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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Commission file number 1-8957

ALASKA AIRLINES, INC.

19300 Pacific Highway South, Seattle, Washington 98188

Registrant’s telephone number, including area code: (206) 431-7079

     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 an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]

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 March 31, 2003.

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PART I. FINANCIAL STATEMENTS

See accompanying notes to financial statements.

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BALANCE SHEETS (unaudited)

See accompanying notes to financial statements.

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STATEMENTS OF OPERATIONS (unaudited)

See accompanying notes to financial statements.

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STATEMENT OF SHAREHOLDER’S EQUITY (unaudited)

See accompanying notes to financial statements.

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STATEMENTS OF CASH FLOWS (unaudited)

See accompanying notes to financial statements.

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NOTES TO FINANCIAL STATEMENTS (unaudited)

Note 1. Basis of Presentation and Significant Accounting Policies
The accompanying unaudited interim financial statements of Alaska Airlines, Inc. (the Company or Alaska), 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, 2002. In the opinion of management, all adjustments have been made which are necessary to present fairly the financial position of the Company as of March 31, 2003, as well as the results of our operations for the three months ended March 31, 2003 and 2002. The Company is a wholly owned subsidiary of Alaska Air Group, Inc. (Air Group) whose principal subsidiaries are Alaska Airlines, Inc. and Horizon Air Industries, Inc.

These financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) and require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities, as well as the reported amounts of revenues and expenses. Significant estimates include assumptions used to record liabilities, expenses and revenue associated with the Company’s Mileage Plan, estimated useful lives of property and equipment and the amounts of certain accrued liabilities. Actual results may differ from these estimates.

Change in Accounting Principle
Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets.” In connection with the adoption of this statement, the Company determined that all of its goodwill was impaired. As a result, effective January 1, 2002, the Company recorded a one-time, non-cash charge of $12.5 million to write-off its goodwill. This charge is reflected as a cumulative effect of accounting change in the statement of operations for the three months ended March 31, 2002.

New Accounting Standards
In August 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, “Accounting for Asset Retirement Obligations”, which requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The statement also requires that the associated asset retirement costs be capitalized as part of the carrying amount of the long-lived asset. This statement is effective for financial statements issued for fiscal years beginning after January 1, 2003. The adoption of this statement did not have a material impact on the Company’s financial position, results of operations or cash flows.

In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”. This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees. Additionally, this Interpretation clarifies the requirements for recognizing a liability at the inception of the guarantee equal to the fair value of the obligation undertaken in issuing the guarantee and incorporates the guidance in FASB Interpretation No. 34, “Disclosure of Indirect Guarantees of Indebtedness of Others.” Disclosures under Interpretation No. 45 are effective for financial statements issued after December 15, 2002.

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While the Company has various guarantees included in contracts in the normal course of business, primarily in the form of indemnities, the adoption of the liability recognition provision of Interpretation No. 45 had no significant impact on the financial condition and results of operations of the Company.

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” which requires the consolidation of variable interest entities, as defined. This Interpretation is applicable to variable interest entities created after January 31, 2003. Variable interest entities created prior to February 1, 2003, must be consolidated effective July 1, 2003. Disclosures are required currently if the Company expects to consolidate any variable interest entities. The Company does not currently believe that any entities will be consolidated as a result of Interpretation No. 46.

In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (SFAS No. 149). SFAS No. 149 amends and clarifies certain derivative instruments embedded in other contracts, and for hedging activities under Statement 133. SFAS No. 149 is effective for certain contracts entered into or modified by the Company after June 30, 2003. The Company is currently evaluating SFAS No. 149 to determine its impact on the financial condition and results of operations of the Company.

Note 2. Frequent Flyer Program
Alaska’s Mileage Plan liabilities are included under the following balance sheet captions (in millions):

Note 3. Long-Term Debt and Capital Lease Obligations
At December 31, 2002, and March 31, 2003, long-term debt and capital lease obligations were as follows (in millions):

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On March 21, 2003, the Company received $63.6 million under a note with Air Group in connection with the issuance of senior notes due 2023 (the Notes). The Notes bear quarterly cash interest at a variable rate of interest of 3-month LIBOR plus 2.5% (3.79% at March 31, 2003) for the first five years from date of issuance. Thereafter, the Notes will cease bearing cash interest. Instead, from such date, the original principal amount of each note will increase daily by the variable yield, which will equal the variable interest rate, up to a maximum of 5.25%, to produce the variable principal amount.

The Company may redeem all or a portion of the Notes for cash at any time on or after the third anniversary of the issuance of the Notes. In addition, Air Group may require the Company to purchase all or a portion of the Notes on the 5th, 10th and 15th anniversaries of the issuance of the Notes and upon the occurrence of a change of control or tax event at principal plus accrued interest.

The Notes are senior unsecured obligations and rank equally with the Company’s existing and future senior unsecured indebtedness.

Note 4. Related Company Transactions
On March 21, 2003, the Company received a capital contribution of $60.0 million from Air Group which is reflected in capital in excess of par value in the Company’s March 31, 2003 balance sheet.

During 2000, Alaska transferred a flight simulator to Alaska Air Group Leasing, Inc. (AAGL), a subsidiary of Air Group, in exchange for a $2.4 million note receivable from AAGL and a $0.6 million reduction in its payable to Air Group. The loan has repayment terms of 12 years at 6.5% interest. AAGL is leasing the simulator to Alaska for 12 years.

Alaska performs all ticket processing for Horizon. Horizon’s ticket sales are recorded by Alaska as air traffic liability and remitted to Horizon when transportation is provided.

Alaska’s Mileage Plan participants may redeem miles on Horizon flights. Additionally, participants who fly on Horizon may earn miles in Alaska’s Mileage Plan. Alaska does not pay nor receive any amounts from Horizon for its participation in the plan.

The Company periodically loans Horizon funds at varying interest rates. All amounts are payable on demand. Interest income recognized related to the Horizon loans totaled $0.5 million for the quarters ended March 31, 2002, and 2003. At March 31, 2003, receivables from related companies include $132.2 million from Horizon, $10.1 million from AAGL and $48.9 million from Air Group.

Alaska has an agreement with Horizon, the Incentive Payment Program (IPP), to provide revenue sharing on certain markets. Under the IPP, Alaska makes a monthly payment to Horizon for markets which provide connecting traffic to Alaska but create losses for Horizon (the incentive markets). The payment is based on full-allocated cost for Horizon to provide the transportation service, plus a 5% mark-up. Incentive markets are analyzed quarterly and the monthly reimbursement amount is adjusted to reflect the prior quarter’s actual performance. Alaska made incentive payments to Horizon of $5.5 million during each of the quarters ended March 31, 2002, and 2003, which are reflected as commission expense in the statements of operations.

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Alaska also provides certain services to Horizon for which Alaska receives payment from Horizon based on the cost of the services, including personnel expenses related to development and maintenance of alaskaair.com, the maintenance of telecommunications lines and related software, personnel and systems expenses to process Horizon’s revenue transactions, and printing and graphics services. Alaska also pays certain leasing and other facilities costs on Horizon’s behalf which are reimbursed monthly by Horizon. Total amounts received by Alaska from Horizon were $1.0 million for the quarter ended March 31, 2002. Amounts received during the period ended March 31, 2003 were de minimis.

In the normal course of business, Alaska and Horizon provide certain ground handling services to the other company. For the quarters ended March 31, 2002 and 2003, charges for ground services provided by Alaska to Horizon totaled $0.3 million and $0.6 million, respectively. For the quarters ended March 31, 2002 and 2003, charges for ground services provided by Horizon to Alaska totaled $0.7 million and $0.9 million, respectively.

Note 5. Contingencies
Oakland Maintenance Investigation
In December 1998, the U.S. Attorney for the Northern District of California initiated a grand jury investigation concerning certain 1998 maintenance activities at Alaska’s Oakland maintenance base. In January 2000, the investigation was expanded to include the aircraft involved in the loss of Flight 261. The Federal Aviation Administration (FAA) separately proposed a civil penalty in connection with the 1998 maintenance activities, which Alaska and the FAA have settled for an agreed amount. In December 2001, the U.S. Attorney notified Alaska that the evidence it had gathered relative to the 1998 maintenance activities did not warrant the filing of criminal charges, and closed that part of the investigation. The U.S. Attorney also placed the portion of its investigation related to Flight 261 on inactive status, with the possibility of reactivating and reviewing the matter when the National Transportation Safety Board (NTSB) issued its final report on the accident. Accordingly, following the final NTSB hearing on the Flight 261 investigation in December 2002, the U.S. Attorney’s Office reactivated the matter in order to review it in light of the final NTSB report.

Flight 261 Litigation
Alaska is a defendant in a number of lawsuits relating to the loss of Flight 261 on January 31, 2000. Representatives of all 88 passengers and crew on board have filed cases against Alaska, the Boeing Company, and others. The suits were originally filed in various state and federal courts in Alaska, California, Washington and Illinois. Since then, they have all been consolidated in the U.S. District Court for the Northern District of California. The suits seek unspecified compensatory and punitive damages. In May 2001, the judge presiding over the majority of the cases ruled that punitive damages are not available against Alaska. Alaska has settled the majority of these cases and continues in its efforts to settle the remaining ones. Trial on the remaining cases is set for July 2003. Consistent with industry standards, the Company maintains insurance against aircraft accidents.

Management believes the ultimate disposition of the above matters is not likely to materially affect the Company’s financial position or results of operations. This forward-looking statement is based on management’s current understanding of the relevant law and facts; it is subject to various contingencies, including the potential costs and risks associated with litigation and the actions of judges and juries.

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

Note 6. Other Subsequent Events
On April 16, 2003, the Emergency Wartime Supplemental Appropriations Act (the Act) was signed into legislation. The Act includes a $2.3 billion one-time cash payment which will be allocated to air carriers based on each carrier’s share of security fees remitted and carrier fees paid to the Transportation Security Administration (TSA) since its inception in February 2002. The Company believes its share of the grant will range between $40.0 million and $50.0 million, and is expected to be received during the second quarter of 2003.

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Alaska Airlines Financial and Statistical Data

NM = Not Meaningful

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Information
This report may contain forward-looking statements that are based on the best information currently available to management. These forward-looking statements are intended to be 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. Forward-looking statements are indicated by phrases such as “will,” “should,” “the Company believes,” “we expect” or any other language indicating a prediction of future events. There can be no assurance that actual developments will be those anticipated by the Company. Actual results could differ materially from those projected as a result of a number of factors, some of which the Company cannot predict or control. For a discussion of these factors, please see Item 1 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.

Results of Operations
First Quarter 2003 Compared with First Quarter 2002
During the first quarter of 2003, the Company’s financial performance continued to be adversely affected by weak economic conditions and a continued negative impact from the 2001 terrorist attacks. In addition, the U.S. war in Iraq further adversely affected the financial performance of Alaska and the airline industry. Net loss for the first quarter of 2003 was $45.1 million compared with a loss of $39.3 million in 2002. The 2002 net loss includes the write-off of all of the Company’s goodwill ($12.5 million), in accordance with Statement of Financial Accounting Standards (SFAS) No. 142. (See Note 1 to the financial statements). Excluding this goodwill write-off, net loss for 2002 was $26.8 million. The operating loss for the first quarter of 2003 was $61.6 million compared with an operating loss of $39.0 million for 2002. Financial and statistical data is shown on page 12. A discussion of this data follows.

Revenues
Operating revenue increased $14.8 million, or 3.6%, during 2003 as compared to 2002. Available seat miles (ASMs or Capacity) increased 12.2% in January, 2.8% in February and 1.7% in March as compared to the same periods in 2002. For the quarter, capacity increased 5.4% and revenue passenger miles (RPM’s or Traffic) increased 5.6% as compared to the same period in 2002. The capacity increases are primarily due to the addition of service to new cities (Boston, Denver, Newark and Miami) and an increase in service in the Mexican and Canadian markets, partially offset by lower capacity in virtually all other markets. Traffic increases primarily reflect service to new cities and traffic increases between the U.S. mainland and Mexico, Canada and Anchorage/Fairbanks, partially offset by decreases in traffic in Northern California, Southern California and Arizona. Passenger load factor remained consistent in 2003 compared to 2002 at 66.7%.

Yield per passenger mile was down 2.0% due to a combination of fewer business fares and a drop off in demand caused by the U.S. war in Iraq and a continued slow U.S. economy. Higher traffic combined with lower yields resulted in a $13.0 million, or 3.5% increase in passenger revenues.

Freight and mail revenues increased $1.5 million, or 9.4%, due to higher freight and mail volumes attributable to a reduction of security restrictions. Other-net revenues increased $0.3 million, or 1.3%, due largely to increased revenue from the sale of miles in Alaska’s frequent flyer program.

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Operating Expenses
For the quarter, total operating expenses increased $37.4 million, or 8.3%, as compared to the same period in 2002. This increase is due largely to a 5.4% increase in ASMs combined with higher fuel and wage and benefit costs. Operating expenses per ASM excluding fuel decreased 1.3% as compared to the same period in 2002. Explanations of significant period-over-period changes in the components of operating expenses are as follows:

	•		Wages and benefits increased $22.3 million, or 13.5%, due to an 11.5% increase in average wages and benefits per employee combined with a 1.8% increase in the average number of employees. The increase in average wages and benefits per employee is due principally to higher pension costs related to our defined benefit plans, higher health insurance and workers compensation costs and scale and step increases for employees represented under collective bargaining agreements.
	•		Aircraft fuel increased $21.7 million, or 39.3%, due to a 34.7% increase in the fuel cost per gallon and a 3.5% increase in fuel gallons consumed. Air Group’s fuel hedging program resulted in Alaska recognizing $8.5 million in hedging gains during the first quarter of 2003, of which $7.8 million is reflected in aircraft fuel and $0.7 million is reflected in other-net. For the remainder of 2003, Air Group has fuel hedges in place for 35% of its expected fuel consumption, principally crude oil swaps at prices below $22 per barrel.
	•		Aircraft maintenance increased $2.3 million, or 6.5%, due to increases in the number of airframe checks and outside repairs on major aircraft components.
	•		Commissions decreased $6.0 million, or 42.3%, due primarily to the elimination of travel agent base commissions starting in June 2002, and the continuing shift to direct sales channels. In 2003, 46.2% of Air Group ticket sales were made through traditional travel agents, compared to 53.1% in 2002. In 2003, 24.9% of the ticket sales were made through Alaska’s Internet web site compared to 18.8% in 2002.
	•		Other selling expenses decreased $3.0 million, or 12.0%, due to lower customer reservation system costs and Mileage Plan selling costs partially offset by increases in credit card commissions and advertising expenses.
	•		Landing fees and other rentals increased $5.1 million, or 21.6%. The 2002 results include a $2.2 million credit from adjusting a December 2001 accrual due to a year-end airport assessment coming in lower than expected. Absent this amount, landing fees and other rentals increased 11.2%. The higher rates reflect modest volume growth and an increase in airports’ cost of operations including facility expansion initiatives and increased costs for security.
	•		Other expense decreased $2.2 million, or 6.1%, primarily reflecting lower expenditures for insurance, supplies, data and communications and foreign exchange gains, partially offset by an increase in expenditures for property taxes, professional services and per diems. Insurance expense decreases are a reflection of several factors including additional coverage

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from government aviation insurance programs and competitive pressures in the aviation insurance market. However, aviation insurance remains substantially higher than before September 11, 2001.

Nonoperating Income (Expense)
Net nonoperating items were $9.0 million expense in 2003 compared to $2.7 million expense in 2002. Interest income decreased $3.8 million due to lower interest rates and an adjustment of premium and discount amortization on the Company’s marketable securities portfolio, while interest expense (net of capitalized interest) was down $1.2 million due to decreases in variable interest rates in 2003. Other-net includes $1.8 million and $0.7 million in gains resulting from hedge ineffectiveness on fuel hedging contracts in 2002 and 2003, respectively. In 2002, the Company received a $1.4 million insurance recovery and a $0.9 million gain on conversion of Equant N.V. shares (a telecommunications network company owned by many airlines).

Income Tax Benefit
Accounting standards require us to provide for income taxes each quarter based on our estimate of the effective tax rate for the full year. The volatility of air fares and fuel prices and the seasonality of our business make it difficult to accurately forecast full-year pretax results. In addition, a relatively small change in pretax results can cause a significant change in the effective tax rate due to the magnitude of nondeductible expenses, such as employee per diem costs. In estimating the 36.1% tax rate for the first quarter of 2003, we considered a variety of factors, including the U.S. federal rate of 35%, estimates of nondeductible expenses and state income taxes, and our forecast of pretax income for the full year. We evaluate this rate each quarter and make adjustments when necessary.

Critical Accounting Policies
For more information on the Company’s critical accounting policies, see Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.

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

*Excludes current portion of long-term debt and capital lease obligations

The Company has various options available to meet its capital and operating commitments in 2003, including cash and marketable securities on hand at March 31, 2003 of $615.3 million. In addition, to

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supplement cash requirements, the Company periodically considers various borrowing or leasing options. In the first quarter of 2003, the Company received $60.0 million and $63.6 million, respectively, from Air Group in connection with a capital contribution and issuance of senior notes due 2023 (see discussion in Note 3, “Long-term Debt and Capital Lease Obligations” and Note 4, “Related Company Transactions” in the Notes to the Financial Statements). Funds from these transactions are expected to provide additional liquidity to be used in the Company’s operations.

During the first quarter of 2003, shareholder’s equity increased $15.7 million, reflecting the $60 million capital contribution from Air Group, partially offset by the Company’s net loss of $45.1 million.

Cash Used in Operating and Investing Activities
During the first quarter of 2003, net cash used in operating activities was $20.0 million, primarily reflecting the first quarter net loss of $45.1 million. Cash used in investing activities totaled $130.7 million, primarily reflecting capital expenditures of $90.9 million and purchases of marketable securities of $171.8 million, partially offset by sales and maturities of marketable securities of $131.6 million and cash provided by disposition of assets of $0.5 million.

Cash Provided by Financing Activities
In 2003, cash provided by financing activities was $87.3 million, reflecting a capital contribution received from Air Group of $60.0 million and intercompany debt issuance of $63.6 million, partially offset by long-term debt and capital lease payments of $36.3 million. On March 21, 2003, the Company received $63.6 million from Air Group in connection with the issuance of senior notes due 2023. See Note 3, “Long-term Debt and Capital Lease Obligations” in the Notes to Financial Statements.

Commitments As of March 31, 2003, the Company had firm orders for 14 aircraft requiring aggregate payments of approximately $236.2 million, as set forth below. In addition, Alaska has options to acquire 26 additional B737s. Alaska expects to finance the new planes with either leases, long-term debt or internally generated cash.

The Company has a purchase commitment that may trigger a liability under certain events of default. The executory contract for the purchase commitment is not an obligation of the Company until the aircraft is delivered. As a result, the purchase commitment is not included in current and long-term debt or deposits for future flight equipment in the balance sheet.

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The following table is a summary of the Company’s material contractual obligations as of March 31, 2003 for the remainder of 2003 and by fiscal year: