ALASKA AIRLINES INC, 10-Q, 2000-11-06

ALASKA AIRLINES INC
10-Q, 2000-11-06
AIR TRANSPORTATION, SCHEDULED

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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 30, 2000

/ /	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
(State or other jurisdiction of
incorporation or organization)

92-0009235
(I.R.S. Employer
Identification No.)

19300 Pacific Highway South, Seattle, Washington 98188
(Address of principal executive offices)

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 / /

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 30, 2000.

PART I. FINANCIAL STATEMENTS

ITEM 1. Financial Statements

BALANCE SHEET (unaudited)
Alaska Airlines, Inc.

ASSETS

	December 31, 1999		September 30, 2000
	(In Millions)
Current Assets
Cash and cash equivalents	$	132.3	$	137.4
Marketable securities		196.5		245.9
Receivables from related companies		27.1		61.8
Receivables—net		70.9		95.6
Inventories and supplies		29.9		34.5
Prepaid expenses and other assets		120.5		147.8

Total Current Assets		577.2		723.0

Property and Equipment
Flight equipment		1,286.2		1,434.4
Other property and equipment		280.1		311.0
Deposits for future flight equipment		163.8		192.9

		1,730.1		1,938.3
Less accumulated depreciation and amortization		421.6		466.4

		1,308.5		1,471.9

Capital leases:
Flight and other equipment		44.4		44.4
Less accumulated amortization		31.6		33.3

		12.8		11.1

Total Property and Equipment—Net		1,321.3		1,483.0

Intangible Assets—Subsidiaries		13.5		13.1

Other Assets		69.2		32.9

Total Assets	$	1,981.2	$	2,252.0

See accompanying notes to financial statements.

BALANCE SHEET (unaudited)
Alaska Airlines, Inc.

LIABILITIES AND SHAREHOLDER'S EQUITY

	December 31, 1999		September 30, 2000
	(In Millions Except Share Amounts)
Current Liabilities
Accounts payable	$	88.3	$	108.8
Payables to related companies		126.9		127.6
Accrued aircraft rent		68.3		66.9
Accrued wages, vacation and payroll taxes		70.7		59.5
Other accrued liabilities		89.6		160.9
Air traffic liability		183.2		236.3
Current portion of long-term debt and capital lease obligations		66.5		95.8

Total Current Liabilities		693.5		855.8

Long-Term Debt and Capital Lease Obligations		337.0		406.5

Other Liabilities and Credits
Deferred income taxes		143.3		110.8
Deferred revenue		34.2		117.2
Other liabilities		104.3		134.5

		281.8		362.5

Shareholder's Equity
Common stock, $1 par value
Authorized: 1,000 shares
Issued: 1999 and 2000—500 shares		—		—
Capital in excess of par value		225.8		225.8
Retained earnings		443.1		401.4

		668.9		627.2

Total Liabilities and Shareholder's Equity	$	1,981.2	$	2,252.0

See accompanying notes to financial statements.

CONSOLIDATED STATEMENT OF INCOME (unaudited)
Alaska Airlines, Inc.

	Three Months Ended September 30
	1999			2000
	(In Millions)
Operating Revenues
Passenger	$	435.6		$	451.5
Freight and mail		21.9			19.8
Other—net		18.6			13.0

Total Operating Revenues		476.1			484.3

Operating Expenses
Wages and benefits		137.5			150.3
Contracted services		14.1			16.3
Aircraft fuel		59.5			82.1
Aircraft maintenance		23.7			32.3
Aircraft rent		40.1			35.4
Food and beverage service		13.1			13.5
Commissions		26.7			17.1
Other selling expenses		21.7			27.0
Depreciation and amortization		16.9			22.2
Loss on sale of assets		0.2			0.4
Landing fees and other rentals		18.3			19.9
Other		28.6			34.5

Total Operating Expenses		400.4			451.0

Operating Income		75.7			33.3

Nonoperating Income (Expense)
Interest income		5.5			6.9
Interest expense		(3.6	)		(9.3	)
Interest capitalized		2.2			3.2
Other—net		0.5			0.9

		4.6			1.7

Income before income tax		80.3			35.0
Income tax expense		31.6			17.6

Net Income	$	48.7		$	17.4

See accompanying notes to financial statements.

CONSOLIDATED STATEMENT OF INCOME (unaudited)
Alaska Airlines, Inc.

	Nine Months Ended September 30
	1999			2000
	(In Millions)
Operating Revenues
Passenger	$	1,157.1		$	1,221.6
Freight and mail		60.6			57.7
Other—net		58.9			40.7

Total Operating Revenues		1,276.6			1,320.0

Operating Expenses
Wages and benefits		390.5			431.2
Contracted services		40.7			46.4
Aircraft fuel		144.2			223.6
Aircraft maintenance		69.1			90.8
Aircraft rent		120.5			107.3
Food and beverage service		37.0			38.0
Commissions		73.2			49.4
Other selling expenses		61.7			70.8
Depreciation and amortization		49.3			60.2
Loss on sale of assets		0.4			0.8
Landing fees and other rentals		51.7			54.4
Other		80.8			96.6
Special charge—Mileage Plan		—			24.0

Total Operating Expenses		1,119.1			1,293.5

Operating Income		157.5			26.5

Nonoperating Income (Expense)
Interest income		16.3			19.3
Interest expense		(11.1	)		(25.1	)
Interest capitalized		5.8			8.8
Other—net		3.0			1.7

		14.0			4.7

Income before income tax and accounting change		171.5			31.2
Income tax expense		67.4			16.0

Income before accounting change		104.1			15.2
Cumulative effect of accounting change, net of income taxes of $35.6 million		—			(56.9	)

Net Income (Loss)	$	104.1		$	(41.7	)

See accompanying notes to financial statements.

STATEMENT OF SHAREHOLDER'S EQUITY (unaudited)
Alaska Airlines, Inc.

	Common Stock		Capital in Excess of Par Value		Retained Earnings			Total
	(In Millions)
Balances at December 31, 1999	$	—	$	225.8	$	443.1		$	668.9
Net loss for the nine months ended September 30, 2000						(41.7	)		(41.7	)

Balances at September 30, 2000	$	—	$	225.8	$	401.4		$	627.2

See accompanying notes to financial statements.

STATEMENT OF CASH FLOWS (unaudited)
Alaska Airlines, Inc.

		Nine Months Ended September 30
		1999			2000
		(In Millions)
Cash flows from operating activities:
Net income (loss)		$	104.1		$	(41.7	)
Adjustments to reconcile net income (loss) to cash:
	Cumulative effect of accounting change		—			56.9
	Special charge—Mileage Plan		—			24.0
	Depreciation and amortization		49.3			60.2
	Amortization of airframe and engine overhauls		32.9			36.7
	Loss on sale of assets		0.4			0.8
	Increase (decrease) in deferred income taxes		45.6			(32.5	)
	Increase in accounts receivable		(19.2	)		(59.4	)
	Decrease in other current assets		2.8			6.4
	Increase in air traffic liability		35.9			53.1
	Increase in other current liabilities		45.5			79.9
	Other—net		4.2			11.2

Net cash provided by operating activities			301.5			195.6

Cash flows from investing activities:
Proceeds from disposition of assets			0.2			37.1
Purchases of marketable securities			(98.7	)		(229.6	)
Sales and maturities of marketable securities			205.9			180.2
Restricted deposits			3.9			(0.2	)
Additions to flight equipment deposits			(106.7	)		(95.0	)
Additions to property and equipment			(241.4	)		(181.8	)

Net cash used in investing activities			(236.8	)		(289.3	)

Cash flows from financing activities:
Proceeds from issuance of long-term debt			—			118.7
Long-term debt and capital lease payments			(17.6	)		(19.9	)

Net cash provided by (used in) financing activities			(17.6	)		98.8

Net change in cash and cash equivalents			47.1			5.1
Cash and cash equivalents at beginning of period			29.1			132.3

Cash and cash equivalents at end of period		$	76.2		$	137.4

Supplemental disclosure of cash paid during the period for:
	Interest (net of amount capitalized)	$	6.4		$	10.2
	Income taxes		21.8			13.7

Noncash investing and financing activities:

2000—A flight simulator was transferred to Alaska Air Group Leasing in exchange for a $2.4 million note receivable and a $0.6 million reduction in its payable to Alaska Air Group.

See accompanying notes to financial statements.

NOTES TO FINANCIAL STATEMENTS THAT HAVE CHANGED SIGNIFICANTLY
DURING THE NINE MONTHS ENDED SEPTEMBER 30, 2000
Alaska Airlines, Inc.

Note 1. Basis of presentation

The accompanying unaudited 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, 1999. They include all adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods. The adjustments made were of a normal recurring nature.

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.

Note 2. Prepaid Expenses and Other Current Assets

At September 30, 2000, other current assets included $38.5 million of restricted deposits that will be used to pay certain current liabilities. At December 31, 1999, these deposits were included with other assets. These deposits are yen-denominated investments that are held to repay yen-denominated borrowings that are due in the next 12 months.

Note 3. Frequent Flyer Program

(a) Change in Accounting Principle

In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin 101 (SAB 101), Revenue Recognition in Financial Statements. SAB 101 gives specific guidance on the conditions that must be met before revenue may be recognized, and in June 2000 Alaska changed its method of accounting for the sale of miles in its Mileage Plan. Under the new method, a majority of the sales proceeds is deferred, and recognized when the award transportation is provided. The deferred proceeds are recognized as passenger revenue for awards issued on Alaska and as other revenue-net for awards issued on other airlines. In connection with the change, Alaska recognized a $56.9 million cumulative effect charge, net of income taxes of $35.6 million, effective January 1, 2000. Accordingly, results for the first quarter 2000 have been restated.

(b) Special Charge—Mileage Plan

In June 2000, Alaska recorded a $24.0 million special charge to recognize the increased incremental cost of travel awards earned by flying on Alaska and travel partners. The higher cost is due to an increase in the estimated costs Alaska incurs to acquire awards on other airlines for its Mileage Plan members, as well as lower assumed forfeiture of miles.

(c) Balance Sheet Classification of Frequent Flyer Liability

Alaska's Mileage Plan liabilities are included under the following balance sheet captions.

		December 31, 1999		September 30, 2000
		(In millions)
Current Liabilities:
	Other accrued liabilities	$	40.0	$	72.4
Other Liabilities and Credits:
	Deferred revenue		—		77.0
	Other liabilities		—		37.0

Total Liabilities		$	40.0	$	186.4

(d) Restated First Quarter 2000

The following table shows Alaska's previously reported results and the restated results for the change in accounting principle for the sale of miles.

		1st Quarter 2000
		Reported			Restated
		(in millions, except per share)
Operating Revenues:
	Passenger	$	355.6		$	360.1
	Freight and mail		17.8			17.8
	Other—net		20.9			13.6

Total Revenues		$	394.3		$	391.5

Loss before accounting change		$	(10.9	)	$	(13.7	)
Cumulative effect of accounting change net of income tax			—			(56.9	)

Net Loss		$	(6.5	)	$	(65.1	)

(e) Pro Forma Results for 1999

The following table shows Alaska's previously reported results and what those results would have been on a pro forma basis if the new accounting policy for the sale of miles had been in effect in 1999.

		Three Months Ended September 30, 1999
		Three Months Ended September 30, 1999				Nine Months Ended September 30, 1999
				Pro Forma		Nine Months Ended September 30, 1999
		Reported		Pro Forma		Reported		Pro Forma
		(in millions, except per share)
Operating Revenues:
	Passenger	$	435.6	$	441.0	$	1,157.1	$	1,172.3
	Freight and mail		21.9		21.9		60.6		60.6
	Other—net		18.6		11.7		58.9		37.0

Total Revenues		$	476.1	$	474.6	$	1,276.6	$	1,269.9

Net Income		$	48.7	$	47.9	$	104.1	$	100.3

Alaska Airlines
Financial and Statistical Data

	Quarter Ended September 30								Nine Months Ended September 30
Financial Data:	1999			2000			% Change		1999			2000			% Change
	(In millions)
Operating Revenues:
Passenger	$	435.6		$	451.5		3.7		$	1,157.1		$	1,221.6		5.6
Freight and mail		21.9			19.8		(9.6	)		60.6			57.7		(4.8	)
Other—net		18.6			13.0		(30.1	)		58.9			40.7		(30.9	)

Total Operating Revenues		476.1			484.3		1.7			1,276.6			1,320.0		3.4

Operating Expenses:
Wages and benefits		130.0			150.3		15.6			374.4			431.2		15.2
Employee profit sharing		7.5			0.0		NM			16.1			0.0		NM
Contracted services		14.1			16.3		15.6			40.7			46.4		14.0
Aircraft fuel		59.5			82.1		38.0			144.2			223.6		55.1
Aircraft maintenance		23.7			32.3		36.3			69.1			90.8		31.4
Aircraft rent		40.1			35.4		(11.7	)		120.5			107.3		(11.0	)
Food and beverage service		13.1			13.5		3.1			37.0			38.0		2.7
Commissions		26.7			17.1		(36.0	)		73.2			49.4		(32.5	)
Other selling expenses		21.7			27.0		24.4			61.7			70.8		14.7
Depreciation and amortization		16.9			22.2		31.4			49.3			60.2		22.1
Loss on sale of assets		0.2			0.4		NM			0.4			0.8		NM
Landing fees and other rentals		18.3			19.9		8.7			51.7			54.4		5.2
Other		28.6			34.5		20.6			80.8			96.6		19.6
Special charge—Mileage Plan										0.0			24.0		NM

Total Operating Expenses		400.4			451.0		12.6			1,119.1			1,293.5		15.6

Operating Income		75.7			33.3		(56.0	)		157.5			26.5		(83.2	)

Interest income		5.5			6.9					16.3			19.3
Interest expense		(3.6	)		(9.3	)				(11.1	)		(25.1	)
Interest capitalized		2.2			3.2					5.8			8.8
Other—net		0.5			0.9					3.0			1.7

		4.6			1.7					14.0			4.7

Income Before Income Tax and Accounting Change	$	80.3		$	35.0		(56.4	)	$	171.5		$	31.2		(81.8	)

Operating Statistics:
Revenue passengers (000)		3,813			3,655		(4.2	)		10,324			10,255		(0.7	)
RPMs (000,000)		3,265			3,226		(1.2	)		8,943			9,088		1.6
ASMs (000,000)		4,641			4,494		(3.2	)		13,025			12,936		(0.7	)
Passenger load factor		70.3	%		71.8	%	1.5 pts			68.7	%		70.3	%	1.6 pts
Breakeven load factor		56.7	%		66.8	%	10.1 pts			58.2	%		67.9	%	9.7 pts
Yield per passenger mile		13.34	¢		13.99	¢	4.9			12.94	¢		13.44	¢	3.9
Operating revenue per ASM		10.26	¢		10.78	¢	5.1			9.80	¢		10.20	¢	4.1
Operating expenses per ASM		8.63	¢		10.04	¢	16.3			8.59	¢		10.00	¢	16.4
Fuel cost per gallon		72.8	¢		104.6	¢	43.8			62.7	¢		98.5	¢	57.1
Fuel gallons (000,000)		81.8			78.5		(4.0	)		230.1			227.1		(1.3	)
Average number of employees		9,419			9,763		3.6			9,183			9,494		3.4
Aircraft utilization (blk hrs/day)		11.7			10.8		(7.7	)		11.3			10.7		(5.3	)
Operating fleet at period-end		88			93		5.7			88			93		5.7

NM = Not Meaningful

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

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, 1999.

Results of Operations

Third Quarter 2000 Compared with Third Quarter 1999

Net income for the third quarter of 2000 was $17.4 million compared with $48.7 million in 1999. Operating income for the third quarter of 2000 was $33.3 million compared with $75.7 million for 1999. The $42.4 million reduction in operating income was largely due to higher fuel prices, and higher labor and aircraft maintenance costs. Financial and statistical data is shown on page 10. A discussion of this data follows.

Revenues

Capacity was reduced 3.2% in order to improve schedule reliability. Traffic dropped 1.2%, resulting in a 1.5 point increase in passenger load factor. Passenger yields were up 4.9% (4.0% excluding the impact of a new accounting method for the sale of miles), primarily due to fuel-related fare increases. Yields were up in substantially all major markets. The lower traffic combined with the higher yield resulted in a 3.7% increase in passenger revenue. In spite of the loss of the marketing alliance with Canadian Airlines in August 2000, traffic and load factor in the Canadian market increased in September 2000.

Freight and mail revenues decreased 9.6%, primarily due to lower freight volumes that resulted from 4.7% fewer flights operated, lower seafood shipments and more competition.

Other-net revenues decreased $5.5 million (29.8%), due to a change in accounting for the sale of miles in Alaska's frequent flyer program. If the new accounting method had been in effect in 1999, other-net revenues would have increased $1.4 million (11.6%).

Expenses

Operating expenses grew by 12.6% as a result of an 16.3% increase in cost per ASM. The increase in cost per ASM was largely due to higher fuel prices, higher labor and aircraft maintenance costs and lower ASMs. Explanations of significant year-over-year changes in the components of operating expenses are as follows:

•: Wages and benefits increased 15.6% due to a 3.6% increase in the number of employees combined with an 11.5% increase in average wages and benefits per employee. Management employees were hired in many areas (e.g. maintenance and quality control, computer services, training, marketing and employee services) to better manage the existing operations. The number of pilots and flight attendants increased, in spite of a reduction in capacity, due to training requirements. The 2000 results include a $2.9 million charge for a flight attendant early retirement program. Absent this charge, average wages and benefits per employee increased

9.4%. New labor contracts for flight attendants, passenger service and ramp service employees, combined with longevity increases for pilots, and annual merit raises for management employees all contributed to the higher average wage rates.

•: Contracted services increased 16%. The 2000 results include a $0.6 million charge for aircraft accident costs not expected to be covered by insurance. Absent this charge, contracted services increased 11% due to new costs for processing marketing information, higher contract labor and security costs, and higher rates for ground handling services.
•: Fuel expense increased 38%, primarily due to a 44% increase in the cost of fuel. The fuel consumption rate decreased 2% due to the use of more fuel efficient B737-700 aircraft. Fuel hedging saved $1.9 million.
•: Maintenance expense increased 36%, due to greater use of outside contractors for airframe checks, a greater number of such checks and increased expenses for engine overhauls.
•: Aircraft rent expense decreased 12%, due to leasing four fewer MD-80 aircraft and two fewer B737-400 aircraft.
•: Commission expense decreased 36% on a 4% increase in passenger revenue. The commission rate paid to travel agents decreased from 8% to 5%. In 2000, 63% of ticket sales were made through travel agents, versus 67% in 1999. In 2000, 10.5% of ticket sales were made through Alaska's Internet web site versus 5.8% in 1999.
•: Other selling expense increased 24%, higher than the 4% increase in passenger revenue, due to increased expenses for Mileage Plan awards.
•: Depreciation increased 31%, primarily due to owning 10 more aircraft in 2000.
•: Other expense increased 21%, primarily due to higher expenditures for legal fees, passenger remuneration, hotel and flight crew meals, professional services and recruiting.

Nonoperating Income (Expense) Net nonoperating income decreased $2.9 million, primarily due to higher interest expense resulting from new debt incurred in late 1999 and in the third quarter of 2000.

Nine Months 2000 Compared with Nine Months 1999

In accordance with guidance provided in the SEC's Staff Accounting Bulletin 101, Alaska changed its method of accounting for the sale of miles in its Mileage Plan. In connection with the change, Alaska recognized a $56.9 million cumulative effect charge, net of income taxes of $35.6 million, effective January 1, 2000. The income before accounting change for the nine months ended September 30, 2000 was $15.2 million compared with $104.1 million in 1999. Operating income for the first nine months of 2000 was $26.5 million compared with $157.5 million for 1999.

The $131.0 million reduction in operating income was primarily due to higher fuel prices ($74.4 million) and a special charge related to Mileage Plan estimates ($24.0 million). Changes in operating revenues and operating expenses are generally due to the same reasons stated above in the third quarter comparison.

Liquidity and Capital Resources

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

	December 31, 1999			September 30, 2000			Change
	(In millions, except debt-to-equity)
Cash and marketable securities	$	328.8		$	383.3		$	54.5
Working capital (deficit)		(116.3	)		(132.8	)		(16.5	)
Long-term debt and capital lease obligations		337.0			406.5			69.5
Shareholders' equity		668.9			627.2			(41.7	)
Debt-to-capital		34%:66%			39%:61%			NA
Debt-to-capital assuming aircraft operating leases are capitalized at seven times annualized rent		67%:33%			69%:31%			NA

The Company's cash and marketable securities portfolio increased by $55 million during the first nine months of 2000. Operating activities provided $196 million of cash during this period. Additional cash was provided by the issuance of $119 million of new debt. Another $37 million was provided by insurance proceeds from an aircraft accident and other asset dispositions. Cash was used for $277 million of capital expenditures, including the purchase of five new Boeing 737 aircraft, flight equipment deposits and airframe and engine overhauls, and for $20 million of debt repayment.

Aircraft Accident On January 31, 2000, Alaska Airlines flight 261 from Puerto Vallarta en route to San Francisco, went down in the water off the coast of California near Point Mugu. The flight carried 83 passengers and five crew members. There were no survivors. Consistent with industry standards, the Company maintains insurance against aircraft accidents. The Company expects substantially all accident response and civil litigation costs to be covered by insurance. However, any aircraft accident, even if fully insured, could cause a negative public perception of the Company with adverse financial consequences. Principally as a result of added maintenance inspections Alaska carried out after the accident, Alaska estimates that it canceled 6% of its flights in February and 3% of its flights in March.

Safety Activities In March 2000, to enhance existing lines of communication, Alaska established a "safety hotline" for employees to contact the chairman's office directly regarding any safety concern. In April 2000, an independent team of outside safety experts began a full audit of the maintenance, flight operations, hazardous materials handling and security areas of Alaska. The team presented its final report to Alaska in June 2000 and Alaska is implementing those recommendations. Alaska has also hired a vice president of safety, who reports directly to the chairman.

Commitments As of September 30, 2000, the Company had firm orders for 18 aircraft requiring aggregate payments of approximately $475 million, as set forth below. In addition, Alaska has options to acquire 26 more B737s. Alaska expects to finance the new planes with either leases, long-term debt or internally generated cash.

	Delivery Period—Firm Orders
Aircraft	2000		2001		2002		Total
Boeing B737-700		2		3		2		7
Boeing B737-900		—		6		5		11

Total		2		9		7		18

Payments (Millions)	$	62	$	239	$	174	$	475

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

In December 1998, search warrants and a grand jury subpoena (for the U.S. District Court for the Northern District of California) were served on Alaska, initiating an investigation into the Company's Oakland maintenance base by the U.S. Attorney for the Northern District of California. Alaska has cooperated with the U.S. Attorney's initial and subsequent requests for information concerning the Company's maintenance operations. In addition, the Federal Aviation Administration (FAA) issued a letter of investigation (LOI) to Alaska relating to maintenance performed on an MD-80 aircraft. In April 1999, the FAA issued a notice of proposed civil penalty for $44,000. In July 1999, Alaska responded informally to the notice, disputing that any violation occurred, and to date the FAA has not taken any further action. The Company understands that information developed by the National Transportation Safety Board in connection with the crash of flight 261 on January 31, 2000 is being shared with the U.S. Attorney and that the U.S. Attorney is using this information, along with other records relating to the aircraft Alaska has produced, to evaluate whether any crimes were committed in connection with flight 261. To the Company's knowledge, no charges have been filed as a result of the grand jury investigation.

Alaska is currently a defendant in a number of lawsuits relating to flight 261. The Company is unable to predict the amount of claims that may ultimately be made against it or how those claims might be resolved. Consistent with industry standards, the Company maintains insurance against aircraft accidents.

In April 2000, the FAA began an audit of Alaska's maintenance and flight operations departments to ensure adherence to mandated procedures. During the audit, the FAA requested that Alaska take a number of actions, which Alaska has done or is currently implementing. In June 2000, the FAA informed Alaska that it was proposing to amend Alaska's operations specification to suspend the Company's ability to perform heavy maintenance on its aircraft. In June 2000, Alaska submitted an Airworthiness and Operations Action Plan describing numerous steps Alaska would take to address the FAA's concerns. In response to this plan the FAA withdrew its proposal. The FAA also requested that the Company submit a growth plan to demonstrate its ability to handle operationally its planned fleet additions. In June 2000, Alaska submitted its growth plan to the FAA. In July 2000, Alaska responded in writing to each of the FAA's findings from its April audit. The FAA has issued a number of LOIs stemming from the resulting increased FAA oversight. Alaska is investigating and responding to these LOIs, which may be followed by proposed civil penalties. The Company has not been informed what further actions, if any, the FAA intends to take with respect to these matters.

The Company cannot predict the outcome of any of the pending civil or potential criminal proceedings described above. As a result, the Company can give no assurance that these proceedings, if determined adversely to Alaska, would not have a material adverse effect on the financial position or results of operations of the Company.

ITEM 5. Other Information

Alliances with Other Airlines

In August 2000, due to its merger with Air Canada, Canadian Airlines canceled its marketing alliance with Alaska and Horizon.

ITEM 6. Exhibits and Reports on Form 8-K

(a): Exhibit 27—Financial data schedule.

SIGNATURES

Pursuant to the requirements of the Securities 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 3, 2000
/s/ JOHN F. KELLY John F. Kelly Chairman and Chief Executive Officer
/s/ BRADLEY D. TILDEN Bradley D. Tilden Vice President/Finance and Chief Financial Officer

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