands ~~costs~~disclosure ~~components~~about offair value measurements. SFAS 157 is intended to eliminate the ~~Company’s~~diversity ~~restructuring~~in ~~accrual~~practice asassociated ofwith ~~and~~measuring fair value under existing accounting pronouncements. SFAS 157 is effective for ~~the~~fiscal ~~nine months~~years ~~ended~~beginning ~~September~~after November 3015, ~~2006~~2007, and ~~2005~~interim periods within those fiscal years. The ~~restructuring~~adoption ~~adjustment~~of inSFAS ~~2005~~157 ~~relates~~is not expected to ~~our~~have ~~change~~a inmaterial ~~estimated~~impact ~~costs~~on ofthe ~~medical~~Company’s ~~coverage~~financial ~~extended~~position, toresults ~~impacted~~of ~~employees~~operations ($or incash ~~millions):~~flows.

Accrual for Severance and Related Costs	2006			2005
Balance at December 31, 2005 and 2004, respectively	$	3.1		$	38.7
Restructuring charges		32.4			16.1
Restructuring adjustment		—			(3.4	)
Cash payments		(5.7	)		(44.3	)
Balance at September 30	$	29.8		$	7.1

In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (Statement 159), which allows entities the option to measure eligible financial instruments at fair value as of specified dates. Such election, which may be applied on an instrument-by-instrument basis, is typically irrevocable once elected. This interpretation is effective for fiscal years beginning after November 15, 2007, and an early adoption is allowed under certain circumstances. The Company does not expect this statement to have a significant impact on the Company’s financial position, results of operations or cash flows.

~~The~~Note ~~Company expects to make the majority of the remaining cash payments during the fourth quarter of 2006 and the first quarter of 2007~~2. ~~The~~Fleet ~~accrual~~Transition ~~for severance and related costs is included in accrued wages, vacation and payroll taxes in the balance sheets.~~

~~During~~ In March ~~2005~~2006, the Company’s ~~notified~~Board approved a plan to accelerate the ~~Port~~retirement of ~~Oakland~~the ofCompany’s ~~its~~MD-80 ~~decision~~fleet to(15 ~~terminate~~owned ~~the~~and ~~lease~~11 ~~for~~leased aircraft at the ~~Oakland~~time) ~~hangar~~and asremove ~~part~~those aircraft from service by the end of ~~its~~2008, ~~ongoing~~which ~~restructuring~~is ~~efforts~~earlier than the original retirement schedule. ~~Accordingly~~As a result of this decision, the Company ~~recorded~~evaluated an impairment ~~charge~~as ofrequired $7by SFAS No.7144 ~~million~~and inconcluded that the ~~first quarter~~carrying value of ~~2005 for~~ the ~~leasehold~~owned ~~improvements~~MD-80 ~~that~~fleet ~~were~~was ~~abandoned~~no aslonger arecoverable ~~result~~when ofcompared to the ~~lease~~estimated ~~termination~~remaining future cash flows. ~~Additionally~~Accordingly, during the first quarter of 2006, the Company recorded aan impairment charge oftotaling $0131.31 million ~~for~~(pretax) ~~certain~~to ~~costs~~write ~~associated~~down ~~with~~ the ~~lease~~fleet ~~termination,~~to ~~which~~its ~~have~~estimated ~~been~~fair ~~paid~~market value.

~~Note~~In 4.the ~~Fuel~~third ~~Hedge~~quarter ~~Contracts~~of 2006, the Company also purchased five MD-80 aircraft from lessors and, in conjunction with the purchases, terminated the leases for those five aircraft.

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, collar structures, and swap agreements for crude oil, among other initiatives.

The Company records derivative instruments, all of which are currently fuel hedge contracts, on the balance sheet at their fair value. Because of historical variations in the spread between the prices of West Texas Intermediate crude oil (the commodity the Company uses to hedge) and jet fuel, the Company’s hedge contracts are not “highly correlated” to changes in prices of aircraft fuel, as defined in SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” As a result, changes in the fair value of these fuel hedge contracts are recorded each period in aircraft fuel expense.

~~Beginning~~During ~~January~~the three months ended June 130, ~~2006~~2007, the Company ~~records~~sold 19 ~~all~~ of its ~~fuel~~20 ~~hedging~~owned ~~gains~~MD-80s, and ~~losses~~has ina ~~aircraft~~forward ~~fuel, including~~sales ~~hedging~~agreement ~~gains and losses. Prior~~ to ~~January 1,~~sell ~~2006,~~ the ~~majority~~20th ofat ~~these~~a ~~fuel~~future ~~hedging gains and losses were recorded in other nonoperating income (expense)~~date. The ~~prior~~majority ~~period~~of ~~presentation~~these ~~has~~aircraft ~~been~~are ~~conformed~~being toleased ~~the~~from ~~current~~the ~~year~~buyer ~~format.~~under ~~The~~short-term ~~following~~lease ~~table~~arrangements ~~summarizes~~that ~~GAAP~~will ~~and~~allow ~~economic~~the ~~aircraft~~Company ~~fuel~~to ~~expense~~maintain ~~for~~ the ~~three~~current ~~and~~MD-80 ~~nine~~retirement ~~months~~schedule ~~ended~~through ~~September~~December ~~30,~~2008. ~~2006 and 2005 (in millions):~~

	Three Months EndedSep. 30						Nine Months Ended Sep. 30
	2006			2005			2006			2005
Raw or “into-plane” fuel cost	$	218.9		$	179.5		$	585.5		$	465.2
Less: gains on settled hedges		(23.6	)		(37.8	)		(79.0	)		(81.4	)
Economic fuel expense	$	195.3		$	141.7		$	506.5		$	383.8
Mark-to-market (gains) or losses related to hedges that settle in future periods, net of the reclassification of previously recorded mark-to-market gains on settled hedges		56.2			(19.9	)		60.7			(100.2	)
Aircraft fuel expense, as reported	$	251.5		$	121.8		$	567.2		$	283.6

The Company currently has four MD-80 aircraft under long-term lease arrangements that it plans to cease operating before the end of the lease term. Management anticipates that once these aircraft have been removed from operation, the Company will dispose of these aircraft through lease buy-out, a sublease arrangement, or store them at a long-term storage facility. It is likely that the Company will record an operating charge in its statement of operations if this occurs.

~~The~~Note ~~following~~3. ~~table~~Related ~~compares~~Company ~~amounts~~Transactions ~~as originally reported in 2005 to the current-year format for the three and nine months ended September 30, 2005 (in millions):~~

	Three Months EndedSep. 30, 2005			Nine Months EndedSep. 30, 2005
Aircraft fuel expense as originally reported	$	176.6		$	455.7
Reclassification of fuel hedging gains		(54.8	)		(172.1	)
Aircraft fuel expense	$	121.8		$	283.6
Operating income as originally reported	$	80.4		$	11.4
Reclassification of fuel hedging gains		54.8			172.1
Operating income	$	135.2		$	183.5
Nonoperating income (expense) as originally reported	$	52.6		$	159.1
Reclassification of fuel hedging gains		(54.8	)		(172.1	)
Nonoperating income (expense)	$	(2.2	)	$	(13.0	)

Capacity Purchase Agreement

The Company has entered into a Capacity Purchase Agreement (CPA) with its sister company, Horizon Air Industries, Inc. (Horizon) effective January 1, 2007, whereby the Company purchases capacity in certain routes (“incentive markets”) from Horizon as specified by the agreement. Under the CPA, the Company pays Horizon a contractual amount for the purchased capacity in the incentive markets, regardless of the revenue collected on those flights. The amount paid to Horizon is generally based on Horizon’s operating costs, plus a margin. The Company establishes the scheduling, routes and pricing for the flights, and has the inventory and revenue risk in those markets.

Under the prior revenue-sharing agreement, the Company made a payment to Horizon equal to Horizon’s loss in those markets, if any, and a quarterly bonus that was based on Alaska’s overall operating margin.

The Company paid $68.9 million and $0.3 million to Horizon under the CPA agreement for the quarters ended June 30, 2007 and 2006, respectively, and $131.2 million and $1.4 million during the six months ended June 30, 2007 and 2006, respectively.

The Company also advances Horizon funds at varying interest rates. All amounts are payable on demand. Interest income recognized related to the Horizon receivable totaled $3.1 million and $1.1 million for the quarters ended June 30, 2007 and 2006, respectively, and $4.9 million and $2.0 million for the six months ended June 30, 2007 and 2006, respectively. At June 30, 2007, receivables from related companies include $258.6 million from Horizon, $8.2 million from Alaska Air Group Leasing (AAGL) and $12.1 million from Air Group. At June 30, 2007, payables to related companies include $1.4 million to Horizon, $0.6 million to AAGL and $79.1 million to Air Group.

~~Outstanding~~Intercompany ~~fuel~~Services ~~hedge positions as of September 30, 2006 are as follows:~~

	Approximate % ofExpected FuelRequirements		Gallons Hedged (in millions)	Average Crude OilPrice per Barrel
Fourth Quarter 2006	35	%	31.3	$	46.10
First Quarter 2007	35	%	31.5	$	56.63
Second Quarter 2007	29	%	27.8	$	55.32
Third Quarter 2007	32	%	32.5	$	54.08
Fourth Quarter 2007	22	%	20.0	$	55.22
First Quarter 2008	18	%	16.5	$	59.77
Second Quarter 2008	12	%	12.2	$	62.56
Third Quarter 2008	11	%	11.6	$	62.16
Fourth Quarter 2008	10	%	9.5	$	61.77

The Company also provides certain services to Horizon for which the Company receives payment from Horizon based on the cost of the services, including personnel expenses related to development and maintenance of certain information and communication systems, processing Horizon’s revenue transactions, accounting and payroll services, and other administrative services. The Company also pays certain leasing and other facilities costs on Horizon’s behalf that are reimbursed monthly by Horizon. The total amount received by the Company from Horizon was $2.7 million for the quarters June 30, 2007 and 2006 and $5.4 million for the six months ended June 30, 2007 and 2006.

~~The~~In ~~fair~~the ~~values~~normal course of business, Alaska and Horizon each provide certain ground handling services to the other company. Charges for ground services provided by the Company’s ~~fuel~~to ~~hedge~~Horizon ~~positions~~totaled at$1.6 ~~September~~million and $1.5 million during the quarters ended June 30, 2007 and 2006, respectively, and ~~December~~$3.2 million and $2.9 million during the six months ended June 3130, ~~2005~~2007 and 2006, respectively. Charges for ground ~~were~~services provided by Horizon to the Company totaled $~~70.~~2.5 million and $~~133~~2.43 million for the quarters ended June 30, 2007 and 2006, respectively, and ~~are~~$5.0 ~~presented~~million asand ~~fuel~~$4.7 ~~hedge~~million ~~contracts~~for in the ~~balance~~six ~~sheets.~~months ended June 30, 2007 and 2006, respectively.

Note 54. ~~Change~~Restructuring inCharges ~~Accounting Principle~~

~~Effective~~In ~~January 1,~~July ~~2005~~2006, the Company ~~changed~~reached ~~its~~new ~~method~~four-year ofagreements ~~accounting~~with ~~for~~the ~~major~~approximately ~~airframe~~3,700 ~~and~~clerical, ~~engine~~office ~~overhauls~~and ~~from~~passenger ~~the~~service ~~capitalize~~ employees and ~~amortize~~the ~~method~~ramp toservice ~~the~~and ~~direct~~stores ~~expense~~agents, ~~method.~~all ~~Under~~represented by the ~~former~~International ~~method,~~Association ~~these~~of ~~costs~~Machinists. ~~were~~Among ~~capitalized~~other ~~and~~items, ~~amortized~~the agreements toincluded ~~maintenance~~a ~~expense~~voluntary ~~over~~severance ~~the~~package ~~shorter~~offered ofto ~~the~~employees ~~life~~in of the ~~overhaul~~top orfour ~~the~~wage-scale ~~remaining~~steps ~~lease~~that ~~term.~~included ~~Under~~cash ~~the~~payments ~~direct expense~~based ~~method,~~on ~~overhaul~~years ~~costs~~of ~~are~~service, ~~expensed~~one asyear ~~incurred.~~of ~~Accordingly,~~medical incoverage after the ~~first~~severance ~~quarter~~date, ofand ~~2005,~~continued ~~the~~travel ~~Company~~privileges ~~wrote~~for a ~~off~~period ~~the~~of ~~net~~time. ~~book~~The ~~value~~total amount of ~~its~~the ~~previously~~charge ~~capitalized~~was ~~airframe~~$28.6 million and ~~engine~~was ~~overhauls~~recorded ~~for~~as ~~all~~restructuring ~~aircraft~~charges in athe ~~charge~~statement ~~totaling~~of ~~$128.2 million~~operations ~~pre-tax~~during ~~($80.1~~the ~~million~~third ~~after~~quarter ~~tax)~~of 2006.

~~Note~~The 6.accrual ~~Related~~for ~~Company~~severance ~~Transactions~~and related costs is included in accrued wages, vacation, and payroll taxes in the condensed balance sheets.

The ~~Company~~following ~~periodically~~table ~~loans~~displays ~~its~~the ~~sister~~activity ~~company,~~and ~~Horizon~~balance ~~Air~~of ~~Industries,~~the ~~Inc.~~severance ~~(Horizon)~~and ~~funds~~related atcosts ~~varying~~components ~~interest~~of ~~rates. All amounts are payable on demand. Interest income recognized related to~~ the ~~Horizon~~Company’s ~~loans totaled~~restructuring ~~$0.6~~accrual ~~million~~as of and ~~$0.6 million~~ for the ~~three~~six months ended ~~September~~June 30, ~~2006~~2007 and ~~2005, respectively, and $2~~2006.6 Substantially ~~million~~all ~~and~~of ~~$2.1 million for~~ the ~~nine~~accrual ~~months~~at ~~ended September~~December 3031, 2006 and ~~2005, respectively. At September~~June 30, ~~2006, receivables~~2007 ~~from~~relates ~~related companies include $42.3 million from Horizon, $8.6 million from Alaska Air Group Leasing (AAGL) and $12.2 million from Air Group. At September 30, 2006, payables~~ to ~~related~~the ~~companies~~severance ~~include~~package ~~$1.4~~described ~~million to Horizon, $0~~above.5 ~~million to AAGL and $33.6 million to Air Group.~~

The Company has an agreement with Horizon to provide revenue sharing on certain markets. Under the arrangement, the Company makes a monthly payment to Horizon for markets that provide connecting traffic to the Company but create losses for Horizon (the incentive markets). Alternatively, if the incentive markets are profitable for Horizon over a specified margin, Horizon will make a payment to the Company. The payment is based on fully allocated cost for Horizon to provide the transportation service, plus a specified margin if the Company has an operating profit for the quarter. Incentive markets are analyzed quarterly and the monthly reimbursement amount is adjusted to reflect the prior quarter’s actual performance. The Company made incentive payments to Horizon of $0.7 million during the three months ended September 30, 2006 and received payments from Horizon of $2.2 million during the three months ended September 30, 2005. The Company made incentive payments to Horizon of $2.2 million and $0.5 million during the nine months ended September 30, 2006 and 2005, respectively.


Accrual for Severance and Related Costs ($ in millions)	2007			2006
Balance at December 31, 2006 and 2005, respectively	$	19.9		$	3.1
Cash payments		(18.0	)		0.7

Balance at June 30	$	1.9		$	3.8

The Company expects to make the remaining cash payments within the next 12 months.

~~The~~Note ~~Company files a consolidated tax return with Air Group and other Air Group subsidiaries~~5. AsFuel aHedge ~~result,~~Contracts the Company has current and non-current payables to Air Group for accrued income taxes. At September 30, 2006, the amount to Air Group for income taxes was $23.2 million and is recorded as other accrued liabilities in the balance sheet. Additionally, as of September 30, 2006, the long-term accrued income taxes payable to Air Group amount was $1.4 million and is recorded as other liabilities in the balance sheet.

The Company’s ~~also~~operations ~~provides~~are ~~certain~~inherently ~~services~~dependent toupon ~~Horizon for which~~ the ~~Company~~price ~~receives payment from Horizon based on the cost of the services, including personnel expenses related to development~~ and ~~maintenance~~availability of ~~certain~~aircraft ~~information and communication systems, processing Horizon’s revenue transactions, accounting and payroll services, and other administrative services~~fuel. ~~The~~To ~~Company~~manage ~~also~~economic ~~pays~~risks ~~certain~~associated ~~leasing~~with ~~and~~fluctuations ~~other~~in ~~facilities~~aircraft ~~costs~~fuel onprices, ~~Horizon’s behalf that are reimbursed monthly by Horizon. Total amounts received by~~ the Company ~~from~~periodically ~~Horizon~~enters ~~were~~into ~~$2.8~~call ~~million and $2.9 million for the three months ended September 30~~options, collar ~~2006 and 2005~~structures, ~~respectively,~~ and ~~$8.2~~swap ~~million~~agreements ~~and $8.3 million~~ for ~~the~~crude ~~nine months ended September 30~~oil, ~~2006~~among ~~and~~other ~~2005, respectively~~initiatives.

InThe ~~the normal course of business, Alaska and Horizon provide certain ground handling services to the other company. Charges for ground services provided by the~~ Company torecords ~~Horizon~~fuel ~~totaled~~hedge ~~$1.6~~contracts ~~million~~on ~~and $0.7 million during~~ the ~~three~~condensed ~~months~~balance ~~ended~~sheet ~~June 30, 2006 and 2005, respectively, and $4.5 and $1.9 for the nine months ended September 30,~~at ~~2006~~their ~~and~~fair ~~2005, respectively~~value. ~~Charges~~Changes ~~for~~in ~~ground services provided by Horizon to~~ the ~~Company~~fair ~~totaled~~value ~~$2.8~~of ~~million~~these ~~and~~fuel ~~$1.6~~hedge ~~million~~contracts ~~for~~are ~~the~~recorded ~~three~~each ~~months~~period ~~ended~~in ~~September 30,~~aircraft ~~2006~~fuel ~~and 2005, respectively, and $7~~expense.5 ~~million and $4.3 million for the nine months ended September 30, 2006 and 2005, respectively.~~

~~Note~~The 7.following ~~Other~~table summarizes ~~Assets~~the components of aircraft fuel expense for the three and six months ended June 30, 2007 and 2006 (in millions):

Other assets consisted of the following (in millions):


	Three Months Ended June 30						Six Months Ended June 30
	2007			2006			2007			2006
Raw or “into-plane” fuel cost	$	196.9		$	200.0		$	362.8		$	366.6
Changes in value and settlement of fuel hedge contracts		(3.5	)		(26.3	)		(11.8	)		(50.9	)

Aircraft fuel expense	$	193.4		$	173.7		$	351.0		$	315.7

	September 30,2006		December 31,2005
Restricted deposits (primarily restricted investments)	$	69.0	$	83.7
Deferred costs and other		13.0		11.6
	$	82.0	$	95.3

The Company realized gains of $5.0 million and $29.6 million during the three months ended June 30, 2007 and 2006, respectively, on fuel hedge contracts that settled during the period. Gains on the settled hedges were $6.5 million and $55.4 million during the six months ended June 30, 2007 and 2006, respectively.

~~Note~~Outstanding 8.fuel ~~Mileage~~hedge ~~Plan~~positions as of June 30, 2007 are as follows:

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


Quarter	Approximate % of Expected Fuel Requirements	Gallons Hedged (in millions)	Approximate Crude Oil Price per Barrel
Third Quarter 2007	50%	45.8	$57.12
Fourth Quarter 2007	50%	44.1	$62.21
First Quarter 2008	36%	30.7	$61.92
Second Quarter 2008	29%	26.2	$63.53
Third Quarter 2008	21%	20.3	$63.94
Fourth Quarter 2008	23%	19.8	$64.20
First Quarter 2009	5%	4.7	$67.68
Second Quarter 2009	5%	4.9	$67.50
Third Quarter 2009	6%	4.5	$68.25

	September 30,2006		December 31,2005
Current Liabilities:
Other accrued liabilities	$	186.7	$	165.0
Other Liabilities and Credits (non-current):
Deferred revenue		309.1		280.9
Other liabilities		21.0		20.9
Total Mileage Plan deferrals and liabilities	$	516.8	$	466.8

~~Alaska~~As of June 30, 2007 and December 31, 2006, the fair values of the Company’s ~~Mileage~~fuel ~~Plan~~hedge ~~revenue~~positions iswere $61.7 ~~included~~million ~~under~~and ~~the~~$59.1 ~~following~~million, ~~statement~~respectively, including capitalized premiums of ~~operations~~$31.2 ~~captions~~million ~~for~~and ~~the~~$33.8 ~~three~~million, respectively, and ~~nine~~ ~~months~~are ~~ended~~presented ~~September~~as 30both (current and non-current assets in ~~millions):~~the condensed balance sheets, depending on settlement dates.

	Three Months EndedSeptember 30				Nine Months EndedSeptember 30
	2006		2005		2006		2005
Passenger revenues	$	24.0	$	20.8	$	75.3	$	60.7
Other-net revenues		23.6		29.5		69.8		70.6
Total Mileage Plan revenues	$	47.6	$	50.3	$	145.1	$	131.3

Note 6. Other Assets

~~Note~~Other 9.assets ~~Long-term~~consisted ~~Debt~~of the following (in millions):

At September 30, 2006 and December 31, 2005, long-term debt obligations were as follows (in millions):


	June 30, 2007		December 31, 2006
Restricted deposits (primarily restricted investments)	$	61.4	$70.5
Deferred costs and other assets		15.6	13.1

	$	77.0	$83.6

	September 30,2006			December 31,2005
Fixed-rate notes payable due through 2020	$	678.0		$	546.7
Variable-rate notes payable due through 2021		253.6			251.5
Pre-delivery payment facility expiring in 2009		142.3			73.8
Long-term debt		1,073.9			872.0
Less current portion		(198.7	)		(109.4	)
	$	875.2		$	762.6

Note 7. Mileage Plan

~~During~~The ~~the first nine months of 2006, the~~ Company’s ~~borrowed~~Mileage ~~$159.5~~Plan ~~million~~deferred ~~using~~revenue ~~fixed-rate~~ and ~~variable-rate~~related ~~debt secured~~liabilities byare ~~flight~~included ~~equipment~~under ~~and increased its borrowings on its pre-delivery payment facility by $68.5 million. Additionally,~~ the ~~Company~~following ~~assumed~~balance ~~$11.6~~sheet ~~million~~captions ~~of debt related to the purchase of one of its leased MD-80 aircraft~~ (in ~~the third quarter (See Note 2~~millions).:

During the first nine months of 2006, the Company exercised its option under certain existing variable-rate, long-term debt arrangements to fix the interest rates through maturity. The fixed rates on these affected debt arrangements range from 6.2% to 6.8%. These changes did not result in any gain or loss in the condensed statements of operations.


	June 30, 2007		December 31, 2006
Current Liabilities:
Other accrued liabilities	$	217.6	$196.6
Other Liabilities and Credits (non-current):
Deferred revenue		347.4	328.3
Other liabilities		20.6	20.7

	$	585.6	$545.6

~~Note~~The ~~10.~~Company’s ~~Employee~~Mileage ~~Benefit~~Plan ~~Plans~~revenue is included under the following statement of operations captions for the three and six months ended June 30, 2007 and 2006 (in millions):

Pension Plans-Qualified Defined Benefit


	Three Months Ended June 30				Six Months Ended June 30
	2007		2006		2007		2006
Passenger revenues	$	32.3	$	25.6	$	60.6	$	51.3
Other-net revenues		25.6		25.9		53.5		46.4

	$	57.9	$	51.5	$	114.1	$	97.7

~~Net~~Note ~~pension~~8. ~~expense~~Long-term ~~for~~Debt ~~the three and nine months ended September 30 included the following components (in millions):~~

	Three Months EndedSeptember 30						Nine Months EndedSeptember 30
	2006			2005			2006			2005
Service cost	$	14.1		$	13.3		$	38.7		$	38.8
Interest cost		15.3			12.9			40.7			38.7
Expected return on assets		(14.9	)		(12.5	)		(39.9	)		(37.5	)
Curtailment loss*		0.3			—			0.3			—
Amortization of prior service cost		1.2			1.2			3.6			3.6
Actuarial loss		5.8			3.6			13.6			10.8
Net pension expense	$	21.8		$	18.5		$	57.0		$	54.4

At June 30, 2007 and December 31, 2006, long-term debt obligations were as follows (in millions):

* In connection with the reduction in employees as discussed in Note 3, the Company recorded curtailment charges. These charges are included in restructuring charges in the condensed financial statements.


	June 30, 2007			December 31, 2006
Fixed-rate notes payable due through 2022	$	768.8		$	664.5
Variable-rate notes payable due through 2022		427.8			374.0
Pre-delivery payment facility expiring in 2009		17.0			39.2

Long-term debt		1,213.6			1,077.7
Less current portion		(102.3	)		(114.2	)

	$	1,111.3		$	963.5

~~The~~During ~~Company made no contributions during~~ the ~~three-month~~first ~~period~~six ~~ended~~months ~~September 30~~of 2007, ~~2006~~the ~~and~~Company borrowed $71196.91 million ~~in contributions~~using ~~during~~fixed-rate ~~the~~and ~~nine~~variable-rate ~~months~~debt ~~ended~~secured by ~~September 30,~~flight ~~2006.~~equipment ~~The~~and ~~Company~~ made payments of $3060.72 million, ~~and~~including $6922.32 million inon ~~contributions~~its ~~during~~pre-delivery ~~the~~payment ~~three and nine months ended September 30, 2005, respectively~~facility.

Note 9. Employee Benefit Plans

Pension Plans-Qualified Defined Benefit

Net pension expense for the three and six months ended June 30, 2007 and 2006 included the following components (in millions):


	Three Months Ended June 30						Six Months Ended June 30
	2007			2006			2007			2006
Service cost	$	13.3		$	12.3		$	26.6		$	24.6
Interest cost		15.0			12.7			30.0			25.4
Expected return on assets		(16.3	)		(12.5	)		(32.6	)		(25.0	)
Amortization of prior service cost		1.0			1.2			2.0			2.4
Actuarial loss		3.0			3.9			6.0			7.8

Net pension expense	$	16.0		$	17.6		$	32.0		$	35.2

The Company contributed $17.5 million and $35.0 million to its qualified defined-benefit plans during the three and six months ended June 30, 2007. We continue to evaluate the amount of additional funding for the remainder of 2007. The Company made $55.1 million and $71.9 million in contributions to its defined benefit-pension plans during the three and six months ended June 30, 2006, respectively.

Pension Plans-Nonqualified Defined Benefit

Net pension expense for the unfunded, noncontributory defined benefit plans ~~for~~was ~~certain~~$0.9 ~~elected~~million ~~officers~~and of$1.8 ~~the~~million ~~Company~~ for the three and ~~nine~~six months ended ~~September~~June 30, ~~included~~2007, respectively, compared to $1.0 million and $2.0 million for the ~~following~~three ~~components~~and ~~(in~~six ~~millions):~~months ended June 30, 2006.

	Three Months EndedSeptember 30,				Nine Months EndedSeptember 30,
	2006		2005		2006		2005
Service cost	$	0.4	$	0.6	$	1.2	$	1.2
Interest cost		0.5		0.4		1.5		1.2
Actuarial loss		0.1		0.1		0.3		0.3
Net pension expense	$	1.0	$	1.1	$	3.0	$	2.7

Post-retirement Medical Benefits

~~Postretirement~~Net ~~Medical~~periodic ~~Benefits~~benefit cost for the post-retirement medical plans for the three and six months ended June 30 included the following components (in millions):

Net periodic benefit cost for the postretirement medical plans for the three and nine months ended September 30 included the following components (in millions):


	Three Months Ended June 30					Six Months Ended June 30
	2007			2006		2007			2006
Service cost	$	1.2		$	1.4	$	2.4		$	2.7
Interest cost		1.4			1.1		2.8			2.1
Amortization of prior service cost (credit)		(0.1	)		3.5		(0.2	)		3.3
Actuarial loss		0.4			0.4		0.8			0.8

Net periodic benefit cost	$	2.9		$	6.4	$	5.8		$	8.9

	Three Months EndedSeptember 30,					Nine Months EndedSeptember 30,
	2006		2005			2006		2005
Service cost	$	1.3	$	1.1		$	4.0	$	3.1
Interest cost		1.1		1.1			3.2		3.3
Amortization of prior service cost		—		(0.1	)		3.3		(0.3	)
Actuarial loss		0.4		0.5			1.2		1.5
Net periodic benefit cost	$	2.8	$	2.6		$	11.7	$	7.6

Note 11. Stock Plans

The Company adopted Statement of Financial Accounting Standards (SFAS) 123R, “Share-Based Payment: An Amendment of SFAS Nos. 123 and 95,” as of January 1, 2006. This new standard requires companies to recognize as expense the fair value of stock options and other equity-based compensation issued to employees as of the grant date. The standard applies to both stock options and restricted stock units that Air Group grants to employees of the Company and Air Group’s Employee Stock Purchase Plan (ESPP), which features a look-back provision and allows employees to purchase stock at a 15% discount. The Company is using the “modified prospective method,” which is explained below.

The adoption of SFAS 123R changes the accounting for stock options under Air Group’s long-term incentive equity plans and changes the accounting for the ESPP. Accounting for the restricted stock awards did not change with the adoption of the standard. All stock-based compensation expense is recorded in wages and benefits in the condensed statements of operations.

Note 10. Stock-Based Compensation Plans

Stock-based compensation recorded by the Company relates to stock awards granted to Company employees by Air Group. As the Company does not have common stock that is traded on an exchange and all equity-based awards are related to Air Group common stock, the disclosures below have been limited.

The Company accounts for stock-based awards using Statement of Financial Accounting Standards (SFAS) No. 123R, Share-Based Payment: An Amendment of SFAS Nos. 123 and 95. The Company adopted this standard January 1, 2006 using the modified prospective method. All stock-based compensation expense is recorded in wages and benefits in the condensed statements of operations.

Stock Options

~~SFAS 123R~~Air isGroup ~~effective~~has ~~for all~~ stock ~~options~~option ~~granted~~awards ~~beginning~~outstanding ~~January 1,~~under ~~2006.~~a ~~For~~number ~~stock~~of ~~options~~long-term ~~granted~~incentive ~~prior~~equity ~~to January 1~~plans, ~~2006,~~one ~~for~~of which ~~the~~continues ~~vesting~~to ~~period~~provide isfor ~~not complete,~~ the ~~“modified~~grant ~~prospective~~of ~~method”~~stock ~~for~~options ~~transition~~to ~~permitted~~purchase byAir ~~SFAS~~Group’s ~~123R~~common ~~was~~stock ~~used.~~at ~~Under~~market ~~this~~prices ~~method, the Company accounts for the unvested portion of these awards~~ on ~~a prospective basis, with expense recognized in~~ the ~~condensed~~date ~~statements~~ of ~~operations beginning January 1, 2006 using the~~ grant~~-date~~ ~~fair values previously calculated for pro forma disclosures. The Company selected this method due~~ to ~~the~~directors, ~~relatively~~officers ~~limited~~and ~~use~~employees of ~~stock-based awards and~~ the ~~immaterial impact on the comparability between periods~~Company.

~~The~~During ~~Company has stock option awards outstanding under a number of Air Group’s long-term incentive equity plans, one of which continues to provide for~~ the ~~grant~~six ofmonths ~~stock~~ended ~~options~~June 30, ~~to purchase Air Group’s common stock at market prices on the date of grant to directors~~2007, ~~officers and employees of the Company and its sister company. Under all plans~~160,087 ~~the stock~~ options ~~granted~~were ~~have terms of up to ten years. The options are typically~~ granted with ~~graded~~a ~~vesting provisions, and compensation cost is amortized over the service period using the straight~~weighted-~~line~~average ~~method. The~~ fair value of ~~each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model, which requires the Company to make several assumptions~~$19. ~~The risk-free interest rate is based on the U~~49.S. ~~Treasury~~During ~~yield curve in effect for~~ the ~~term~~same ~~nearest~~period ~~the expected term of the option at the time of grant. The dividend yield is zero as Air Group does not pay dividends and has no plans to do so~~ in the ~~immediate~~prior ~~future.~~year, ~~The~~7,675 ~~market~~options ~~price~~were ~~volatility~~granted ofwith ~~the common stock is based on~~ a ~~combination~~weighted-average offair ~~the~~value ~~historical volatility over a time period equal to the expected term~~ of ~~the option and management’s judgment of future volatility~~$14. ~~The expected life of the options and the expected forfeiture rates are based on our historical experience for various homogenous employee groups~~17.

~~During~~The ~~the three months ended September 30, 2006, Air Group granted 190,305 options to the~~ Company’s ~~employees~~recorded ~~with a weighted~~stock-~~average~~based ~~exercise~~compensation ~~price~~expense ofrelated ~~$37.99 per~~to ~~share~~stock ~~and~~options ~~a weighted-average fair value~~ of $~~18.51~~ ~~per share~~1.6 million ~~The fair value was derived using risk-free interest rates ranging from 4.7% to 5.2%, expected volatility ranging between 41.5% to 44.7%,~~ and ~~expected lives between 4~~$1.753 ~~years~~million ~~and~~for ~~6 years. During~~ the ~~nine~~six months ended ~~September~~June 30, 2007 and 2006, ~~Air Group granted 197,980 options to the Company’s employees~~ with acorresponding ~~weighted-average~~tax ~~exercise~~benefits ~~price~~ of $370.686 ~~per~~million ~~share~~ and a$0.5 ~~weighted-average~~million, ~~fair~~respectively. ~~value~~As of ~~$18.35~~June 30, ~~per~~2007, ~~share~~$7.4 ~~The~~million ~~fair value~~of ~~was~~compensation ~~derived~~cost ~~using~~associated ~~risk-free~~with ~~interest~~unvested ~~rates~~stock ~~ranging~~option ~~from~~awards ~~4.5%~~attributable to ~~5.2%,~~future ~~expected~~service ~~volatility~~had ~~ranging~~not ~~between~~yet 41been recognized.5% toThis ~~44.7%,~~amount ~~and~~will ~~expected~~be ~~lives~~recognized ~~between~~as ~~4.75~~expense ~~years~~over ~~and~~a weighted-average period of 1.6 years.

The total intrinsic value of options exercised during the three and nine months ended September 30, 2006 was $1.2 million and $7.2 million, respectively.

Restricted Stock Awards

During the ~~nine~~six months ended ~~September~~ June 30, ~~2006 and 2005~~2007, Air Group awarded ~~100~~53,~~275~~585 ~~and 174,175~~ restricted stock units (RSUs), ~~respectively,~~ to certain ~~employees~~Alaska ~~of the Company~~employees, with grant date fair values of $32.7 3 million ~~and $5~~.7 ~~million,~~This ~~respectively.~~amount ~~These~~reflects ~~amounts reflect~~ the value of the total RSU awards at the grant date based on the closing price of ~~the~~Air ~~Company~~Group’s common stock. Compensation cost for RSUs is recognized over three years from the date of grant as the awards “cliff vest” after three years. AsThe ofCompany ~~September 30,~~recorded ~~2006,~~stock-based ~~371,010~~compensation ~~RSUs~~expense ~~awarded~~related to ~~the~~RSUs ~~Company’s~~of ~~employees~~$2.3 ~~were~~million ~~outstanding,~~and ~~with~~$1.4 anmillion ~~aggregate~~during ~~intrinsic~~the ~~value~~six ofmonths ~~$14.1~~ended ~~million~~June 30, 2007 and 2006, respectively.

~~Impact~~As of ~~Adoption~~June 30, 2007, $7.0 million of ~~SFAS~~compensation ~~123R~~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 12 months.

Performance Stock~~-based~~ Awards ~~compensation expense recognized under SFAS 123R for the three and nine months ended September 30, 2006 is as follows:~~

	Three Months EndedSeptember 30, 2006
	Pre-tax Effect		After-tax Effect
	(in millions)		(in millions)
Stock Options	$	0.8	$	0.4
ESPP		0.2		0.1
Restricted Stock Units		0.7		0.5
Total	$	1.7	$	1.0
	Nine Months Ended September 30, 2006
	Pre-tax Effect		After-tax Effect
	(in millions)		(in millions)
Stock Options	$	2.1	$	1.3
ESPP		0.7		0.4
Restricted Stock Units		2.1		1.3
Total	$	4.9	$	3.0

During the first quarter of 2007, Air Group awarded Performance Share Unit awards (PSUs) to certain executives. PSUs are similar to RSUs, but vesting is based on a performance condition tied to the Air Group achieving a specified pretax margin over a three-year period. The PSU plan allows a portion of the PSUs to vest even if the specified pretax margin falls below the target, and additional shares to be granted if the margin target is exceeded, subject to a maximum. The Company intends to regularly review its assumptions about meeting the performance goal and expected vesting, and to adjust the related compensation expense accordingly. The Company recorded compensation expense related to PSUs of $0.2 million for the six months ended June 30, 2007.

AsEmployee ~~of September 30, 2006, $6.7 million and $8.1 million of compensation cost associated with unvested stock~~Stock ~~options~~Purchase ~~and~~Plan restricted stock awards, respectively, attributable to future service had not yet been recognized. These amounts will be recognized as expense over a weighted-average period of 1.6 years and 1.2 years for stock options and restricted stock awards, respectively.

~~Had~~Compensation ~~compensation~~expense ~~cost~~recognized ~~for~~under ~~stock~~the ~~options~~Employee ~~and~~Stock ~~employee~~Purchase ~~stock~~Plan ~~purchase~~was ~~plan~~$0.3 ~~been~~million ~~determined~~and ~~in accordance with SFAS No~~$0. ~~123, “Accounting~~5 ~~for~~million ~~Stock-Based Compensation,” net income~~ for the ~~three~~six ~~and nine~~ months ended ~~September~~ June 30, ~~2005~~2007 ~~would have been negatively impacted by $0.7 million~~ and ~~$2.3 million~~2006, respectively.

Note 1211. ~~Contribution~~Income ~~from~~Taxes ~~Parent~~

OnThe ~~December~~Company ~~16,~~files ~~2005,~~a ~~Air~~consolidated ~~Group sold~~tax ~~5.7 million~~return ~~shares~~with ofAir ~~its~~Group ~~common stock at $35~~subsidiaries.15 ~~per~~Each ~~share~~member ~~for aggregate proceeds~~ of ~~$200.4~~the ~~million.~~consolidated ~~The~~group ~~net~~calculates ~~proceeds~~the ~~were~~tax ~~transferred~~provision ~~to Alaska~~ and ~~recorded as payables to~~ related ~~companies in the~~ balance sheet. Inamounts ~~the~~on ~~second~~a ~~quarter~~separate ~~of 2006,~~entity ~~Air Group contributed the equity to its subsidiaries, of which Alaska was credited $160~~basis.~~2 million.~~ ~~This transaction relieved an equal amount of Alaska’s payable to Air Group and reduced Alaska’s receivable from Horizon by $40.2 million.~~

~~Note~~In 13July 2006, FASB issued FASB Interpretation No 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109 ~~Contingencies~~(FIN 48). The purpose of FIN 48 is to clarify certain aspects of the recognition and measurement related to accounting for income tax uncertainties. Under FIN 48, the impact of an uncertain income tax position must be recognized at the largest amount that is more likely than not of being sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained.

InThe ~~April 2006,~~Company was subject to the provisions ~~federal~~of ~~district~~FIN ~~court~~48 as inof January ~~Seattle~~1, ~~granted~~2007. ~~voluntary~~Upon ~~dismissal~~adoption, no cumulative effect of ~~the~~accounting ~~Company’s~~change ~~lawsuit~~was ~~against~~necessary or recorded in the ~~International~~condensed ~~Association~~financial ofstatements. ~~Machinists~~The ~~(IAM)~~total ~~seeking~~amount toof ~~compel~~unrecognized ~~arbitration~~tax ofbenefits ~~dispute~~as ~~regarding~~of the ~~permissibility~~date of ~~subcontracting of~~adoption ~~the~~was ~~Company’s~~$16.5 ~~ramp~~million. ~~service~~This ~~operation~~number inincludes ~~Seattle~~a $15.1 Atmillion increase in the ~~same~~liability ~~time,~~and ~~the~~a ~~court~~corresponding ~~also~~increase ~~dismissed~~in adeferred ~~counterclaim~~tax assets byfor ~~the~~unrecognized ~~IAM~~tax ~~alleging~~benefits ~~that~~as ~~Alaska~~a ~~violated~~result of the ~~Railway~~implementation ~~Labor~~of ~~Act~~FIN ~~status~~48 ~~quo~~ and ~~engaged~~$1.5 inmillion ~~bad~~of ~~faith~~tax ~~bargaining.~~benefits ~~The~~that, ~~appeal~~if ~~period~~recognized, ~~has expired~~would ~~and~~impact ~~these~~the ~~matters~~effective ~~are~~tax ~~closed~~rate.

~~Additionally,~~Accrued ~~the~~interest ~~IAM~~on ~~filed~~tax apositions ~~grievance~~is ~~against~~recorded ~~the~~as ~~Company~~a ~~alleging~~component ~~that~~of itinterest ~~violated~~expense. ~~the~~Total ~~collective~~accrued ~~bargaining agreement~~interest ~~by,~~on ~~among~~tax ~~other~~positions ~~things,~~included ~~subcontracting the ramp service operation~~ in ~~Seattle when~~ the ~~parties~~FIN ~~could~~48 ~~not~~liability ~~reach~~was ~~agreement~~zero onat anJanuary 1, ~~acceptable~~2007 ~~labor~~and ~~contract~~$0.2 ~~This~~million ~~matter~~at June 30, ~~is scheduled for arbitration in December 2006 and into~~ 2007. ~~The~~No ~~Company cannot~~penalties ~~predict~~were ~~the~~accrued ~~outcome~~at ~~of this arbitration; however~~January 1, ~~management~~2007 ~~does not believe any unfavorable outcome would be material to the Company’s cash flows~~ or ~~financial~~at ~~position~~June 30, 2007.

The Company is a party to routine commercial and employment litigation incidental to its business and with respect to which no material liability is expected.

~~Management~~The ~~believes~~periods ~~the~~subject ~~ultimate~~to ~~disposition~~examination offor ~~these~~the ~~matters~~Air isGroup’s ~~not~~federal ~~likely~~income totax ~~materially~~return ~~affect~~are the ~~Company’s financial~~2003 ~~position~~through or2006 ~~results~~tax years. ofThe ~~operations.~~periods ~~However,~~subject ~~this~~to ~~belief~~examination isfor ~~based~~the onAir ~~management~~Group’s ~~current~~major ~~understanding~~state ofincome ~~the~~tax ~~relevant~~returns ~~law~~other ~~and~~than ~~facts;~~California itare isalso ~~subject~~the toyears ~~various~~2003 ~~contingencies,~~through ~~including~~2006. ~~the~~In ~~potential~~California, ~~costs~~the ~~and~~income ~~risks~~tax ~~associated~~years ~~with litigation~~2002 ~~and~~through ~~the~~2006 ~~actions~~remain ofopen ~~judges~~to ~~and juries~~examination.

The Company anticipates that total unrecognized tax benefits will decrease by $2.0 million due to the expiration of the statute of limitations for certain tax years prior to December 31, 2007.

The Company does not believe that it is reasonably possible that the total unrecognized tax benefit would significantly increase or decrease in the next 12 months. The FIN 48 liability for its unrecognized tax benefit is classified in other long-term liabilities on the condensed balance sheet.

During the first quarter of 2007, the Company received a favorable decision in a matter with the State of California. As a result of the decision, the Company reduced its FIN 48 liability by $0.7 million, recorded a previously unrecognized tax benefit of $1.0 million, and accrued interest income of $1.5 million.

Note 12. Contingencies

Grievance with International Association of Machinists

In June 2005, the International Association of Machinists (IAM) filed a grievance under its Collective Bargaining Agreement (CBA) with Alaska alleging that the Company violated the CBA by, among other things, subcontracting the Ramp service operation in Seattle. The dispute was referred to an arbitrator and hearings on the grievance commenced in January 2007. A second round of hearings took place in April 2007 and a third round took place in late June 2007. A final hearing date is scheduled in late August. Most likely a decision from the arbitrator will not be issued until early to mid 2008.

Dispute with Los Angeles World Airports

Despite more than a year of negotiations to reach a mutual agreement, in December 2006, the Company was notified by the City of Los Angeles that terminal charges related to the Company’s operations at Los Angeles International Airport (LAX) would be unilaterally increased dramatically for 2007 and beyond. Additionally, maintenance and operations fees were increased retroactively to January 2006. These increases were made applicable for all airlines operating in Terminals 1 and 3 at LAX, but were not imposed on airlines operating in Terminals 2 and 4 through 8, because of their long-term leases currently in effect. The Company, along with other airlines in Terminals 1 and 3, filed a complaint against Los Angeles World Airports (LAWA) with the Department of Transportation alleging that the amount and duration of the disparities in terminal changes among the carriers at LAX are unreasonable and unjustly discriminatory as they apply to the carriers at Terminals 1 and 3. Additionally, the Company believes these changes violate DOT and FAA policies and regulations, as well as other federal statutes. In April 2007, a DOT Administrative Law Judge heard the complaint and issued an opinion in favor of the

~~ITEM 2~~carriers in mid-May 2007. ~~Management’s~~In ~~Discussion~~June ~~and~~2007, ~~Analysis~~the Secretary of ~~Financial~~Transportation ~~Condition~~issued a final decision ruling in favor of the carriers, and ~~Results~~in July 2007, ordered LAWA to repay the excess charges from February 2007 through June 2007. LAWA issued a credit to the Company in July 2007 in the amount of ~~Operations~~$2.2 million. LAWA appealed the decision to a Federal Circuit Court of Appeals. The carriers have filed cross appeals over certain aspects of the DOT ruling.

~~The~~Other ~~following discussion~~items should be read in conjunction with our condensed financial statements and the related notes contained elsewhere in this quarterly report on Form 10-Q. All statements in the following discussion that are not reports 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.

Alaska’s filings with the Securities and Exchange Commission, including its 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~~Company ~~contained on our website~~ is ~~not~~ a ~~part~~party ofto ~~this~~routine ~~quarterly~~litigation ~~report~~matters onincidental ~~Form~~to ~~10-Q.~~its Asbusiness ~~used in this Form 10-Q, the terms “Alaska,” “our,” “we”~~ and ~~“Company”~~with ~~refer~~respect to ~~Alaska~~which ~~Airlines,~~no ~~Inc.~~material ~~unless~~liability ~~the~~is ~~context indicates otherwise~~expected.

~~Third~~Management ~~Quarter~~believes ~~Highlights~~the ultimate disposition of the matters discussed above 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 judges and juries.

In what is historically been our most profitable quarter, we reported a third-quarter net loss, driven principally by fleet transition costs, restructuring charges, and the downward mark-to-market adjustment of our fuel hedge portfolio as a result of declining oil prices. However, these items should not overshadow what we believe to be a very strong quarterly financial result. The quarter was characterized by strong revenue, offset by significantly higher economic fuel cost and a small increase in other operating expenses.

Fleet Transition

During the first quarter of this year, we announced our intention to retire our MD-80 fleet by the end of 2008, earlier than originally expected, as part of our move to an all Boeing 737 fleet. As part of this plan, we recognized a pre-tax impairment charge of $131.1 million during the first quarter related to 15 owned MD-80 aircraft. At that time, we also estimated that we would have significant additional charges resulting from actions taken on our 11 leased MD-80 aircraft. During the third quarter, we realized a portion of that expected charge as we purchased five of the leased MD-80s from the lessors for cash of $69.3 million and assumed debt of $11.6 million. Immediately upon purchase of the aircraft, we evaluated the aircraft for impairment and concluded that the carrying value was not recoverable. Therefore, we recorded a $58.4 million charge ($36.5 million after tax) in the third quarter for the impairment, including the write-off of $1.8 million of leasehold improvements related to those aircraft. The charge was offset by the reduction of $7.5 million of deferred rent associated with the acquired aircraft. We had signed a letter of intent with a prospective buyer for our 20 owned MD-80s, although we are uncertain as to whether this transaction will close. We are continuing to negotiate with other prospective buyers, but the timing of any sale of our MD-80s is uncertain at this time.

After taking into account the five aircraft purchased out of leases mentioned above, we have six remaining leased MD-80s. We expect to cease operation of four of these aircraft prior to the lease expiration date through lease buy-outs, lease agreement restructuring, subleasing of the aircraft, or storing the aircraft at a long-term storage facility. At such time as one of these actions is taken on the aircraft, we expect to have an associated charge that will be recorded in our statements of operations.

OnITEM ~~July 7, 2006, we entered into a purchase and sale agreement to sell six B737-200 aircraft to a third party~~2. ~~Our seventh~~Management’s ~~(and~~Discussion ~~remaining) B737-200 aircraft will be donated to an aviation museum in Alaska. The six aircraft will be sold~~ and ~~delivered~~Analysis ~~at various intervals through April 2007. One~~ of ~~the~~Financial ~~six~~Condition ~~aircraft was transferred to the buyer in the third quarter~~ and ~~there~~Results ~~was~~of ~~a nominal gain on the sale.~~ Operations

~~Labor~~Overview ~~Costs and Negotiations~~

~~During~~The ~~the~~following ~~third~~Management’s ~~quarter,~~Discussion weand ~~reached~~Analysis ~~new~~of ~~four-year~~Financial ~~agreements~~Condition ~~with~~and ~~our~~Results ~~approximately~~of ~~3,700~~Operations (MD&A) ~~clerical,~~is ~~office~~intended ~~and~~to ~~passenger~~help ~~service~~the ~~employees~~reader ~~and~~understand ~~ramp~~the ~~service agents and stock clerks~~Company, ~~all~~our ~~represented~~operations byand ~~the International~~our ~~Association~~present ofbusiness ~~Machinists~~environment. ~~These~~The ~~agreements~~MD&A ~~included~~is aprovided ~~signing~~as ~~bonus,~~a insupplement ~~aggregate~~to, ofand ~~$1.9~~should ~~million~~be read in ~~July~~conjunction ~~2006~~with, ~~which is included in wages and benefits in~~ our ~~statement~~condensed offinancial ~~operations~~statements and anthe accompanying ~~immediate 2% wage increase~~notes. ~~Additionally, the~~All ~~agreements~~statements ~~included a severance package offered to employees~~ in the ~~top~~following ~~four~~discussion ~~wage-scale steps~~ that ~~includes~~are ~~cash~~not ~~payments~~reports ~~based on years~~ of ~~service,~~historical ~~one~~information ~~year~~or descriptions of ~~medical~~current ~~coverage~~accounting ~~after~~policy ~~the~~are ~~severance~~forward-looking ~~date,~~statements. ~~and~~Please ~~continued~~consider ~~travel~~our ~~privileges~~forward-looking ~~for~~statements ~~a period~~in oflight ~~time. The total amount~~ of the risks ~~charge~~referred ~~was~~to ~~$28.6~~in ~~million~~this ~~($17.9~~report’s ~~million~~introductory ~~after~~cautionary ~~tax)~~note inand the ~~third~~risks ~~quarter.~~mentioned ~~This~~in ~~charge~~the ~~is management~~Company’s ~~best~~filings ~~estimate~~with atthe ~~this~~Securities ~~time~~ and weExchange ~~will~~Commission. ~~likely~~This ~~record~~overview ~~adjustments~~summarizes ~~related~~the toMD&A, ~~this~~which ~~charge~~includes in the ~~fourth quarter~~following ~~as more information becomes available.~~ sections:

In• ~~November~~Second ~~2006,~~Quarter wein ~~will~~Review ~~begin~~and ~~negotiations~~Current onEvents a– ~~new~~highlights ~~collective~~from ~~bargaining~~the ~~agreement~~second ~~for~~quarter ~~our~~of ~~pilots,~~2007 ~~all represented~~outlining bysome of the ~~Air~~major ~~Line~~events ~~Pilots~~that ~~Association.~~happened ~~Our~~during ~~pilots~~the ~~are~~period ~~currently~~and ~~under~~how anthey ~~arbitrated~~affected ~~agreement~~our ~~that~~financial ~~becomes amendable on May 1, 2007~~performance.

~~Mark~~• Results of Operations – an in-todepth analysis of the results of operations for the three and six months ended June 30, 2007. We believe this analysis will help the reader better understand our condensed statements of operations. Financial and statistical data, and reconciliations between certain non-~~Market~~GAAP ~~Fuel~~measures ~~Hedging~~to ~~Gains~~the most directly comparable GAAP measure are also included here.

~~Beginning~~This insection ~~the~~includes ~~second~~forward-looking ~~quarter~~statements ofregarding ~~2004,~~our weview ~~lost~~of the ~~ability~~remainder toof ~~use hedge accounting because the price correlation between crude oil, the commodity we use to hedge, and West Coast jet fuel fell below required thresholds~~2007. AsIn ~~a result~~general, ~~our earnings are more volatile as~~ we ~~mark~~have included ~~our~~these ~~entire~~forward-looking ~~hedge~~statements ~~portfolio~~in tothe ~~market~~second ~~each~~quarter ~~period~~discussion ~~through~~only ~~earnings, even though the actual consumption~~ and ~~related~~have ~~cash~~chosen ~~settlement~~not ~~will~~to ~~take~~repeat ~~place~~them in athe ~~future~~six-month ~~period~~discussion.

~~Historically,~~• weLiquidity ~~have reported these gains~~ and ~~losses~~Capital ~~in other~~Resources ~~nonoperating~~– ~~income~~an ~~and~~analysis ~~expense. Beginning in the first quarter~~ of ~~2006,~~cash ~~however~~flows, wesources ~~report these gains~~ and ~~losses~~uses ~~in aircraft fuel, including hedging gains and losses, in the condensed statements~~ of ~~operations. Prior period amounts have been reclassified to conform to the current-year format. Because of the recent decline in world oil prices~~cash, wecontractual ~~recorded a mark-to-market fuel hedging loss~~obligations, ~~including~~commitments ~~the~~and ~~reclassification of previously recorded mark~~off-~~to-market~~balance ~~gains~~sheet ~~on settled hedges~~arrangements, ~~of $56.2~~an ~~million~~overview ~~on our hedge portfolio, as its value declined during the quarter. This loss is compared to $19.9 million~~ of ~~gains~~financial inposition ~~the~~and ~~third quarter of 2005. Even though we had a loss in~~ the ~~value~~impact of ~~our~~inflation hedge portfolio in the third quarter, the portfolio will still provide benefit as the value of those contracts as of September 30, 2006 was $70.2 million. The vast majority of these contracts are call options, which effectively cap the crude oil price component of our fuel consumption. These types of contracts allow us to benefit from a reduction in oil prices and ~~limit~~changing ~~our exposure when~~ prices ~~increase~~. ~~In the third quarters of 2006 and 2005, we recorded gains from settled fuel hedges totaling $23.6 million and $37.8 million, respectively, which are also recorded in aircraft fuel.~~

Alaska’s 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. As used in this Form 10-Q, the terms “Alaska,” “our,” “we” and “Company” refer to Alaska Airlines, unless the context indicates otherwise.

WeSecond ~~have~~Quarter ~~provided~~in ~~information~~Review onand ~~mark-to-market~~Current ~~gains~~Events ~~or losses, as well as calculations of our economic fuel cost per gallon on page 24. For more discussion, see Note 4 to our condensed financial statements.~~

We ~~continue~~recorded toa ~~believe~~pretax ~~that~~income ~~our~~of ~~fuel~~$80.9 ~~hedge~~million ~~program~~during isthe ~~an important~~second ~~part~~quarter of ~~our~~2007 ~~strategy~~compared to ~~reduce~~$72.5 ~~our~~million ~~exposure~~in tothe ~~volatile~~second ~~fuel~~quarter ~~prices~~of 2006. WeThe ~~began~~2006 ~~entering~~results ~~into~~included ~~hedge~~a ~~contracts~~$3.8 ~~again~~million inrestructuring charge associated with the voluntary ~~third~~severance ~~quarter~~package ofoffered ~~2006~~to ~~after~~our ~~several~~flight ~~quarters~~attendants as part of noan ~~activity~~early-out program. WeBoth ~~expect~~periods toinclude ~~continue~~adjustments to ~~enter~~reflect ~~into~~timing ~~these types~~ of ~~contracts~~ ~~into~~gain ~~the~~or ~~future,~~loss ~~although~~recognition ~~significant~~resulting ~~changes~~from in mark-to-market ~~conditions~~fuel ~~could~~hedge ~~affect our decisions~~accounting.

~~Outlook~~The revenue environment in the second quarter was characterized by increased competition and softening demand which caused yield and load factor to fall, driving a reduction in unit revenues. Despite the lower unit revenues, our passenger revenue increased by $16.0 million because of higher capacity. Our total revenue increased by $84.7 million during the second quarter of 2007, compared to the second quarter of 2006. The majority of the increase resulted from the new Capacity Purchase Agreement with Horizon.

~~For~~Our ~~2006,~~total weoperating ~~expect~~costs ~~full-year~~increased ~~capacity increases of approximately 4~~$74.5%7 ~~over~~million during ~~2005~~the ~~capacity.~~second ~~The~~quarter ~~expected~~of ~~capacity~~2007, ~~increase~~compared ~~is due largely~~ to anthe ~~increase~~same period in ~~scheduled departures~~the ~~after~~prior ~~last~~ year’s. ~~summer~~Continued ~~capacity~~increases ~~reduction~~in ~~and~~fuel ~~the~~prices ~~introduction~~drove ofthe 12majority ~~new B737-800 aircraft in 2006,~~ of ~~which~~this ~~six~~increase. ~~will~~These beincreases ~~delivered~~were inpartially ~~the fourth quarter,~~ offset by ~~the~~declines ~~retirement~~in ofvariable ~~four~~incentive ~~MD-80~~pay ~~aircraft.~~expense, ~~For the fourth quarter of~~reflecting ~~2006,~~lower weexpected ~~expect~~payouts aunder ~~capacity~~our ~~increases~~various ofemployee ~~between~~incentive ~~3.5%~~plans ~~and~~this 4%year.

Labor Costs and Negotiations

We are now in the process of negotiating new contracts with the Company’s pilots, which became amendable May 1, 2007. We hope to reach negotiated contracts that recognize the important contributions that our pilots make to our airlines while not harming the Company’s competitive position. Factoring in pay rates, productivity measures, pension, and post-retirement medical benefits, we believe our pilot unit costs are among the highest in the industry for the size of aircraft operated.

We do not know what the final outcome of these negotiations will be or when agreements will be reached. However, uncertainty around open contracts could be a distraction to some employees, reduce employee engagement in our business, and prevent us from achieving the operational goals (such as on-time and completion-rate targets) that we have set.

Capacity Purchase Agreement

Alaska and Horizon entered into a Capacity Purchase Agreement (CPA) effective January 1, 2007, whereby the Company purchases capacity on certain routes (“incentive markets”) from Horizon as specified by the agreement. This agreement has resulted in a new presentation in the Company’s statement of operations. The actual passenger revenue from the incentive markets is identified as “Passenger revenue - regional flying” and the associated costs are identified as “Regional flying costs.” See Note 3 to the condensed financial statements for additional information.

~~SELECTED~~The ~~FINANCIAL~~Company ~~AND~~also ~~STATISTICAL~~has ~~DATA~~a similar arrangement in place with a third-party carrier for flying between Anchorage and Dutch Harbor, Alaska. Historically, the revenue from this arrangement was presented in “Other revenue – net” and the associated costs were in “Contracted services” in the Company’s statement of operations. Now, all of these revenues and costs are presented with the Horizon incentive-market flying revenues and costs, and the prior period has been reclassified to conform to the current presentation.

	Three Months EndedSeptember 30								Nine Months Ended September 30
Financial Data (in millions):	2006			2005			% Change		2006			2005			% Change
Operating Revenues:
Passenger	$	698.4		$	624.1		11.9		$	1,882.5		$	1,656.6		13.6
Freight and mail		25.7			25.2		2.0			71.8			68.4		5.0
Other - net		35.8			40.0		(10.5	)		106.0			103.9		2.0
Total Operating Revenues		759.9			689.3		10.2			2,060.3			1,828.9		12.7
Operating Expenses:
Wages and benefits		190.3			171.7		10.8			552.9			548.7		0.8
Variable incentive pay		3.3			2.8		17.9			17.3			7.5		130.7
Contracted services		32.3			27.6		17.0			98.4			87.0		13.1
Aircraft fuel, including hedging gains and losses		251.5			121.8		106.5			567.2			283.6		100.0
Aircraft maintenance		32.4			43.2		(25.0	)		118.6			143.5		(17.4	)
Aircraft rent		26.4			29.5		(10.5	)		84.6			87.2		(3.0	)
Food and beverage service		12.6			13.0		(3.1	)		36.1			36.0		0.3
Selling expenses		36.8			35.6		3.4			110.0			102.2		7.6
Depreciation and amortization		35.2			31.9		10.3			99.6			92.9		7.2
Landing fees and other rentals		40.5			38.8		4.4			117.9			117.2		0.6
Other		40.8			39.6		3.0			118.4			118.9		(0.4	)
Fleet transition costs		58.4			—		NM			189.5			—		NM
Restructuring charges and adjustments		28.6			(1.4	)	NM			32.4			20.7		NM
Total Operating Expenses		789.1			554.1		42.4			2,142.9			1,645.4		30.2
Operating Income (Loss)		(29.2	)		135.2		NM			(82.6	)		183.5		NM
Interest income		14.6			9.2		58.7			41.2			23.1		78.4
Interest expense		(19.9	)		(13.0	)	53.1			(53.5	)		(36.9	)	45.0
Interest capitalized		6.1			2.6		134.6			15.5			4.5		244.4
Other - net		0.5			(1.0	)	NM			(0.7	)		(3.7	)	NM
		1.3			(2.2	)	NM			2.5			(13.0	)	NM
Income (Loss) Before Income Tax and Accounting Change	$	(27.9	)	$	133.0		NM		$	(80.1	)	$	170.5		NM
Operating Statistics:
Revenue passengers (000)		4,710			4,632		1.7			13,058			12,715		2.7
RPMs (000,000) “traffic”		4,873			4,598		6.0			13,579			12,812		6.0
ASMs (000,000) “capacity”		6,150			5,822		5.6			17,523			16,735		4.7
Passenger load factor		79.2	%		79.0	%	0.2	pts		77.5	%		76.6	%	0.9	pts
Yield per passenger mile		14.33	¢		13.57	¢	5.6			13.86	¢		12.93	¢	7.2
Operating revenue per ASM		12.36	¢		11.84	¢	4.4			11.76	¢		10.93	¢	7.6
Operating expenses per ASM (a)		12.83	¢		9.52	¢	34.8			12.23	¢		9.83	¢	24.4
Operating expense per ASM excluding fuel, fleet transition costs, and restructuring charges and adjustments(a)		7.33	¢		7.53	¢	(2.7	)		7.73	¢		8.04	¢	(3.9	)
GAAP fuel cost per gallon (a)	$	2.68		$	1.34		100.3		$	2.12		$	1.08		96.7
Economic fuel cost per gallon (a)	$	2.08		$	1.56		33.5		$	1.90		$	1.46		29.7
Fuel gallons (000,000)		93.9			90.4		3.9			267.2			260.8		2.5
Average number of full-time equivalent employees		9,467			8,961		5.6			9,267			9,108		1.7
Aircraft utilization (blk hrs/day)		11.4			10.9		4.6			11.1			10.8		2.8
Average aircraft stage length (miles)		920			887		3.7			921			895		2.9
Operating fleet at period-end		112			110		1.8			112			110		1.8

Aircraft Fuel Expense

NMDuring =the ~~Not~~past ~~Meaningful~~two years, we have realized significant benefits from in-the-money fuel hedge contracts. However, our fuel hedge protection has declined substantially as the strike price of our hedges is now closer to current oil prices compared to those in place during 2006 and 2005. During the second quarter of 2007, our economic fuel costs increased substantially because the hedge benefit was $5.0 million, compared to $29.6 million in the second quarter of 2006. This trend is consistent with the first quarter of 2007. Please refer to page 28 for a reconciliation between aircraft fuel expense and economic fuel cost.

~~(a)~~We ~~See~~continue ~~Note~~to Abelieve onthat ~~page~~our 24fuel hedge program is an important part of our strategy to reduce our exposure to volatile fuel prices. We expect to continue to enter into these types of contracts in the future, although significant changes in market conditions could affect our decisions.

Fleet Transition

During the quarter, we sold 19 of our 20 owned MD-80s, and we have an agreement for the 20^th to be sold at a future date. The majority of these aircraft are being leased from the buyer under short-term lease arrangements, which will allow us to maintain our current MD-80 retirement schedule through December 2008.

We currently have four MD-80 aircraft under long-term lease arrangements that we plan to cease operating before the end of the lease term. We anticipate that once these aircraft have been removed from operation, we will dispose of these aircraft through lease buy-out, a sublease arrangement, or store them at a long-term storage facility. It is likely that we will record an operating charge in our statement of operations if this occurs. Aggregate minimum lease payments for these aircraft through the end of the lease terms for these four aircraft are approximately $73.3 million.

During the second quarter, we completed modifications of two additional B737-400 combi aircraft, bringing the total combi aircraft to four. We intend to convert a fifth B737-400 into the fixed, combi configuration by December 2007.

~~Note~~Line A:of Credit Modification

~~Pursuant~~In ~~to Item 10~~April ~~of Regulation S-K~~2007, we ~~are~~announced ~~providing~~the ~~disclosure~~Second Amendment of the ~~reconciliation~~March 25, of2005, ~~reported~~$160 ~~non~~million variable-~~GAAP~~rate ~~financial~~credit ~~measures~~facility towith ~~their~~a ~~most~~syndicate ~~directly~~of ~~comparable~~ financial ~~measures reported on a GAAP basis~~institutions. The ~~non-GAAP~~terms ~~financial~~of ~~measures provide management~~ the ~~ability~~Second toAmendment ~~measure~~provide ~~and~~that ~~monitor~~any ~~performance~~borrowings ~~both~~will ~~with~~be secured ~~and~~by ~~without~~either ~~the cost of~~ aircraft ~~fuel~~or ~~(including~~cash ~~the~~collateral. ~~gains~~The ~~and~~Second ~~losses~~Amendment: ~~associated with our fuel hedging program where appropriate~~(i), increases ~~fleet transition costs, and restructuring charges and adjustments. Because~~ the ~~cost~~size ~~and availability~~ of ~~aircraft~~the ~~fuel~~facility ~~are subject~~ to ~~many~~$185 ~~economic~~million; ~~and~~(ii) improves ~~political~~the ~~factors~~collateral ~~beyond~~advance ~~our~~rates ~~control~~for ~~and~~certain weaircraft; ~~record~~(iii) extends ~~changes in~~ the ~~fair~~agreement ~~value~~by oftwo ~~our hedge portfolio in our income statement, it is our view that the~~years ~~measurement~~with ~~and~~a ~~monitoring~~maturity ofdate ~~performance without fuel is important. In addition, we believe the disclosure~~ of ~~financial performance without fleet transition costs~~March 31, ~~restructuring~~2010; ~~charges,~~ and (iv) reprices the ~~navigation~~credit ~~fee~~facility ~~refund~~to isreflect ~~useful~~current tomarket ~~investors~~rates. ~~Finally,~~ ~~these~~The ~~non-GAAP~~Company ~~financial~~has ~~measures~~no ~~are~~immediate ~~also~~plans ~~more comparable~~ to ~~financial~~borrow ~~measures~~using ~~reported~~this tocredit ~~the Department of Transportation by other major network airlines~~facility.

~~The~~New ~~following~~Markets ~~tables reconcile our non-GAAP financial measures to the most directly comparable GAAP financial measures:~~

~~Alaska~~In ~~Airlines~~June 2007, ~~Inc~~the Company announced non-stop service between Seattle and both Honolulu and Lihue, Hawaii beginning in October 2007 and seasonal service from Anchorage, Alaska to Honolulu beginning in December 2007.: We have also initiated or announced additional service in certain existing markets or connected cities already served with new non-stop service.

($Seasonality ~~in millions)~~

	Three Months EndedSeptember 30						Nine Months EndedSeptember 30
	2006			2005			2006			2005
Unit cost reconciliations:
Operating expenses	$	789.1		$	554.1		$	2,142.9		$	1,645.4
ASMs (000,000)		6,150			5,822			17,523			16,735
Operating expenses per ASM		12.83	¢		9.52	¢		12.23	¢		9.83	¢
Operating expenses	$	789.1		$	554.1		$	2,142.9		$	1,645.4
Less: aircraft fuel		(251.5	)		(121.8	)		(567.2	)		(283.6	)
Less: fleet transition costs		(58.4	)		—			(189.5	)		—
Add: navigation fee refund		—			4.7			—			4.7
Less: restructuring charges and adjustments		(28.6	)		1.4			(32.4	)		(20.7	)
Operating expenses excluding fuel, fleet transition costs, the navigation fee refund, and restructuring charges and adjustments	$	450.6		$	438.4		$	1,353.8		$	1,345.8
ASMs (000,000)		6,150			5,822			17,523			16,735
Operating expenses per ASM excluding fuel, fleet transition costs, the navigation fee refund, and restructuring charges and adjustments		7.33	¢		7.53	¢		7.73	¢		8.04	¢
Reconciliation to GAAP income (loss) before taxes and accounting change:
Income (loss) before taxes and accounting change, excluding mark-to-market hedging gains (losses), fleet transition costs, the navigation fee refund, and restructuring charges and adjustments	$	115.3		$	106.0		$	202.5		$	85.3
Mark-to-market hedging gains (losses) included in aircraft fuel		(56.2	)		19.9			(60.7	)		100.2
Less: fleet transition costs		(58.4	)		—			(189.5	)		—
Add: navigation fee refund and related interest received		—			5.7			—			5.7
Less: restructuring charges and adjustments		(28.6	)		1.4			(32.4	)		(20.7	)
GAAP income (loss) before taxes and accounting change as reported	$	(27.9	)	$	133.0		$	(80.1	)	$	170.5
Aircraft fuel reconciliations:* ($ in millions except per gallon amounts)
	Three Months Ended September 30
	2006						2005
				Cost/Gal						Cost/Gal
Raw or “into-plane” fuel cost	$	218.9		$	2.33		$	179.5		$	1.99
Less: gains on settled hedges		(23.6	)		(0.25	)		(37.8	)		(0.43	)
Economic fuel expense*	$	195.3		$	2.08		$	141.7		$	1.56
Less: mark-to-market gains and losses related to hedges that settle in future periods and the reclassification of previously recorded mark-to-market gains on settled hedges		56.2			0.60			(19.9	)		(0.22	)
GAAP fuel expense*	$	251.5		$	2.68		$	121.8		$	1.34
Fuel gallons (000,000)		93.9						90.4
	Nine Months Ended September 30
	2006						2005
				Cost/Gal						Cost/Gal
Raw or “into-plane” fuel cost	$	585.5		$	2.19		$	465.2		$	1.78
Less: gains on settled hedges		(79.0	)		(0.29	)		(81.4	)		(0.32	)
Economic fuel expense*	$	506.5		$	1.90		$	383.8		$	1.46
Less: mark-to-market gains and losses related to hedges that settle in future periods and the reclassification of previously recorded mark-to-market gains on settled hedges		60.7			0.22			(100.2	)		(0.38	)
GAAP fuel expense*	$	567.2		$	2.12		$	283.6		$	1.08
Fuel gallons (000,000)		267.2						260.8

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 operating income is generally lowest (or if it is the case, our loss the greatest) during the first and fourth quarters due principally to lower traffic, generally increases in the second quarter and typically reaches its highest level during the third quarter as a result of vacation travel, including increased activity in the state of Alaska.

*Outlook Beginning in the first quarter of 2006, the Company records all fuel hedging activity, including mark-to-market gains and losses, in aircraft fuel expense. Prior year amounts have been reclassified for consistency.

The following table summarizes expected 2007 capacity increases as measured by available seat miles:


Third quarter 2007		2% - 3%
Fourth quarter 2007		4% - 5%
Full year 2007		3% - 4%

The expected capacity increase is due primarily to the introduction of 14 new B737-800 aircraft in 2007 and the annualization of capacity additions that resulted from 12 B737-800 aircraft delivered in 2006, offset by the retirement of eight MD-80 aircraft and, to a lesser extent, scheduled retirement of other aircraft. On a net basis, we expect that the Company’s fleet size will increase by only two aircraft, although the 737-800 aircraft are larger than the MD-80s, allowing for the capacity growth mentioned above. The aircraft deliveries in 2007 are planned to be used to replace outgoing aircraft, increase frequency in our existing markets and, to a lesser degree, serve new markets.

RESULTS OF OPERATIONS

Comparison of Three Months Ended ~~September~~June 30, ~~2006~~2007 to Three Months Ended ~~September~~June 30, ~~2005~~2006

Our net ~~loss~~income for the ~~third~~second quarter of ~~2006~~ 2007 was $2050.1 million, ~~versus~~compared to net income of $8249.2 million in the second quarter of 2006. The second quarter of 2006 included a $3.8 million restructuring charge associated with an offer of voluntary severance to the Company’s flight attendants as part of an early retirement program. Both periods include adjustments to reflect timing of gain or loss recognition resulting from mark-to-market fuel hedge accounting. Excluding the restructuring charge, and with fuel stated on an economic basis, our pretax income would have been $82.4 million in the ~~third~~second quarter of ~~2005~~2007 compared to $79.6 million in 2006. We believe presentation of this non-GAAP financial measure provides useful information to investors and other readers because:

~~The~~• ~~2006~~it ~~results~~is ~~include~~useful ~~certain significant items that impact the comparability~~ to ~~2005.~~monitor ~~These~~performance ~~items~~without ~~are~~these ~~discussed in the “Third Quarter Highlights” section beginning on page 20. Our 2005 results also include certain~~ items ~~that~~as ~~impact~~it ~~comparability,~~improves ~~including~~our ~~$1.4~~ability ~~million of favorable restructuring adjustments, $19.9 million of mark-~~to~~-market~~ ~~fuel~~compare ~~hedging~~our ~~gains,~~results ~~and a navigation fee refund of $5.7 million. Financial and statistical data comparisons are shown on page 23. On page 24, we have included a reconciliation of reported non-GAAP financial measures~~ to ~~the~~other ~~most directly comparable GAAP financial measures.~~ airlines;

~~Revenues~~• this financial measure is the basis for our various incentive plans, thus allowing investors to better understand the changes in variable incentive pay expense in our condensed statements of operations;

~~Operating~~• ~~revenues~~this ~~increased~~financial ~~$70.6~~measure ~~million,~~is ormost ~~10.2%,~~often ~~during~~used ~~the third quarter of 2006 as compared to the same period~~ in ~~2005~~internal ~~due~~management ~~to a 4.4% increase in operating revenue per available seat mile (RASM)~~ and aboard ~~5.6% increase~~reporting ~~in capacity. The increase in RASM resulted from an increase in load factors~~ and ~~a 5.6% increase in ticket yields resulting largely from higher ticket prices, offset by a 10.5% decline in other~~decision-~~net~~making; revenue as explained below. The increase in capacity is primarily the result of having a fleet of 112 operating aircraft at September 30, 2006, compared to 110 at September 30, 2005, a longer average stage length this quarter compared to last year, the schedule reduction in the summer of 2005, and ~~a larger average seat capacity on our aircraft.~~

~~Load~~• factor increased slightly by 0.2 percentage points to 79.2% for the third quarter of 2006 due to a 6.0% increase in passenger traffic outpacing the 5.6% increase in capacity. Even though load factor was nearly flat for the quarter, we ~~did experience a decline in load factor from prior year in the month of August. We~~ believe ~~this decline~~it is ~~due, in part, to~~ the ~~foiled~~basis ~~terror~~by ~~plot~~which ~~in the United Kingdom and the resulting new security measures. Alaska has seen a softening revenue environment in the last few months and~~ we ~~expect~~are aevaluated ~~continuing trend of slower year-over-year growth into the fourth quarter when compared to the first half of 2006 This was evidenced~~ by ~~the~~industry ~~trend in yields throughout the quarter~~analysts. ~~Our yields were up 7.7% in July, 6.8% in August and 1.4% in September.~~

~~Freight~~For the three and ~~mail~~six ~~revenues~~months ~~increased~~ended ~~$0.5~~June 30, ~~million~~2007, orfinancial ~~2.0%,~~and ~~primarily~~statistical ~~due~~data tofor ~~higher~~Alaska ~~mail~~is ~~and~~shown ~~freight~~on ~~yields~~page ~~and~~26. ~~fuel~~On ~~surcharges~~pages ~~that~~27 and 28, we ~~added~~have toincluded ~~our~~a ~~freight~~reconciliation ~~services beginning~~of inreported ~~the~~non-GAAP ~~third~~financial ~~quarter~~measures ofto the ~~2005,~~most ~~offset~~comparable byGAAP ~~lower~~financial ~~volumes~~measures.

Other-net revenues decreased $4.2 million, or 10.5%, due to a decrease in Mileage Plan revenues, resulting from a higher deferral rate on cash received from miles sold, offset by higher cash receipts compared to the prior year period. As yields have increased in 2006, our rate at which we defer the revenue related to sold miles has increased, resulting in a smaller percentage of those cash receipts recorded as revenue during the period.

~~Expenses~~Alaska Airlines Financial and Statistical Data (unaudited)

Total operating expenses increased $235.0 million, or 42.4%, as compared to the same period in 2005. The increase in operating expenses is largely due to fleet transition costs, a significant increase in aircraft fuel (including hedging gains and losses), and increases in wages and benefits, contracted services, depreciation and amortization, and restructuring charges, offset by a decline in aircraft maintenance, and aircraft rent. Operating expenses per ASM increased 34.8% from 9.52 cents in the third quarter of 2005 to 12.83 cents in the third quarter of 2006. Operating expense per ASM excluding fuel, fleet transition costs, restructuring charges and the navigation fee refund in 2005 decreased by 2.7% to 7.33 cents per ASM compared to 7.53 cents per ASM in 2005. Our estimates of costs per ASM excluding fuel and items noted above for the fourth-quarter and full-year targets for 2006 are 7.9 cents and between 7.75 cents and 8.0 cents, respectively.


	Three Months Ended June 30								Six Months Ended June 30
Financial Data (in millions):	2007			2006			% Change		2007			2006			% Change
Operating Revenues:
Passenger	$	663.3		$	647.3		2.5		$	1,209.2		$	1,184.1		2.1
Passenger - regional flying		71.0			4.4		NM			128.3			8.8		NM
Freight and mail		26.3			25.6		2.7			47.0			46.1		2.0
Other - net		34.5			33.1		4.2			70.4			61.4		14.7

Total Operating Revenues		795.1			710.4		11.9			1,454.9			1,300.4		11.9

Operating Expenses:
Wages and benefits		185.6			186.9		(0.7	)		372.9			362.6		2.8
Variable incentive pay		2.1			7.6		(72.4	)		9.8			14.0		(30.0	)
Aircraft fuel, including hedging gains and losses		193.4			173.7		11.3			351.0			315.7		11.2
Aircraft maintenance		34.5			41.9		(17.7	)		68.8			86.2		(20.2	)
Aircraft rent		27.9			28.9		(3.5	)		54.2			58.2		(6.9	)
Landing fees and other rentals		42.2			40.5		4.2			84.0			77.4		8.5
Regional flying costs		74.1			4.0		NM			141.5			7.9		NM
Contracted services		30.2			30.2		—			59.6			58.2		2.4
Selling expenses		33.4			38.5		(13.2	)		65.0			73.2		(11.2	)
Depreciation and amortization		35.6			32.2		10.6			71.0			64.4		10.2
Food and beverage service		12.0			11.9		0.8			22.6			22.7		(0.4	)
Other		43.2			39.4		9.6			83.0			78.4		5.9
Fleet transition costs		—			—		—			—			131.1		NM
Restructuring charges and adjustments		—			3.8		NM			—			3.8		NM

Total Operating Expenses		714.2			639.5		11.7			1,383.4			1,353.8		2.2

Operating Income (Loss)		80.9			70.9		NM			71.5			(53.4	)	NM

Interest income		16.6			14.8					32.5			26.6
Interest expense		(22.1	)		(17.8	)				(42.5	)		(33.6	)
Interest capitalized		6.0			5.1					12.3			9.4
Other - net		(0.5	)		(0.5	)				(0.4	)		(1.2	)

		—			1.6					1.9			1.2

Income (Loss) Before Income Tax	$	80.9		$	72.5		NM		$	73.4		$	(52.2	)	NM

Mainline Operating Statistics:
Revenue passengers (000)		4,627			4,443		4.1			8,489			8,348		1.7
RPMs (000,000) “traffic”		4,820			4,626		4.2			8,886			8,706		2.1
ASMs (000,000) “capacity”		6,140			5,834		5.2			11,834			11,373		4.1
Passenger load factor		78.5	%		79.3	%	(0.8	)pts		75.1	%		76.5	%	(1.4	)pts
Yield per passenger mile		13.76	¢		13.99	¢	(1.6	)		13.61	¢		13.60	¢	0.1
Operating revenue per ASM (RASM)		11.79	¢		12.10	¢	(2.6	)		11.21	¢		11.36	¢	(1.3	)
Passenger revenue per ASM		10.80	¢		11.10	¢	(2.7	)		10.22	¢		10.41	¢	(1.8	)
Operating expenses per ASM		10.43	¢		10.89	¢	(4.2	)		10.49	¢		11.83	¢	(11.3	)
Operating expense per ASM excluding fuel, fleet transition costs, and restructuring charges (a)		7.28	¢		7.85	¢	(7.3	)		7.53	¢		7.87	¢	(4.3	)
GAAP fuel cost per gallon	$	2.16		$	1.96		10.2		$	2.02		$	1.82		11.0
Economic fuel cost per gallon (a)	$	2.14		$	1.92		11.5		$	2.05		$	1.80		13.9
Fuel gallons (000,000)		89.8			88.8		1.1			173.9			173.3		0.3
Average number of full-time equivalent employees		9,748			9,347		4.3			9,645			9,168		5.2
Aircraft utilization (blk hrs/day)		11.0			11.0		—			10.9			11.0		(0.9	)
Average aircraft stage length (miles)		917			920		(0.3	)		917			921		(0.4	)
Operating fleet at period-end		114			113		1 a/c			114			113		1 a/c
Regional Operating Statistics:
Revenue passengers (000)		702			13		NM			1,280			26		NM
RPMs (000,000)		273			11		NM			493			22		NM
ASMs (000,000)		352			19		NM			668			37		NM

~~Explanations~~NM of= ~~significant~~Not ~~period-over-period~~Meaningful ~~changes in the components of operating expenses are as follows:~~

•(a) ~~Wages~~See ~~and~~pages ~~benefits~~27 ~~increased~~and by28 ~~$18.6~~for ~~million,~~a orreconciliation ~~10.8%, during the third quarter~~ of ~~2006~~this ~~compared~~non-GAAP ~~to the same period in 2005 primarily due to the following:~~measure.

– a $1.9 million signing bonus resulting from the new four-year contract with our clerical, office and passenger service employees and our ramp service and stores agents that was ratified during the third quarter of 2006;

– market-based pay adjustments for our non-union personnel in the spring of 2006 and an increase in stock-based compensation expense following the adoption of SFAS 123R;

– an increase in mechanics and flight attendant wages resulting from the contracts ratified in the fourth quarter of 2005 and the second quarter of 2006, respectively;

– increased postretirement medical and pension costs from the prior year, including a $3.2 million third quarter adjustment resulting from certain assumption changes; and

– a 5.6% increase in the average number of full-time equivalent employees from 8,961 in 2005 to 9,467 in 2006.

• Contracted services increased $4.7 million, or 17.0%, due largely to the receipt of a $4.7 million navigation fee refund in 2005, which reduced our 2005 expenses. No similar amount was received in the third quarter of 2006.

• Aircraft fuel increased $129.7 million, or 106.5%, due primarily to losses on the value of our fuel hedge portfolio and, to a lesser extent, the significant rise in fuel prices compared to the same period in 2005. As mentioned earlier, we began recording all fuel hedging gains and losses in aircraft fuel during the first quarter of 2006 and have reclassified prior

~~periods~~Pursuant to ~~conform~~Item 10 toof ~~the~~Regulation ~~current~~S-~~period~~K, ~~format.~~we ~~For~~are ~~the~~providing ~~third~~disclosure ~~quarter~~ of ~~2006,~~the ~~aircraft~~reconciliation ~~fuel~~of ~~includes~~reported non-GAAP ~~$56.2~~financial ~~million~~measures ~~of mark-~~to~~-market~~ ~~losses~~their ~~related~~most todirectly ~~hedges~~comparable ~~that~~financial ~~settle~~measures inreported ~~future~~on ~~periods,~~a ~~including~~GAAP ~~the~~basis. ~~reclassification~~The ofnon-GAAP ~~previously~~financial ~~recorded~~measures ~~mark-~~provide management the ability to~~-market~~ ~~gains~~measure onand ~~settled~~monitor ~~hedges,~~performance ~~compared~~both towith ~~$19.9~~and ~~million~~without the cost of ~~gains~~aircraft ~~during~~fuel (including the ~~same~~gains ~~period~~and oflosses ~~2005. Additionally,~~associated ~~aircraft~~with our fuel ~~expense~~hedging ~~includes~~program ~~$23.6~~where ~~million~~appropriate), ~~and~~fleet ~~$37.8~~transition ~~million~~costs, ofand ~~gains~~restructuring ~~from~~charges ~~settled~~and ~~hedges~~adjustments. ~~during~~Because the ~~third~~cost ~~quarter~~and availability of ~~2006~~aircraft ~~and~~fuel ~~2005,~~are ~~respectively.~~subject ~~After~~to ~~excluding~~many ~~mark-to-market~~economic ~~gains~~and political factors beyond our control and ~~losses~~we ~~recorded~~record ~~during~~changes in the ~~quarters,~~fair ~~our “economic,”~~value orof ~~net,~~our ~~fuel~~hedge ~~expense~~portfolio ~~increased~~in ~~$53.6~~our ~~million,~~income ~~or 37.8%~~statement, ~~over~~it ~~the~~is ~~same~~our ~~period~~view inthat ~~2005,~~the onmeasurement aand ~~3.9%~~monitoring ~~increase~~of inperformance without fuel ~~consumption~~is important. ~~Our~~In ~~economic~~addition, ~~fuel~~we ~~cost~~believe ~~per~~the disclosure ~~gallon~~of ~~increased~~financial ~~33.5%~~performance ~~over~~without ~~the~~fleet ~~third~~transition ~~quarter~~costs ofand ~~2005~~restructuring ~~from~~charges ~~$1.56~~and adjustments is useful to $2investors.~~08. Even~~ ~~though~~Finally, ~~fuel~~these ~~prices~~non-GAAP ~~have~~financial ~~declined~~measures ~~recently,~~are wealso ~~expect~~more acomparable ~~year-over-year~~to ~~increase~~financial inmeasures ~~fuel~~reported ~~cost~~to in the ~~fourth~~Department of ~~quarter~~Transportation ofby ~~2006~~other major airlines.

~~See~~The ~~page~~following ~~24 for~~tables areconcile ~~table~~our ~~summarizing~~non-GAAP ~~fuel~~financial ~~cost~~measures ~~per~~to ~~gallon realized by Alaska (~~the ~~economic~~most ~~cost~~directly ~~per~~comparable ~~gallon) and the cost per gallon on a~~ GAAP ~~basis~~financial measures ~~(including~~for ~~all~~Alaska ~~hedging~~Airlines, ~~gains and losses)~~Inc.:

•Alaska ~~Aircraft maintenance decreased by $10.8 million~~Airlines, ~~or 25~~Inc.~~0%,~~ compared to the prior-year quarter primarily due to lower maintenance costs on our B737-200 and MD-80 fleets as we are transitioning out of those aircraft, fewer unexpected engine maintenance events, a change in the mix of airframe events, and lower airframe costs per event due to renegotiated contracts with our outside vendors. Our current expectation is that aircraft maintenance costs will be down approximately $20 million for the full year 2006 compared to 2005.

•(in ~~Aircraft rent decreased by $3.1 million~~millions, orexcept ~~10.5%,~~for ~~compared to the same period in 2005 primarily due to the buyout of five of our MD~~per-80ASM ~~leases~~unit ~~during~~information) ~~this year’s third quarter and the discontinuation of lease payments associated with those leases. See Note 2 to the condensed financial statements for further discussion.~~

• Depreciation and amortization increased $3.3 million, or 10.3%, compared to the same period in 2005. This increase is primarily due to six new B737-800 aircraft delivered in the first nine months of 2006, the purchase of five MD-80 aircraft from lessors during the third quarter, and the acceleration of depreciation on our owned MD-80 fleet as we reduced the estimated economic lives to reflect the estimated date at which those aircraft would be sold. Despite the impairment charge recorded in the first quarter of 2006, depreciation on the MD-80 fleet was $7.3 million in the third quarter of 2006 compared to $5.5 million in the same period of 2005 as a result of the accelerated depreciation.


	Three Months Ended June 30						Six Months Ended June 30
	2007			2006			2007			2006
Mainline unit cost reconciliations:
Operating expenses	$	714.2		$	639.5		$	1,383.4		$	1,353.8
Less: regional flying costs		(74.1	)		(4.0	)		(141.5	)		(7.9	)

Mainline operating expenses	$	640.1		$	635.5		$	1,241.9		$	1,345.9
Mainline ASMs		6,140			5,834			11,834			11,373

Mainline operating expenses per ASM		10.43	¢		10.89	¢		10.49	¢		11.83	¢

Operating expenses	$	714.2		$	639.5		$	1,383.4		$	1,353.8
Less: regional flying costs		(74.1	)		(4.0	)		(141.5	)		(7.9	)
Less: aircraft fuel		(193.4	)		(173.7	)		(351.0	)		(315.7	)
Less: fleet transition costs		—			—			—			(131.1	)
Less: restructuring charges and adjustments		—			(3.8	)		—			(3.8	)

Mainline operating expenses excluding fuel, fleet transition costs, and restructuring charges and adjustments	$	446.7		$	458.0		$	890.9		$	895.3
Mainline ASMs		6,140			5,834			11,834			11,373

Mainline operating expenses per ASM excluding fuel, fleet transition costs, and restructuring charges and adjustments		7.28	¢		7.85	¢		7.53	¢		7.87	¢


	Three Months Ended June 30						Six Months Ended June 30
	2007			2006			2007			2006
Reconciliation to GAAP income (loss) before taxes:
Income before taxes, excluding mark-to-market hedging gains (losses), fleet transition costs, and restructuring charges and adjustments	$	82.4		$	79.6		$	68.1		$	87.2
Adjustments to reflect timing of gain or loss recognition resulting from mark-to-market accounting on fuel hedges		(1.5	)		(3.3	)		5.3			(4.5	)
Less: fleet transition costs		—			—			—			(131.1	)
Less: restructuring charges and adjustments		—			(3.8	)		—			(3.8	)

GAAP income (loss) before taxes as reported	$	80.9		$	72.5		$	73.4		$	(52.2	)

Nonoperating Income (Expense)

Net nonoperating income (expense) was $1.3 million in the third quarter of 2006 compared to $(2.2) million during the same period of 2005. Interest income increased $5.4 million compared to the third quarter of 2005, primarily due to the higher average cash and marketable securities

~~balance~~Alaska ~~and~~Airlines ~~higher~~Fuel ~~average~~Reconciliation portfolio returns. Interest expense increased $6.9 million due to interest rate increases on our variable-rate debt, new debt arrangements in the first nine months of 2006, the increased balance on our pre-delivery payment facility, and the changes to some of our variable-rate debt arrangements to slightly higher fixed rates. Capitalized interest increased $3.5 million from $2.6 million in the third quarter of 2005 to $6.1 million in the third quarter of 2006. This increase is due to the significant increase in deposits for future flight equipment resulting from our recent aircraft purchase agreements for B737-800.

~~Income~~(in ~~Tax~~millions, ~~Expense~~except ~~(Benefit~~for per-gallon amounts)

See discussion below under “Comparison of Nine Months Ended September 30, 2006 to Nine Months Ended September 30, 2005.”


	Three Months Ended June 30
	2007						2006
	Dollars			Cost/Gal			Dollars			Cost/Gal
Raw or “into-plane” fuel cost	$	196.9		$	2.20		$	200.0		$	2.25
Less: gains during the period on settled hedges		(5.0	)		(0.06	)		(29.6	)		(0.33	)

Economic fuel expense	$	191.9		$	2.14		$	170.4		$	1.92

Adjustments to reflect timing of gain or loss recognition resulting from mark-to-market accounting on fuel hedges		1.5			0.02			3.3			0.04

GAAP fuel expense	$	193.4		$	2.16		$	173.7		$	1.96

Fuel gallons		89.8						88.8


	Six Months Ended June 30
	2007						2006
	Dollars			Cost/Gal			Dollars			Cost/Gal
Raw or “into-plane” fuel cost	$	362.8		$	2.09		$	366.6		$	2.12
Less: gains during the period on settled hedges		(6.5	)		(0.04	)		(55.4	)		(0.32	)

Economic fuel expense	$	356.3		$	2.05		$	311.2		$	1.80

Adjustments to reflect timing of gain or loss recognition resulting from mark-to-market accounting on fuel hedges		(5.3	)		(0.03	)		4.5			0.02

GAAP fuel expense	$	351.0		$	2.02		$	315.7		$	1.82

Fuel gallons		173.9						173.3

Comparison of Nine Months Ended September 30, 2006 to Nine Months Ended September 30, 2005

Our net loss for the nine months ended September 30, 2006 was $47.4 million versus net income of $24.4 million during the same period of 2005.

Both the 2006 and 2005 results include certain significant items that impact the comparability of the nine-month periods:

• Our 2006 net income includes charges of $189.5 million ($118.5 million after tax) associated with our fleet transition plan (See Note 2 to the condensed financial statements);

• We recorded restructuring charges of $32.4 million ($20.3 million after tax) in 2006 associated with the severance packages offered to eligible employees affected by new contracts this year compared to $20.7 million ($12.9 million, net of tax) in the first nine months of 2005 related to severance costs resulting from the subcontracting of the ramp services operation in Seattle and costs associated with the termination of the lease at our Oakland heavy maintenance base;

• Results include $60.7 million ($38.0 million after tax) of mark-to-market fuel hedging losses, including the reclassification of previously recorded mark-to-market gains on settled hedges, in the first nine months of 2006 compared to $100.2 million ($62.6 million after tax) of mark-to-market fuel hedging gains in the same period of 2005;

• Our 2005 net income includes a $128.2 million pre-tax ($80.1 million after tax) charge resulting from the change in the method of accounting for major airframe and engine overhauls as discussed in Note 5 to the financial statements;

• Our 2005 results also include a $5.7 million ($3.6 million after tax) refund, including $1.0 million of related interest income, for navigation fees paid in Mexico.

Financial and statistical data comparisons are shown on page 23. On page 24, we have included a reconciliation of reported non-GAAP financial measures to the most directly comparable GAAP financial measures. A discussion of the nine-month data follows.

Revenues

~~Operating~~Total operating revenues increased $~~231~~84.47 million, or 1211.79%, during the ~~first~~second ~~nine~~quarter ~~months~~ of ~~2006~~2007 as compared to the same period in ~~2005 due primarily to a 7~~2006.6% ~~increase~~The inmajority ~~operating~~of ~~revenue~~the ~~per available seat mile (RASM) and a 4.7%~~ increase ~~in capacity. The increase in RASM~~ resulted from athe ~~slight~~new ~~increase~~Capacity inPurchase ~~load~~Agreement ~~factors~~with ~~and~~Horizon, awith ~~7.2%~~mainline ~~increase~~revenues (defined inas ~~ticket~~passenger ~~yields~~revenues ~~resulting largely~~ from ~~higher~~those ~~ticket~~flights ~~prices, coupled~~operating ~~with~~on ~~increases~~Company injets plus freight, ~~and~~ mail ~~revenue~~ and other~~-net~~ ~~revenue~~revenues) asonly ~~explained~~contributing ~~below~~$18.1 ~~The~~million ~~increase~~of ~~in capacity is primarily~~ the ~~result~~increase. ofThe ~~having~~components ~~a fleet~~ of ~~112~~the ~~operating~~Company’s ~~aircraft~~revenue atare ~~September 30,~~summarized ~~2006~~in ~~compared~~the tofollowing ~~110 at~~table: ~~September 30, 2005 and a longer average stage length this quarter compared to last year.~~

Load factor increased 0.9 percentage points to 77.5% during the first nine months of 2006 due primarily to a 6.0% increase in passenger traffic outpacing the 4.7% increase in capacity.


	Three Months Ended June 30
(in millions)	2007		2006		% Change
Passenger Revenue - Mainline	$	663.3	$	647.3	2.5
Freight and mail		26.3		25.6	2.7
Other - net		34.5		33.1	4.2

Total Mainline Revenues	$	724.1	$	706.0	2.6

Passenger Revenue - Regional flying		71.0		4.4	NM

Total Operating Revenues	$	795.1	$	710.4	11.9

~~Freight~~Passenger ~~and~~Revenue ~~mail~~– ~~revenues increased~~Mainline $3.4 million, or 5.0%, compared to the same period in 2005 primarily due to higher mail and freight yields and fuel surcharges that we added to our freight services beginning in the third quarter of 2005, offset by lower volumes.

~~Other-net~~Mainline ~~revenues~~passenger revenue increased ~~slightly~~2.5% on a 5.2% increase in available seat miles offset by $a 2.7% decline in passenger revenue per available seat mile (PRASM). The decline in PRASM was caused by a 1.6% ~~million~~decline in yields and a 0.8-point decline in load factor, orfrom 279.03% to 78.5%. Market-specific results were mixed; however, ~~due~~our toload anfactor ~~increase~~declines were the largest in ~~Mileage~~our ~~Plan~~Mexico ~~revenues~~markets, ~~resulting~~where ~~from~~we ~~higher~~have ~~award~~seen ~~redemption~~significant onnew ~~our~~competitive capacity. We also ~~partner~~believe ~~airlines~~the ~~and~~load anfactor ~~increase~~declines inare ~~cash~~partly ~~receipts~~the ~~from~~result ~~miles~~of ~~sold,~~the replacement of ~~which~~older aaircraft ~~portion~~with islarger ~~recognized~~B737-800 ~~immediately.~~and ~~The~~our ~~increase~~substitution ~~was~~of ~~offset~~all-passenger byB737-400 anaircraft in place of B737-400 combi aircraft that are being modified, without a commensurate increase in the ~~deferral~~number ~~rate~~of onpassengers. ~~cash~~Our ~~received~~load ~~from~~factor ~~miles~~in ~~sold.~~July Aswas ~~yields~~83.4% ~~have~~compared ~~increased~~to 82.8% in ~~2006,~~the ~~our~~prior ~~rate at~~year. ~~which~~Our weadvance ~~defer~~bookings ~~the~~currently ~~revenue~~suggest ~~related~~that toload ~~sold~~factors ~~miles~~will ~~has~~be ~~increased,~~up ~~resulting~~slightly in aAugust ~~smaller~~and ~~percentage~~September of ~~those~~2007 ~~cash~~compared ~~receipts~~to ~~recorded~~the same asperiods ~~revenue~~in ~~during the period~~2006.

~~Expenses~~Passenger Revenue – Regional Flying

~~Total~~Passenger ~~operating~~revenue ~~expenses~~– regional flying increased by $~~497~~66.56 million, ~~or 30.2%, as compared~~ to ~~the same period in 2005~~$71.0 ~~This~~million ~~increase~~because isof ~~largely due to fleet transition costs during~~ the ~~first~~new ~~nine~~Capacity ~~months~~Purchase ofArrangement ~~2006, a significant increase in aircraft fuel~~ (~~including hedging gains and losses~~CPA), ~~and~~with ~~increases in wages and benefits, variable incentive pay, contracted services, selling expenses, depreciation and amortization, and restructuring charges, offset by a decline in aircraft maintenance~~Horizon. Operating expenses per ASM increased 24.4% to 12.23 cents in the first nine months of 2006 from 9.83 cents during the same period in 2005. Operating expense per ASM excluding fuel, fleet transition costs, restructuring charges and a navigation fee refund in 2005 decreased 3.9% as compared to the same period in 2005.

Although the markets subject to the CPA have changed slightly compared to those included under the prior revenue-sharing arrangement, we believe it is useful to evaluate year-over-year revenue information to gauge actual trends in those markets. This factors out the impact of the intercompany capacity purchase agreement and, as a result, gives readers information about the aggregate impact to Air Group revenues. Total passenger revenue – regional flying recorded by the Company was $71.0 million. In 2006, Horizon recorded $56.5 million in revenues for markets covered by the revenue-sharing arrangement. Yields in those markets declined 8.6% and load factor increased 2.1 points.

~~Explanations~~During ofthe ~~significant~~second ~~period~~quarter, regional flying expenses exceeded regional passenger revenues by $3.1 million, bringing the year-~~over~~to-~~period~~date ~~changes~~deficit to $13.2 million. However, revenues in the ~~components~~incentive markets covered by the CPA are highly seasonal in nature and, accordingly, we expect that passenger revenue – regional flying will exceed regional flying costs in the third quarter but fall below costs in the fourth quarter, resulting in a full-year loss from regional flying in excess of ~~operating~~the year-to-date amount, but not a multiple of it. However, the reported results of regional flying do not reflect the total ~~expenses~~contribution ~~are~~of these flights to our mainline operation as ~~follows:~~many of the flights feed traffic from smaller cities.

•Expenses ~~Wages and benefits increased $4.2 million, or 0.8%, during the first nine months of 2006 compared to the same period in 2005 primarily due to the following:~~

–For athe quarter, total operating expenses increased $274.7 million ~~signing~~compared ~~bonus~~to ~~resulting~~the ~~from~~same ~~the~~period ~~new~~in ~~four-year~~2006. ~~contract~~We ~~with~~believe ~~our~~it ~~flight~~is ~~attendants~~useful ~~that~~to ~~was~~summarize ~~ratified~~operating ~~during~~expenses as follows, which is consistent with the ~~second~~way ~~quarter~~expenses ofare ~~2006;~~reported internally and evaluated by management:


	Three Months Ended June 30
Operating Expenses (in millions)	2007		2006		% Change
Mainline	$	640.1	$	635.5	0.7
Regional flying costs		74.1		4.0	NM

Total Operating Expenses	$	714.2	$	639.5	11.7

–Mainline ~~market-based~~Operating ~~pay~~Expenses ~~adjustments for our non-union personnel in the spring of 2006 and an increase in stock-based compensation expense following the adoption of SFAS 123R;~~

–Total anmainline ~~increase~~operating incosts ~~mechanics~~for ~~wages~~the ~~resulting~~second ~~from~~quarter of 2007 increased by $4.6 million or 0.7% to $640.1 million compared to $635.5 million in the ~~contract~~same ~~ratified~~period of 2006. Higher fuel costs were mostly offset by declines in other areas, although there are a number of items described more fully below that affect the ~~fourth~~comparability ~~quarter~~between the second quarters of ~~2005;~~2007 and 2006.

–Wages ~~increased postretirement medical~~ and ~~pension~~Benefits costs from the prior year primarily driven by a $3.9 million increase in our retiree medical accrual during the second quarter and a $3.2 million third quarter adjustment to pension costs resulting from certain assumption changes.

Wages and benefits were nearly flat during the second quarter of 2007 compared to the same period in 2006. The second quarter of 2006 included a $2.7 million contract-signing bonus paid to our flight attendants and a $3.9 million increase ~~over~~in ~~prior~~our retiree medical accrual. The number of full-time equivalent employees in 2007 increased 4.3%, largely as a result of our ~~year~~initiative ~~was~~to ~~partially~~improve ~~offset~~our byon-time performance and other operational goals and an increase in the ~~following:~~number of flight attendants as we transition to B737-800s, which have four flight attendants compared to three in the MD-80 aircraft that are being replaced.

–Variable ~~the~~Incentive ~~reduction~~Pay ~~in pilot wages resulting from the pilot contract that took effect in May 2005; and~~

–Variable incentive pay decreased $5.5 million, or 72.4%, to $2.1 million. The decrease is due to lower expected annual payouts under the ~~subcontracting~~various ofAir Group profit-based incentive plans, offset by higher expenses associated with our ~~ramp~~Operational ~~services~~Performance ~~operation~~Rewards inplan, which ~~Seattle~~rewards inemployees ~~the~~for ~~second~~meeting ~~quarter~~monthly ofon-time ~~2005~~and customer-satisfaction goals.

• Variable incentive pay increased $9.8 million, or 130.7%, over the same period in 2005, primarily due to an increase in forecasted 2006 profit. Air Group maintains several incentive plans that collectively cover all of our employees. These plans include both operational and financial performance metrics that, to a large extent, are based on certain annual profitability targets. If our actual 2006 results differ materially from our forecast, our expense in the fourth quarter of 2006 could be significantly different than the charge in the first three quarters of the year.

• Contracted services increased $11.4 million, or 13.1%, primarily due to the subcontracting of the Company’s Seattle ramp operations in May 2005 combined with the $4.7 million navigation fee refund received in 2005, which reduced our 2005 expenses.

• Aircraft fuel increased $283.6 million, or 100.0%, primarily due to losses on the value of our fuel hedge portfolio and, to a lesser extent, the significant rise in fuel prices compared to the same period in 2005. For the first nine months of 2006, aircraft fuel includes $60.7 million of mark-to-market losses related to hedges that settle in future periods, including the reclassification of previously recorded mark-to-market gains on settled hedges,

~~compared~~Aircraft toFuel $100.2 million of gains during the same period of 2005. Additionally, aircraft fuel expense includes $79.0 million and $81.4 million of gains from settled hedges during the first nine months of 2006 and 2005, respectively. After excluding mark-to-market gains and losses recorded during the period, our “economic,” or net, fuel expense increased $122.7 million, or 32.0%, over the same period in 2005 on a 2.5% increase in fuel consumption. Our economic fuel cost per gallon increased 29.7% over the first nine months of 2005 from $1.46 to $1.90.

~~See~~We ~~page~~do not 24use “hedge accounting” for our portfolio of fuel hedge contracts. As a ~~table~~result, ~~summarizing~~our aircraft fuel ~~cost~~expense ~~per~~can ~~gallon~~be ~~realized~~volatile byas ~~Alaska~~we ~~(the~~mark ~~economic~~our ~~cost~~hedge ~~per~~portfolio ~~gallon)~~to ~~and~~market ~~the~~each ~~cost~~period. ~~per~~We ~~gallon~~use onthree ameasures ~~GAAP~~to ~~basis (including~~evaluate ~~all~~fuel ~~hedging~~expense ~~gains~~as ~~and~~more ~~losses).~~fully described below:

• ~~Aircraft~~Raw ~~maintenance~~fuel ~~decreased~~expense by– ~~$24.9~~defined ~~million,~~as orthe ~~17.4%,~~price ~~mostly~~that ~~due~~we togenerally ~~fewer~~pay ~~unexpected~~at ~~engine~~the ~~maintenance~~airport, ~~events~~or the “into-plane” price, aincluding ~~change~~taxes. inRaw ~~the~~fuel ~~mix~~prices ofare ~~airframe~~impacted ~~events,~~by ~~lower~~world ~~per-event~~oil prices and refining costs, ~~due~~which tocan ~~renegotiated~~vary ~~contracts~~by ~~with~~region ~~our~~in ~~outside~~the ~~vendors,~~U.S. ~~and~~Raw ~~savings~~fuel ~~from~~expense ~~process~~approximates ~~improvement~~cash ~~initiatives~~paid to suppliers.

• ~~Selling~~Economic ~~expenses~~fuel ~~increased~~expense ~~$7.8~~– ~~million~~defined as raw fuel expense minus the cash we receive from hedge counterparties for hedges that settle during the period, oroffset 7by the premium expense that we recognize.~~6%,~~ ~~primarily~~We ~~due~~believe tothis anis ~~increase~~the inbest ~~revenue-related~~measure ~~expenses~~of ~~such~~the aseffect ~~credit~~that ~~card~~fuel ~~and~~prices ~~codeshare~~are ~~commissions~~currently ~~resulting~~having ~~from~~on ~~the~~our ~~rise~~business inbecause ~~revenues~~it ~~over~~most closely approximates the ~~prior~~net ~~period~~cash ~~and~~outflow anassociated ~~increase~~with inpurchasing ~~incentive~~fuel ~~payments~~for toour ~~Horizon~~operation. Accordingly, many industry analysts evaluate our results using this measure, and it is the basis for ~~certain~~most ~~flying~~internal management reporting and incentive pay plans.

• ~~Depreciation~~GAAP ~~and~~fuel ~~amortization~~expense ~~increased~~– ~~$6.7~~defined ~~million,~~as orraw ~~7.2%,~~fuel ~~compared~~expense toplus the ~~same~~effect ~~period~~of inmark-to-market ~~2005.~~adjustments ~~This~~on ~~increase~~settled isand ~~primarily~~unsettled ~~due~~fuel tohedges that we include in our income statement as the ~~delivery~~value of ~~two~~our ~~new B737~~fuel-~~800~~hedging ~~aircraft~~portfolio inincreases ~~2005~~ and ~~six~~decreases. ~~new~~By ~~B737-800~~definition, ~~aircraft~~our inGAAP ~~the~~fuel ~~first~~expense ~~nine~~is ~~months~~very ofvolatile, ~~2006~~even between quarters, ~~the~~because ~~purchase~~it ofincludes ~~five~~these MDmark-80to-market ~~aircraft~~adjustments. ~~from~~A ~~lessors~~key ~~during~~difference ~~the~~between ~~third~~GAAP ~~quarter,~~fuel expense and economic fuel expense is the ~~acceleration~~timing of ~~depreciation~~gain onor ~~our~~loss ~~owned~~recognition. ~~MD-80~~When ~~fleet~~we asrefer to economic fuel expense, we ~~reduced~~include ~~the~~gains ~~estimated~~only ~~economic~~when ~~lives~~they toare ~~reflect~~realized ~~the~~through ~~estimated~~a ~~date~~cash atreceipt ~~which~~from ~~those~~our ~~aircraft~~hedge ~~would~~contract becounterparties. ~~sold,~~Under ~~offset~~GAAP byfuel ~~the~~expense, ~~lower~~those ~~depreciable~~gains ~~base~~are onrecognized when the ~~MD-80~~underlying ~~fleet~~instrument ~~following~~increases in value, which in the ~~impairment~~past ~~charge~~has ~~taken~~occurred in ~~the~~an ~~first~~earlier ~~quarter~~reporting period.

~~Nonoperating~~See ~~Income~~page ~~(Expense)~~28 for a reconciliation between GAAP fuel expense as reported in our statement of operations and economic fuel expense in total and on a per-gallon basis.

~~Net~~Aircraft ~~nonoperating~~fuel ~~income~~increased ~~(expense) was~~ $219.57 million, inor ~~the~~11.3%, ~~first~~on ~~nine~~slightly ~~months~~higher ofconsumption ~~2006~~as ~~compared~~a toresult ~~$(13.0)~~of ~~million~~a ~~during~~significant ~~the~~decline ~~same~~in ~~period~~the ofbenefit realized ~~2005.~~from ~~Interest~~settled ~~income~~hedges ~~increased~~contracts ~~$18.1 million~~ compared to ~~2005,~~the ~~primarily~~second ~~due~~quarter toof ~~higher~~2006. ~~average~~The ~~portfolio~~total ~~returns~~cash ~~and~~benefit afrom ~~higher~~hedges ~~average~~that ~~cash~~settled ~~and marketable~~during ~~securities~~the ~~balance.~~period ~~Interest~~declined ~~expense~~from ~~increased~~ $1629.6 million ~~primarily~~in ~~due~~the tosecond ~~interest~~quarter ~~rate~~of ~~increases~~2006 onto ~~our~~$5.0 ~~variable-rate~~million ~~debt, new debt arrangements~~ in ~~2006,~~ the ~~increased~~second ~~balance~~quarter onof ~~our~~2007. As ~~pre-delivery~~a ~~payment facility~~result, ~~and~~our ~~the~~economic ~~changes~~fuel ~~to some~~costs ofincreased ~~our~~from ~~variable-rate~~$170.4 ~~debt~~million ~~arrangements~~ to ~~slightly~~$191.9 ~~higher~~million. ~~fixed~~Our ~~rates.~~economic ~~Capitalized~~fuel ~~interest~~cost per gallon increased $11.05% ~~million~~over ~~from~~the ~~$4.5~~second ~~million~~quarter inof ~~2005~~2006 tofrom $151.592 ~~million~~to ~~during 2006~~$2.14. ~~This~~Based ison ~~due~~current tojet ~~the~~fuel ~~significant~~prices, ~~increase~~we inexpect ~~deposits~~our ~~for~~economic cost ~~future~~per ~~flight equipment~~gallon into ~~connection~~be ~~with~~even ~~our~~higher ~~recent~~during ~~aircraft~~the ~~purchase~~third ~~agreements~~quarter ~~for~~of ~~B737-800~~2007.

~~Income~~Aircraft ~~Tax~~Maintenance ~~Expense (Benefit)~~

WeAircraft ~~file~~maintenance adecreased ~~consolidated~~by ~~tax return with Air Group and other Air Group subsidiaries~~$7.4 ~~Each member of the consolidated group calculates its tax provision and tax liability~~million, ifor ~~applicable~~17.7%, oncompared ~~a separate-entity basis. Accounting standards require us~~ to ~~provide for income taxes each quarter based on either our estimate of~~ the ~~effective tax rate for the full~~ prior-year orquarter ~~the~~resulting ~~actual~~largely ~~year-to-date~~from ~~effective tax rate if it is our best estimate of our annual expectation. For~~ the ~~first~~benefits ~~nine months~~ of ~~2006,~~ ~~we used the estimate of~~ our ~~effective~~fleet ~~tax~~transition ~~rate for the full year~~ as we ~~believe~~replace itour toaging beMD-80s aand ~~better estimate than the actual year~~B737-~~to-date~~200C ~~effective~~aircraft ~~tax~~with ~~rate.~~newer ~~Our effective income tax benefit rate on the pre~~B737-~~tax~~800 ~~loss~~and ~~for the nine months ended~~converted ~~September 30,~~B737-400 ~~2006 was 40.8%. The nine months ended September 30~~aircraft, ~~2006 also includes $4~~respectively.2 ~~million~~We ofestimate ~~tax benefits associated with~~ the ~~reduction~~savings offrom ~~certain tax contingency accruals for periods for which~~ the ~~statute~~fleet oftransition ~~limitations~~to ~~expired~~be ~~in 2006~~approximately $5.0 ~~Excluding~~million ~~this~~during ~~benefit, our effective tax rate for~~ the ~~nine months ended September 30, 2006 would have been 35~~quarter.~~6%,~~ ~~which~~We iscurrently ~~the~~expect ~~estimated~~maintenance ~~effective~~expense ~~tax~~to ~~rate~~exceed ~~for the full year~~ 2006. Inlevels ~~arriving~~in ~~at this rate, we considered a variety of factors, including expected full-year pre-tax results,~~ the ~~U.S.~~third ~~federal rate of 35%, estimated year-to-date nondeductible expenses~~ and ~~estimated~~fourth ~~state~~quarters ~~income taxes. We evaluate our tax rate each quarter and make adjustments when necessary. Our final effective tax rate for the full year is highly dependent on the level~~ of ~~pre-tax~~2007, ~~income~~given ~~or loss and~~ the expected ~~magnitude~~timing of ~~any~~certain ~~nondeductible~~maintenance ~~expenses in relation to that pre-tax amount~~events.

~~Critical~~Aircraft ~~Accounting~~Rent ~~Estimates~~

~~For~~Aircraft ~~information~~rent ondeclined ~~our~~slightly ~~critical~~because ~~accounting~~of ~~estimates,~~the ~~see~~buyout ~~Item 7~~of five leased MD-80 aircraft in the third quarter of ~~our~~2006. ~~Annual~~These leases were at high rates that were well above current market. The declines were offset by increases that resulted from ~~Report~~the onsale ~~Form~~and 10short-Kterm leaseback of substantially all of our owned MD-80s during the quarter (although at substantially lower rates) and the addition of two new leased B737-800 aircraft in the fourth quarter of 2006. We expect year-over-year increases in aircraft rent for the rest of the year ~~ended~~as ~~December 31,~~the ~~2005~~full impact of the short-term leases is realized.

~~Liquidity~~Landing Fees and ~~Capital~~Other ~~Resources~~ Rentals

~~The~~Landing ~~table~~fees ~~below~~and ~~presents~~other rentals increased by $1.7 million, or 4.2%, compared to the ~~major~~second ~~indicators~~quarter of ~~financial~~2006 ~~condition~~as a result of higher costs at Seattle-Tacoma International Airport and ~~liquidity~~other airports. This was partially offset by the favorable resolution of the Los Angeles World Airports (LAWA) dispute, and the resulting $2.2 million credit recorded in the second quarter that represented a refund of excess amounts paid in February through June. We expect the year-over-year increases in the third and fourth quarters of 2007 to exceed the second quarter increase.

	September 30,2006		December 31,2005		Change
	(In millions, except per-share and debt-to-capital amounts)
Cash and marketable securities	$	1,107.7	$	982.3	$	125.4
Working capital		309.0		160.8		148.2
Long-term debt, net of current portion		875.2		762.6		112.6
Shareholder’s equity		746.4		626.9		119.5
Long-term debt-to-capital		54%:46%		55%:45%		NA
Long-term debt-to-capital assuming aircraft operating leases are capitalized at seven times annualized rent		68%:32%		72%:28%		NA

Selling Expenses

~~Our~~Selling ~~debt-to-capital~~expenses ~~ratio~~declined ~~decreased~~by ~~from~~$5.1 ~~December 31~~million, ~~2005~~or ~~primarily~~13.2%, ~~due~~compared to the ~~contribution~~second quarter of ~~$160.2~~2006 as a ~~million~~result of ~~equity~~lower ticket distribution costs and credit card fees that resulted from ~~our~~new ~~parent~~contracts that were put into place in the ~~second~~last quarter of 2006,. ~~partially~~The ~~offset~~2006 byamount also included a significant increase in our accrual for Mileage Plan award costs and $470.43 million ~~net~~paid ~~loss~~to ~~for~~Horizon under the ~~nine~~revenue-sharing ~~months,~~arrangement ~~and~~in bydesignated anmarkets ~~increase~~that existed in ~~our~~2006, ~~outstanding~~compared ~~debt~~to inzero ~~connection~~this ~~with~~year because of the new ~~aircraft-secured~~CPA. ~~debt~~These ~~arrangements~~declines were partially offset by higher advertising costs. We currently expect the downward trend in selling expenses to continue for the ~~first~~reasons ~~nine months~~described above for the balance of ~~2006~~the year.

Depreciation and Amortization

Depreciation and amortization increased $3.4 million, or 10.6%, compared to the second quarter of 2006. This is primarily the result of 16 new owned B737-800 aircraft delivered since the beginning of the second quarter of 2006. As we continue to add new aircraft, we expect this trend to continue for the foreseeable future.

~~During~~Other ~~the~~operating ~~nine~~expenses ~~months ended September 30, 2006, our cash and marketable securities increased $125.4 million to just over $1.1 billion. The following discussion summarizes the primary drivers of the increase.~~

~~Cash~~Other ~~Provided~~operating expenses increased because of higher passenger remuneration costs, crew costs, professional fees, software license and maintenance costs, and other costs, offset by ~~(Used~~lower ~~in)~~liability ~~Operating~~insurance ~~Activities~~expenses because of better rates negotiated in December 2006.

~~During~~Mainline ~~the~~Unit ~~first~~Costs ~~nine~~per ~~months~~Available ofSeat ~~2006,~~Mile ~~net~~(CASM) cash provided by operating activities was $339.1 million, compared to $189.0 million during the same period of 2005. The improvement was driven by significantly higher operating revenues and a decline in cash payments made for severance compared to the prior year, offset by continued increases in fuel costs and $71.9 million in cash contributions to our defined benefit pension plan during the first nine months of 2006 compared to $69.3 million during the same period of 2005.

~~Cash~~Operating ~~Provided~~costs byper ASM (~~Used~~CASM) is an important metric in) the industry and we use it to gauge the effectiveness of our cost-reduction efforts. Our effort to reduce unit costs focuses not only on controlling the actual ~~Investing~~dollars ~~Activities~~we spend, but also on increasing our capacity without adding a commensurate amount of cost. As was the case in 2006, our goal for the next two years is to grow capacity primarily through replacing our MD-80 aircraft with larger-gauge 737-800s.

~~Cash~~Total ~~used~~mainline inoperating ~~investing~~costs ~~activities~~per ~~was~~available ~~$449.5~~seat ~~million~~mile ~~during~~decreased ~~the~~from ~~first~~10.89 ~~nine~~cents ~~months~~per ofASM ~~2006, compared~~ to ~~$156~~10.043 ~~million~~cents ~~during~~per ~~the same~~ASM ~~period~~in ~~of 2005. During~~ the ~~first~~second ~~nine~~quarter ~~months~~ of ~~2006,~~2007. Total weoperating ~~had~~costs ~~net~~per ~~purchases~~ASM ofexcluding ~~marketable~~fuel ~~securities~~and ofrestructuring ~~$42.4~~charges ~~million~~recorded ~~and~~in ~~used~~2006 ~~$422~~decreased 7.3%, ~~million~~from ~~for~~7.85 ~~property~~cents ~~and~~per ~~equipment~~ASM ~~additions,~~to ~~net~~7.28 ofcents ~~proceeds~~per ~~from~~ASM ~~asset~~on ~~dispositions~~a 5.2% ~~During~~increase ~~the~~in ~~nine~~ASM ~~months ended~~capacity. ~~September 30~~However, ~~2006,~~the ~~our~~7.3% ~~aircraft-related~~decline ~~capital~~is ~~expenditures,~~not ~~net~~indicative of ~~aircraft~~the ~~deposits~~unit ~~returned~~cost trends ~~and~~that ~~proceeds~~are ~~from~~expected ~~asset~~for ~~dispositions,~~the ~~increased~~rest ~~$148.0~~of ~~million~~the asyear. ~~compared~~For to the ~~same~~third ~~period of 2005~~quarter, ~~primarily~~we ascurrently aexpect ~~result~~our ofunit ~~the~~costs ~~increase in~~excluding ~~pre-delivery~~fuel ~~payments~~to ~~made~~increase ~~for~~by ~~future~~2% ~~aircraft~~to ~~deliveries~~3% ~~and~~to ~~the~~7.4 ~~purchase~~to of7.5 ~~six~~cents ~~B737-800s,~~per ~~and~~ASM. ~~five~~Our ~~MD-80s~~full ~~out~~year ofunit ~~leases~~costs inexcluding ~~the~~fuel ~~first~~are ~~nine~~expected ~~months~~to offall ~~2006,~~by ~~compared~~2% to ~~three~~3% to ~~B737-800s~~7.5 into ~~2005~~7.6 Wecents ~~expect~~per ~~capital~~ASM. ~~expenditures~~For toa bereconciliation ~~approximately $510~~between ~~million~~this ~~for~~measure and the ~~full~~most ~~year~~directly ~~2006~~comparable ~~and~~GAAP ~~$535~~measure, ~~million~~please inrefer ~~2007~~to 27.

~~Cash~~Regional Operating ~~Provided~~Expense ~~by (Used in) Financing Activities~~

~~Net~~Regional ~~cash~~flying ~~provided~~costs byincreased ~~financing~~$70.1 ~~activities~~million, ~~was~~from $~~189.~~4.0 million ~~during~~in the ~~first~~second ~~nine~~quarter ~~months~~ of 2006 ~~compared~~ to ~~net~~$74.1 ~~cash~~million ~~used~~in the second quarter of 2007. Of the total, $3468.39 million ~~during~~was ~~the~~paid ~~same~~to ~~period~~Horizon ~~of 2005.~~under Wethe ~~obtained~~new ~~debt~~CPA ~~financing~~ for ~~five~~333 million ~~new~~ASMs. ~~B737-800~~The ~~aircraft~~balance ~~purchased~~includes inamounts ~~the~~paid ~~first~~to ~~nine~~a ~~months~~third ofparty ~~2006.~~for ~~Additionally,~~the ~~there~~Dutch ~~was~~Harbor aflying ~~net~~(which ~~increase~~approximated ofthe ~~$68.5~~amount ~~million~~paid in ~~our~~2006) ~~pre-delivery~~and ~~payment~~certain administrative ~~facility.~~and ~~Offsetting~~information ~~these~~technology ~~increases~~costs ~~were~~borne ~~normal long-term~~by ~~debt~~the ~~payments~~Company ofthat ~~$38.5~~are ~~million~~allocated ~~during~~to ~~2006~~regional flying costs.

WeNonoperating ~~plan~~Income ~~to meet our capital and operating commitments through internally generated funds from~~(Expense) ~~operations and cash and marketable securities on hand at September 30, 2006, along with additional debt financing and proceeds from our pre-delivery payment facility.~~

~~Noncash~~Nonoperating ~~Investing~~income (expense) netted to zero in the second quarter of 2007, compared to nonoperating income of $1.6 million for the same period of 2006. Interest income rose $1.8 million compared to the second quarter of 2006 as a result of increase in the intercompany receivable from Horizon. Interest expense increased $4.3 million primarily resulting from interest rate increases on our variable-rate debt and ~~Financing~~new ~~Activities~~debt arrangements in the second half of 2006 and the first half of 2007. This increase was partly offset by the conversion of our $150 million senior convertible notes to equity in April 2006, which eliminated further interest expense on those notes.

In the second quarter of 2006, our parent contributed $160.2 million of equity to us through the relief of an intercompany payable. In connection with this contribution, we relieved an intercompany receivable from Horizon in the amount of $40.2 million. Additionally, we assumed debt totaling $11.6 million in connection with the purchase of one of the MD-80 aircraft purchased from lessors during the third quarter.

~~Bank~~ Capitalized ~~Line~~interest increased $0.9 million because of ~~Credit~~the ~~Facility~~increase in pre-delivery deposits made in connection with aircraft orders. We expect that nonoperating expense will increase in 2007 as we continue to finance new aircraft deliveries, resulting in a higher average debt balance.

~~Alaska’s~~Income $160 million variable-rate credit facility restricts Alaska from distributing any funds to Air Group in the form of dividends and limits the amount of funds Alaska can loan to Air Group. As of September 30, 2006, thereTax ~~are~~Expense no(Benefit) ~~outstanding borrowings on this credit facility and we have no immediate plans to draw on the facility.~~

See discussion below under “Comparison of Six Months Ended June 30, 2007 to Six Months Ended June 30, 2006.”

Comparison of Six Months Ended June 30, 2007 to Six Months Ended June 30, 2006

Our net income for the six months ended June 30, 2007 was $46.4 million, compared to a net loss in 2006 of $27.3 million. Our 2006 net loss includes a pretax charge of $131.1 million associated with our plan to transition out of the MD-80 fleet that was recorded in the first quarter of 2006, and a $3.8 million pretax restructuring charge associated with our voluntary severance offer to the Company’s flight attendants as part of an early-out program. Both periods include adjustments to reflect timing of gain and loss recognition resulting from mark-to-market fuel hedge accounting.

Excluding the above items, our pretax income would have been $68.1 million for the first six months of 2007 compared to pretax income of $87.2 million during the same period of 2006. We believe presentation of this non-GAAP financial measure provides useful information to investors and other readers because of the same reasons listed above in the three-month discussion.

Please refer to pages 26 through 28 for financial and statistical data, including a reconciliation between reported non-GAAP financial measures to the most directly comparable GAAP financial measures for the six months ended June 30, 2007.

Revenues

Total operating revenues increased $154.5 million, or 11.9%, during the first six months of 2007 as compared to the same period in 2006. The majority of the increase was due to the new Capacity Purchase Agreement with Horizon described above, with mainline revenues contributing only $35 million of the increase. The changes are summarized in the following table:


	Six Months Ended June 30
(in millions)	2007		2006		% Change
Passenger Revenue - Mainline	$	1,209.2	$	1,184.1	2.1
Freight and mail		47.0		46.1	2.0
Other - net		70.4		61.4	14.7

Total Mainline Revenues	$	1,326.6	$	1,291.6	2.7

Passenger Revenue - Regional flying		128.3		8.8	NM

Total Operating Revenues	$	1,454.9	$	1,300.4	11.9

Passenger Revenue – Mainline

Mainline passenger revenue for the first six months increased 2.1% on a 4.1% increase in available seat miles offset by a 1.8% decline in passenger revenues per available seat mile (PRASM). The decline in PRASM was caused by a 1.4-point decline in load factor, from 76.5% to 75.1%. The year-over-year yield was nearly flat for the six months ended June 30, 2007. Our load factor declines were the largest in our Mexico markets, where we have seen significant new competitive capacity. We also believe the load factor declines are partly the result of the replacement of older aircraft with larger B737-800 and our substitution of all-passenger B737-400 aircraft in place of B737-400 combi aircraft that are being modified, without a commensurate increase in the number of passengers.

Other-net revenues increased $9.0 million, or 14.7%, primarily as a result of higher commission revenue associated with the sale of mileage credits to our bank partner. When we sell mileage credits, we defer the majority of the proceeds and recognize that revenue when award travel takes place. Commission revenue represents the difference between the proceeds from the sale of miles and the amount we defer.

Passenger Revenue – Regional Flying

Passenger revenue – regional flying increased by $119.5 million because of the new Capacity Purchase Arrangement (CPA) with Horizon.

Although the markets subject to the CPA have changed slightly compared to those included under the prior revenue-sharing arrangement, we believe it is useful to evaluate year-over-year revenue information to gauge actual trends in those markets. This factors out the impact of the intercompany capacity purchase agreement and, as a result, gives readers information about the aggregate impact to Air Group revenues. Total passenger revenue – regional flying recorded by the Company in the first half of 2007 was $128.3 million. In 2006, Horizon recorded $106.1 million in revenues for markets covered by the revenue-sharing arrangement in the same period. Yields in those markets declined 8.8%, and load factor increased 0.9 pts.

During the six months ended June 30, 2007, regional flying expenses exceeded regional passenger revenues by $13.2 million. However, the reported results of regional flying do not reflect the total contribution of these flights to our mainline operation as many of the flights feed traffic from smaller cities.

Expenses

For the six months ended June 30, 2007, total operating expenses increased $29.6 million or 2.2% compared to the same period in 2006 as a result of a decline in mainline operating costs offset by new regional flying costs recorded under the new CPA with Horizon. We believe it is useful to summarize operating expenses as follows, which is consistent with the way expenses are reported internally and evaluated by management:


	Six Months Ended June 30
Operating Expenses (in millions)	2007		2006		% Change
Mainline	$	1,241.9	$	1,345.9	(7.7	)
Regional flying		141.5		7.9	NM

Total Operating Expenses	$	1,383.4	$	1,353.8	2.2

Mainline Operating Expenses

Total mainline operating costs decreased $104 million or 7.7% to $1,241.9 million during the first six months of 2007 compared to the same period in the last year. The decrease was primarily due to the $131.1 million fleet transition-related impairment charge recorded in 2006, offset by increases in other operating costs, which are more fully described below.

Wages and Benefits

Wages and benefits increased during the first six months of 2007 by $10.3 million, or 2.8%, primarily due to a 5.2% increase in full-time equivalents and higher wages compared to the same period in 2006. The number of full-time equivalent employees increased largely as a result of our initiative to improve our on-time performance and other operational goals and an increase in the number of flight attendants as we transition to B737-800s, which have four flight attendants, compared to three in the MD-80 aircraft that are being replaced. The first half of 2006 also included a $2.7 million contract-signing bonus paid to our flight attendants and a $3.9 million increase in our retiree medical accrual.

Variable Incentive Pay

Variable incentive pay for the first six months of 2007 decreased $4.2 million or 30.0%, compared to same period in 2006. The decrease results from lower expected annual payouts under the various Air Group profit-based incentive plans, offset by higher expenses associated with our Operational Performance Rewards plan.

Aircraft Fuel

Aircraft fuel increased $35.3 million, or 11.2%, on nearly flat consumption due to a significant decline in the benefit realized from settled hedge contracts compared to the same period in the prior year. The total cash benefit from hedges that settled during the period declined from $55.4 million in the first six months of 2006 to $6.5 million for the six months ended June 30, 2007. As a result, our economic fuel costs increased from $311.2 million in the first six months of 2006 to $356.3 million in the first six months of 2007. Our economic fuel cost per gallon increased 13.9% over the first six months of 2006 from $1.80 to $2.05.

See page 28 for a reconciliation between GAAP fuel expense as reported in our statement of operations and economic fuel expense in total and on a per-gallon basis.

Aircraft Maintenance

Aircraft maintenance decreased by $17.4 million, or 20.2%, during the first six months of 2007, compared to the same period in the prior year, resulting largely from the benefits of our fleet transition.

Aircraft Rent

Aircraft rent declined because of the buyout of five leased MD-80 aircraft in the third quarter of 2006. These leases were at high rates that were well above current market rates. These declines were offset by increases that resulted from the sale and short-term leaseback of substantially all of our owned MD-80 aircraft during the second quarter (although at substantially lower rates) and the addition of two new leased B737-800 aircraft in the fourth quarter of 2006.

Landing Fees and Other Rentals

Landing fees and other rentals increased by $6.6 million, or 8.5%, compared to the first six months of 2006 as a result of higher costs at Seattle-Tacoma International Airport and other airports. The year-over-year comparison was also impacted by a $1.5 million credit from the Port of Seattle related to the final true-up of 2005 rates recorded in the 2006 period.

Selling Expenses

Selling expenses declined by $8.2 million, or 11.2%, compared to the first six months of 2006 as a result of lower ticket distribution costs and credit card fees that resulted from new contracts that were put into place in the last quarter of 2006. The 2006 amount also included $1.5 million paid to Horizon under the revenue-sharing arrangement in certain designated markets that existed in 2006, compared to zero this year because of the new CPA. These declines were partially offset by higher advertising costs.

Depreciation and Amortization

Depreciation and amortization increased $6.6 million, or 10.2%, compared to the first six months of 2006. This is primarily the result of 10 new B737-800 aircraft delivered in 2006 and seven new B737-800 aircraft delivered in the first six months of 2007.

Mainline Unit Costs per Available Seat Mile (CASM)

Total mainline operating costs per available seat mile decreased from 11.83 cents per ASM to 10.49 cents per ASM in the first six months of 2007. Total operating costs per ASM excluding fuel, fleet transition costs and restructuring charges recorded in 2006 decreased 4.3%, from 7.87 cents per ASM to 7.53 cents per ASM on a 4.1% increase in ASM capacity.

Regional Operating Expense

Regional flying costs increased $133.6 million, from $7.9 million for the first six months of 2006 to $141.5 million for the six months ended June 30, 2007. Of the total, $131.2 million was paid to Horizon under the new CPA for 630 million ASMs. The balance includes amounts paid to a third party for the Dutch Harbor flying (which approximated the amount paid in 2006) and certain administrative and information technology costs borne by the Company allocated to the regional flying expense.

Nonoperating Income (Expense)

Net nonoperating income was $1.9 million in the first six months of 2007 compared to $1.2 million in the same period of 2006. The reasons for the changes to the components of nonoperating expense are consistent with those in the three-month discussion.

Income Tax Expense (Benefit)

We file a consolidated tax return with Air Group and other Air Group subsidiaries. Each member of the consolidated group calculates its tax provision and tax liability, if applicable, on a separate-entity basis. Accounting standards require us to provide for income taxes each quarter based on either our estimate of the effective tax rate for the full year or the actual year-to-date rate if it is our best estimate of our annual expectation. For the six months of 2007, we used the actual year-to-date effective tax rate, as we believe it to be our best estimate of the full-year rate at this time. Our effective income tax benefit rate on the pre-tax income for the first six months of 2007 was 36.8%. In arriving at this rate, we considered a variety of factors, including year-to-date pre-tax results, the U.S. federal rate of 35%, estimated year-to-date nondeductible expenses and estimated state income taxes. The effective rate for the first half of the year was positively affected by a $1.7 million credit that resulted from the favorable impact of the state income tax matter referred to in Note 11. Excluding this benefit, our effective benefit rate would have been approximately 39%.

We evaluate our tax rate each quarter and make adjustments when necessary. Our final effective tax rate for the full year is highly dependent on the level of pre-tax income or loss and the magnitude of any nondeductible expenses in relation to that pre-tax amount.

Critical Accounting Estimates

For information on our critical accounting estimates, see Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2006. For information about the impact of recently released accounting standards, see Note 1 to the condensed financial statements.

LIQUIDITY AND CAPITAL RESOURCES

The table below presents the major indicators of financial condition and liquidity.


	June 30, 2007			December 31, 2006			Change
(in millions, except per-share and debt-to-capital amounts)
Cash and marketable securities	$	987.9		$	1,014.0		$	(26.1	)
Working capital		401.7			319.9			81.8
Long-term debt, net of current portion		1,111.3			963.5			147.8
Shareholder’s equity		726.3			672.5			53.8
Long-term debt-to-capital		60%: 40	%		59%: 41	%		NA
Long-term debt-to-capital assuming aircraft operating leases are capitalized at seven times annualized rent		72%: 28	%		72%: 28	%		NA

During the six months ended June 30, 2007, our cash and marketable securities decreased $26.1 million to $987.9 million.

Cash Provided by Operating Activities

During the first six months of 2007, net cash provided by operating activities was $89.7 million, compared to $202.0 million generated during the same period of 2006. The decline of $112.3 million was primarily due to the lower cash benefit of fuel hedges settled during the period, coupled with a increase in the receivable from Horizon and a modest increase in other operating costs. This was offset by the increase in revenues and lower cash contributions to our defined-benefit pension plan during the first six months of 2007. We contributed $35.0 million to our defined-benefit pension plan in the first six months of 2007 compared to $71.9 million during the same period of 2006.

Cash Used in Investing Activities

Our investing activities are primarily made up of capital expenditures associated with our fleet transition program and, to a lesser extent, purchases and sales of marketable securities. Cash used in investing activities was $298.0 million during the first six months of 2007, compared to $277.5 million during the same period of 2006. Our capital expenditures grew by $68.2 million as a result of the increase in pre-delivery payments made for future deliveries and the purchase of seven B737-800s, versus the purchase of four B737-800s in the first six months of 2006. This was partially offset by the proceeds from sale of our MD-80s of approximately $50 million, which were subsequently leased back. We expect capital expenditures to be approximately $570 million during all of 2007.

Cash Provided by Financing Activities

We are currently financing a large portion of our capital spending with debt financing. Net cash provided by financing activities was $135.9 million during the first six months of 2007 compared to $142.7 million during the same period of 2006. We obtained debt financing of $196.1 million for six new B737-800 aircraft. Offsetting this increase were normal long-term debt payments of $60.2 million.

We plan to meet our significant capital and operating commitments through internally generated funds from operations and cash and marketable securities on hand at June 30, 2007, along with additional debt financing and proceeds from our pre-delivery payment facility. We have financing already in place for 13 of the B737-800s that will be delivered throughout the balance of 2007 and through 2009.

Pre-delivery Payment Facility

The Company’s $172 million variable-rate revolving loan facility is available to provide a portion of the pre-delivery funding requirements of the Company’s purchase of new Boeing 737-800 aircraft under the current aircraft purchase agreement. The facility expires on August 31, 2009. The interest rate is based on one-month LIBOR plus a specified margin. Any borrowings will be secured by the Company’s rights under the Boeing purchase agreement. (The principal amounts outstanding on the facility relate to specified aircraft and will be repaid at the time that the Company takes delivery of the aircraft, if not sooner.) As of June 30, 2007, $17.0 million was outstanding. No amounts were borrowed during the first half of 2007, although we may use the facility in the future to fund additional pre-delivery payments.

Line of Credit Modification

See page 24 for information about modifications to our $160 million line of credit.

Contractual Obligations, Commitments and Off-Balance Sheet Arrangements

Aircraft Purchase Commitments

At ~~September~~June 30, ~~2006~~2007, we had firm orders for 4136 aircraft requiring aggregate payments of approximately $~~1.0~~966 ~~billion~~million, as set forth below. In addition, the weCompany ~~have~~has options to acquire 2847 additional B737-800s ~~and purchase rights for 27 more~~. We ~~have also entered into operating lease agreements for two B737-800 aircraft to be delivered in late 2006. We~~ expect to finance the firm orders and, to the extent exercised, the option aircraft through ~~operating lease arrangements,~~ long-term debt, operating lease arrangements, or internally generated cash.

During the first ~~nine~~six months of ~~2006~~2007, we took delivery of ~~six~~seven B737-800 aircraft, all of which were paid for with cash ~~upon~~on ~~delivery~~hand and then ~~five~~six were ~~financed~~subsequently financed with fixed~~-rate~~ ~~debt~~and ~~arrangements. The sixth B737-800 was financed in October. Subsequent to the end of the quarter, Alaska took delivery of an additional B737-800 that was financed with~~ variable-rate debt arrangements.

~~During~~The ~~the~~following ~~third~~table ~~quarter,~~summarizes ~~we executed an agreement to sell six B737-200~~ aircraft. ~~Title~~purchase tocommitments ~~each aircraft will be transferred~~ as ~~each~~ of ~~the aircraft leaves our fleet over the next several months~~June 30, ~~with the last aircraft expected to leave our fleet in April~~ 2007. ~~The first one was sold during the quarter~~ and ~~another~~payments ~~was~~by year: ~~sold in October.~~

The following table summarizes aircraft purchase commitments as of September 30, 2006 and payments by year:

Delivery Period - Firm Orders

October 1 – December 31


Aircraft	July 1 - December 31 2007	2008		2009		2010		2011		Total
Boeing 737-800	7		16		4		6		3		36

Payments (Millions)	$240.9	$	374.8	$	159.5	$	146.0	$	44.9	$	966.1

Aircraft	2006			2007		2008		2009		2010		Beyond2010		Total
Boeing 737-800		6	*		14		8		4		6		3		41
Payments (Millions)	$	100.9		$	349.6	$	227.6	$	159.9	$	146.0	$	44.9	$	1,028.9

* Excludes operating lease agreements for two aircraft to be delivered in late 2006.

As noted, we announced a plan to transition to a single Boeing 737 fleet type by the end of 2008, which includes the accelerated retirement of our MD-80 fleet. As a result, we expect to exercise additional options and purchase rights on our Boeing 737-800 order in the future in addition to the firm deliveries that are identified in the contractual table above.

Giving consideration to ~~this~~the current fleet transition ~~plan~~plans, the following table displays ~~our~~the currently anticipated fleet count as of the end of the second quarter and each remaining quarter in 2007 and at December 31, 2006, ~~2007~~ and 2008:

	2006	2007	2008
	31-Dec-06	30-Jun-07	30-Sep-07	31-Dec-07	31-Dec-08
737-200	2	0	0
737-200C*	2	—	—	—	—
MD80	22	15	0
MD-80	23	20	17	15	—
737-400	3739	35	35	34	32
737-400F	1	1	1
737-400F*	1	1	1	1	1
737-400C	2	4	4
737-400C*	—	4	4	5	5
737-700	22	20	20	20	20
737-800*	15	29	42
737-800**	15	22	25	29	46
737-900	12	12	12	12	12
Totals	~~113~~114	~~116~~114	114	116	116

* ~~Includes~~F=Freighter; ~~options~~C=Combination ~~for three aircraft in 2008, which have not yet been exercised. The total also assumes we will identify one airplane for delivery in 2008 for which we have not yet secured a delivery position.~~freighter/passenger

**	The total includes one leased aircraft in 2008.

Contractual Obligations

The following table provides a summary of our principal payments under current and long-term debt obligations, operating lease commitments, aircraft purchase commitments and other obligations as of ~~September~~June 30, ~~2006~~ 2007. This table excludes contributions to our various pension plans, which we expect to be approximately $5550 million to $80 million per year through ~~2010~~2011.

October 1 – December 31


(in millions)	July 1 - December 31 2007		2008		2009		2010		2011		Beyond 2011		Total
Current and long-term debt obligations	$	40.9	$	87.5	$	92.7	$	99.8	$	128.5	$	747.2	$	1,196.6
Current and long-term portions of the pre-delivery payment facility		17.0		—		—		—		—		—		17.0
Operating lease commitments (1)		67.5		157.2		138.4		129.4		102.2		382.2		976.9
Aircraft purchase commitments		240.9		374.8		159.5		146.0		44.9		—		966.1
Interest obligations (2)		40.9		78.5		70.7		64.2		57.3		182.0		493.6
Other purchase obligations (3)		13.5		29.7		30.0		30.3		30.6		93.6		227.7

Total	$	420.7	$	727.7	$	491.3	$	469.7	$	363.5	$	1,405.0	$	3,877.9

(in millions)	2006		2007		2008		2009		2010		Beyond2010		Total
Current and long-term debt
Obligations		19.0		68.4		71.8		76.1		82.2		614.1	$	931.6
Current and long-term portions of the pre-delivery payment facility		50.2		92.1		—		—		—		—		142.3
Operating lease commitments (1)		36.3		168.9		160.2		145.9		141.0		453.8		1,106.1
Aircraft purchase commitments		100.9		349.6		227.6		159.9		146.0		44.9		1,028.9
Interest obligations (2)		18.7		63.7		58.2		51.5		46.1		139.9		378.1
Other purchase obligations (3)		5.6		29.4		29.7		30.0		30.3		124.2		249.2
Total	$	230.7	$	772.1	$	547.5	$	463.4	$	445.6	$	1,376.9	$	3,836.2

(1)

Operating lease commitments generally include aircraft operating leases, airport property and hangar leases, office space, and other equipment leases. The aircraft operating leases include lease obligations for four leased MD-80 aircraft, all of which we intend to retire earlier than expected in connection with our fleet transition plan.

(12) ~~Operating~~For ~~lease~~variable-rate ~~commitments generally include aircraft operating leases~~debt, ~~airport~~future ~~property~~obligations ~~and~~are ~~hangar~~shown ~~leases,~~above ~~office~~using ~~space~~interest ~~leases,~~rates ~~and other equipment operating leases. Specifically, the line item includes two aircraft lease agreements for B737-800 aircraft that will be delivered~~ in ~~late~~effect ~~2006.~~as ~~Also~~of ~~includes~~June ~~contractual lease obligations for six leased MD-80 aircraft~~30, ~~four of which we intend to retire earlier than expected~~2007.

(23) ~~For~~Includes ~~variable-rate~~minimum ~~debt, future~~ obligations ~~are~~under ~~shown~~our ~~above~~long-term ~~using~~power-by-the-hour ~~interest~~maintenance ~~rates in effect as of September 30, 2006~~agreement.

~~(3)~~41 ~~Includes obligations under our long-term power-by-the-hour maintenance agreement.~~

Recent Accounting Pronouncements

In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109 (FIN 48), which clarifies the accounting and disclosure for uncertainty in tax positions, as defined in that statement. The purpose of FIN 48 is to clarify certain aspects of the recognition and measurement related to accounting for income tax uncertainties. This interpretation is effective for fiscal years beginning after December 15, 2006. We do not believe this interpretation will have a material impact on our results from operations or financial position.

In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 108 (SAB 108). SAB 108 expresses SEC staff views regarding the process by which misstatements in financial statements are evaluated for purposes of determining whether those misstatements are material to our financial statements. SAB 108 is effective for fiscal years ending after November 15, 2006. We are evaluating the impact of this interpretation and expect to have an adjustment to shareholder’s equity, although the adjustment is not expected to be material.

In September 2006, the FASB issued Statement No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R) (SFAS 158). SFAS 158 requires recognition of the overfunded or underfunded status of an entity’s defined benefit postretirement plan as an asset or liability in the financial statements, requires the measurement of defined benefit postretirement plan assets and obligations as of the end of the employer’s fiscal year, and requires recognition of the funded status of defined benefit postretirement plans in other comprehensive income. SFAS 158 is effective for fiscal years ending after December 15, 2006. We expect the impact on shareholders’ equity from the adoption of SFAS 158 and certain assumption changes to be in the range of $75 million to $100 million. We believe the adoption of this statement will not have a material impact on our results from operations or cash flows.

Effect of Inflation - Inflation and price changes other than for aircraft fuel and passenger fares do not have a significant effect on our operating revenues, operating expenses and operating income.

~~Item~~ ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes in market risk from the information provided in Item 7A “Quantitative and Qualitative Disclosure About Market Risk” in our ~~Annual~~2006 ~~Report on Form~~ 10-K ~~for the year ended December 31, 2005~~ except as follows:

Market Risk – Aircraft Fuel

WeCurrently, our fuel-hedging portfolio consists almost exclusively ~~utilize~~of crude oil call options. We utilize the contracts in our portfolio as hedges to decrease our exposure to the volatility of jet fuel prices. Call options are designed to effectively cap our ~~pricing~~cost onof the crude oil component of fuel prices, allowing us to limit our exposure to increasing fuel prices. With these call option contracts, we still benefit from the decline in crude oil prices as there is no downward exposure other than the premiums that we pay to enter into the contracts. WeAlthough to a lesser extent, we also use collar structures ~~in limited instances~~ for fuel hedging purposes. We believe there is risk in not hedging against the possibility of fuel price increases. We estimate that a 10% increase or decrease in crude oil prices as of June 30, 2007 would increase or decrease the fair value of our hedge portfolio by approximately $23.4 million and $20.5 million, respectively.

36We have fuel purchase contracts that fix the refining margin we pay for approximately 50% of our fuel consumption in the third quarter of 2007.

Our portfolio of fuel hedge contracts was worth $61.7 million at June 30, 2007, including $31.2 million of capitalized premiums paid to counterparties, compared to a portfolio value of $59.1 million at December 31, 2006.

Please refer to page 28, as well as to Note 5 in the notes to the condensed financial statements, for company-specific data on the results of our fuel-hedging program, as well as a summary of hedge positions as of June 30, 2007.

Financial Market Risk

We have exposure to market risk associated with changes in interest rates related primarily to our debt obligations and short-term investment portfolio. Our debt obligations include variable-rate instruments, which have exposure to changes in interest rates. This exposure is somewhat mitigated through our variable-rate investment portfolio. We also have investments in marketable securities, which are exposed to market risk associated with changes in interest rates.

possibility of fuel price increases. See Note 4 in the condensed financial statements for a summary of our hedge positions. We estimate that a 10% increase or decrease in crude oil prices as of September 30, 2006 would increase or decrease the fair value of our hedge portfolio by approximately $18.4 million and $17.2 million, respectively.

Additionally, we have entered into fuel purchase contracts that fix the refining margin we pay for approximately 45% and 36% of our fuel consumption in the fourth quarter of 2006 and first quarter of 2007, respectively.

Please refer to page 24, as well as to Note 4 in the condensed financial statements, for company-specific data on the results of our fuel-hedging program.

ITEM 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of ~~September~~June 30, ~~2006~~2007, an evaluation was performed under the supervision and with the participation of our management, including our chief executive officer and chief financial officer (collectively, our “certifying officers”), of the effectiveness of the design and operation of our disclosure controls and procedures. These disclosure controls and procedures are designed to ensure that the information required to be disclosed by us in our ~~current and~~ periodic reports filed with or submitted to the Securities and Exchange Commission (the SEC) is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms, and that the information is accumulated and communicated to our management, including our certifying officers, on a timely basis.

Our certifying officers concluded, based on their evaluation, that disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

Late in the second quarter of 2007, the Company and Horizon began the conversion to an integrated Human Resources, Benefits and Payroll system. Prior to the conversion, the companies operated on separate systems. This automated system conversion was completed in early July 2007. There were no changes into the Company’s internal control over financial reporting, including the changes described above, identified in management’s evaluation during the ~~third~~fiscal quarter ofended ~~2006~~June 30, 2007, that have materially affected, or are reasonably likely to materially ~~affect~~effect, ~~the Company’s~~our internal control over financial reporting.

~~Air~~We ~~Group~~intend ~~has~~to ~~historically~~regularly ~~maintained~~review ~~accounting~~ and ~~payroll~~evaluate ~~departments~~the atdesign ~~both~~and ~~Alaska~~effectiveness ~~Airlines~~of ~~and~~our ~~Horizon~~disclosure controls and ~~Air.~~procedures ~~During~~and ~~the~~internal ~~third~~control ~~quarter~~over offinancial ~~2006,~~reporting ~~the~~on ~~separate~~an ~~accounting~~ongoing basis and ~~payroll~~to ~~departments~~improve ofthese ~~Alaska~~controls and ~~Horizon~~procedures ~~were~~over ~~combined~~time ~~into~~and ~~one~~to ~~Air~~correct ~~Group~~any ~~accounting~~deficiencies ~~and~~that ~~payroll~~we ~~function~~may discover in anthe ~~attempt~~future. toWhile ~~improve~~we ~~economies~~believe the present design of ~~scale~~our disclosure controls and ~~standardize~~procedures ~~processes across~~and ~~the~~internal ~~two~~control ~~companies~~over financial reporting are effective, future events affecting our business may cause us to modify our controls and procedures in the future.

We intend to regularly review and evaluate the design and effectiveness of our disclosure controls and procedures and internal control over financial reporting on an ongoing basis and to improve these controls and procedures over time and to correct any deficiencies that we may discover in the future. While we believe the present design of our disclosure controls and procedures and internal control over financial reporting are effective, future events affecting our business may cause us to modify our controls and procedures.

PART II OTHER INFORMATION

ITEM 1.

Legal Proceedings

InGrievance ~~April~~with ~~2006, the federal district court in Seattle granted voluntary dismissal of our lawsuit against the~~ International Association of Machinists (IAM) seeking to compel arbitration of dispute regarding the permissibility of subcontracting of our ramp service operation in Seattle. At the same time, the court also dismissed a counterclaim by the IAM alleging that Alaska violated the Railway Labor Act status quo and engaged in bad faith bargaining. The appeal period has expired and these matters are closed.

~~Additionally~~In June 2005, the International Association of Machinists (IAM) filed a grievance ~~against~~under usits Collective Bargaining Agreement (CBA) with the Company alleging that wethe Company violated the ~~collective~~CBA ~~bargaining agreement~~ by, among other things, subcontracting the ~~ramp~~Ramp service operation in Seattle. ~~when~~The ~~the~~dispute ~~parties~~was ~~could~~referred ~~not reach~~to ~~agreement~~an arbitrator and hearings on anthe ~~acceptable~~grievance ~~labor~~commenced ~~contract~~in January 2007. ~~This~~A ~~matter~~second isround ~~scheduled~~of hearings ~~for~~took ~~arbitration~~place in ~~December~~April ~~2006~~with ~~and~~a ~~into~~third ~~2007.~~round Wein ~~cannot~~late ~~predict~~June. ~~the~~A ~~outcome~~final ofhearing ~~this~~date ~~arbitration;~~is ~~however,~~scheduled wein dolate ~~not~~August. ~~believe~~Most ~~any~~likely ~~unfavorable~~a ~~outcome~~decision ~~would~~from bethe ~~material~~arbitrator towill ~~our cash~~not ~~flows~~be orissued ~~results~~until ofearly ~~operations~~to mid 2008.

We43 ~~are a party to routine litigation incidental to our business and with respect to which no material liability is expected.~~

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.

ITEM 1A. Risk Factors

We expect to implement a number of new and important operational and financial systems over the next 18 months. As such, we have modified one of the risk factors from our 2005 Form 10-K as follows.

We rely heavily on automated systems to operate our business and any failure of these systems could harm our business.

We depend on automated systems to operate our business, including our computerized airline reservation system, our telecommunication systems, our website, our maintenance systems, and other systems. We also issue a substantial number of our tickets to passengers as electronic tickets. We depend on our computerized reservation system to be able to issue, track and accept these electronic tickets. In order for our operations to work efficiently, our website and reservation system must be able to accommodate a high volume of traffic and deliver important flight

~~information.~~Dispute ~~Substantial~~with orLos ~~repeated~~Angeles ~~website,~~World ~~reservations~~Airports 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, maintenance tracking, and other operational needs. Any disruption in or changes to these systems could result in the loss of important data, increase our expenses and possibly cause us to temporarily cease our operations.

InDespite ~~addition~~more tothan ~~the~~a ~~other~~year ~~information~~of ~~set~~negotiations ~~forth~~to reach a mutual agreement, in ~~this~~December ~~report~~2006, ~~you~~we ~~should~~were ~~carefully~~notified ~~consider~~by the ~~factors~~City ~~discussed~~of inLos ~~Part~~Angeles Ithat terminal charges related to our operations at Los Angeles International Airport (LAX) would be unilaterally increased dramatically for 2007 and beyond. Additionally, ~~“Item~~maintenance 1Aand operations fees were increased retroactively to January 2006. ~~Risk~~These ~~Factors”~~increases were made applicable for all airlines operating in ~~our~~Terminals ~~Annual~~1 ~~Report~~and 3 at LAX, but were not imposed on ~~Form~~airlines 10operating in Terminals 2 and 4 through 8, because of their long-Kterm ~~for~~leases ~~the~~currently ~~year~~in ~~ended~~effect. ~~December 31~~The Company, ~~2005~~along with other airlines in Terminals 1 and 3, filed a complaint against Los Angeles World ~~which~~Airports ~~could~~(LAWA) ~~materially~~with ~~affect~~the ~~our~~Department ~~business,~~of ~~financial~~Transportation ~~condition~~alleging orthat ~~future~~the ~~results.~~amount ~~The~~and ~~risks~~duration ~~described~~of the disparities in ~~our~~terminal ~~Annual~~charges ~~Report~~among onthe ~~Form~~carriers ~~10-K~~at LAX are ~~not~~unreasonable and unjustly discriminatory as they apply to the ~~only~~carriers ~~risks~~at ~~facing~~Terminals ~~our~~1 and 3. Additionally, the Company believes these charges violate DOT and FAA policies and regulations, as well as other federal statutes. ~~Additional~~In ~~risks~~April, a DOT Administrative Law Judge heard the complaint and ~~uncertainties~~issued ~~not~~an ~~currently~~opinion ~~known~~in favor of the carriers in mid-May. In June 2007, the Secretary of Transportation issued a final decision ruling in favor of the carriers, and in July, ordered LAWA to usrepay orthe ~~that~~excess charges from February through June. LAWA issued a credit to Alaska Airlines in July 2007 in wethe ~~currently~~amount ~~deem~~of $2.2 million. LAWA appealed the decision to bea ~~immaterial~~Federal ~~also~~Circuit ~~may~~Court ~~materially~~of ~~adversely~~Appeals. ~~affect~~The ~~our~~carriers ~~business,~~have ~~financial~~filed ~~condition~~cross ~~and/or~~appeals ~~operating~~over ~~results~~certain aspects of the DOT ruling.

~~ITEM 2.~~Other ~~Unregistered Sales of Equity Securities and Use of Proceeds~~

~~None~~We are 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 discussed above is not likely to materially affect the Company’s ~~ITEM 3~~financial position or results of operations. ~~Defaults~~This ~~upon~~forward-looking ~~Senior~~statement ~~Securities~~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.

~~None~~ITEM 1A. Risk Factors

In addition to the other information set forth in ~~ITEM~~this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 431, 2006, which could materially affect our business, financial condition or future results. ~~Submission~~The ofrisks ~~Matters~~described in our Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to aus ~~Vote~~or ofthat ~~Security~~we ~~Holders~~currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

None.

ITEM 5.

Other Information

None.

~~ITEM 6.~~44 ~~Exhibits~~

See Exhibit Index on page 41.

ITEM 6.

Exhibits

See Exhibit Index on page 46.

Signatures

Pursuant to the requirements of the Securities ~~Exchange~~ Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

ALASKA AIRLINES, INC.
Registrant
Date: November 13, 2006
By:		/s/ Brandon S. Pedersen
		Brandon S. Pedersen
		Staff Vice President/Finance and Controller
By:		/s/ Bradley D. Tilden
		Bradley D. Tilden
		Executive Vice President/Finance and Chief Financial Officer

ALASKA AIRLINES, INC.

40Registrant

Date: August 13, 2007



By:		/s/ Brandon S. Pedersen
Brandon S. Pedersen Vice President/Finance and Controller

By:		/s/ Bradley D. Tilden
Bradley D. Tilden Executive Vice President/Finance and Planning and Chief Financial Officer

EXHIBIT INDEX

Pursuant to Item 601(a)(2) of Regulation S-K, this Exhibit Index immediately precedes the exhibits.

The following exhibits are numbered in accordance with Item 601 of Regulation S-K.

Exhibit No.		Description
31.1 (1)		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.1(1)		Section 302 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350
31.2 (1)		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2(1)		Section 302 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350
32.1 (2)		As adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350
32.1(1)		Section 906 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350
32.2 (2)		As adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350
32.2(1)		Section 906 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350

(1) Filed herewith.

~~(2)~~46 Exhibits 32.1 and 32.2 are being furnished pursuant to 18 U.S.C. Section 1350 and shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (“Exchange Act”), or otherwise subject to the liability of that section. Such exhibits shall not be deemed to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Exchange Act, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

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