Alaska Air Group Reports Third Quarter Results

Alaska Air Group, Inc. today reported a net loss of $86.5 million for the third quarter of 2008, compared to net income of $81.8 million in 2007. Excluding special items, the company reported a...

Alaska Air Group, Inc. today reported a net loss of $86.5 million for the third quarter of 2008, compared to net income of $81.8 million in 2007. Excluding special items, the company reported a third quarter net profit of $39.9 million, or $1.10 per diluted share, compared to $78.8 million, or $1.93 per diluted share, in the third quarter of 2007.

"We are pleased to report an adjusted profit for the third quarter. Improved yields at both airlines helped recoup a portion of the $110 million increase in economic fuel expense," said Bill Ayer, Alaska Air Group’s chairman and chief executive officer. "Looking forward, the volatility of oil prices and the weak economy make this an extremely challenging environment. The key is to adapt our business to the changing conditions. Our fleet, balance sheet and strong customer following put us in a great position to do just that. I am grateful to the employees of Alaska and Horizon who, in spite of unprecedented headwinds, have kept their focus on customers and have dramatically improved our operation."

The current-period results include a loss of $218.2 million ($136.7 million after tax, or $3.79 per diluted share) associated with the decline in the value of the company’s fuel-hedge portfolio, compared to a $4.8 million gain ($3.0 million after tax, or $0.08 per diluted share) in the third quarter of 2007. "While the value of the portfolio of our hedges that will settle in future periods has declined with the drop in oil prices, the total value at the end of the second quarter was still nearly $100 million. We had a net cash benefit of $44 million for hedges that settled during the quarter and $130 million so far this year," Ayer said.

Under GAAP accounting rules, the company’s fuel-hedge portfolio must reflect the current market value at each reporting date, with changes in market value reflected in current-period earnings. For hedge contracts that settle in future periods, rising oil prices generally result in recording unrealized gains; conversely, falling oil prices generally result in recording unrealized losses. To a large extent, this quarter’s $218.2 million mark-to- market loss offsets the $155.3 million mark-to-market gain reported in the second quarter when oil prices were at historical highs.

Other special items in the third quarter of 2008 include MD-80 and CRJ-700 fleet transition costs of $22.2 million ($13.9 million after tax, or $0.38 per diluted share) and severance costs of $3.7 million ($2.3 million after tax, or $0.06 per diluted share) associated with the reductions in force. During the third quarter, Alaska also recorded a $42.3 million benefit ($26.5 million after tax, or $0.73 per diluted share) from the reduction in the number of Mileage Plan miles outstanding after deleting accounts with no activity for more than two years under its new policy.

Alaska Airlines’ mainline passenger traffic in the third quarter declined 1.1 percent on a capacity decline of 0.8 percent, compared to the third quarter of 2007. Load factor declined 0.2 percentage points to 79.5 percent. Alaska’s mainline passenger revenue per available seat mile (ASM) increased 4.4 percent and its operating cost per ASM excluding fuel and the special items mentioned above declined 0.7 percent. Alaska’s total pretax loss for the quarter was $107.4 million, compared to pretax income of $127.4 million in 2007. Excluding the special items above, Alaska’s pretax income was $56.6 million for the quarter, compared to pretax income of $123.4 million in the third quarter of 2007.

Horizon Air’s passenger traffic in the third quarter declined 13.9 percent on a 12.8 percent capacity decrease. Load factor decreased by 0.9 percentage points to 76.3 percent. Horizon’s passenger revenue per ASM increased 18.8 percent, and its operating cost per ASM excluding fuel and the special items mentioned above increased 0.7 percent. Horizon’s total pretax loss for the quarter was $25.1 million, compared to pretax income of $8.3 million in 2007. Excluding special items, Horizon’s pretax income was $12.7 million for the quarter, compared to pretax income of $7.5 million in the third quarter of 2007.

A summary of financial and statistical data for Alaska Airlines and Horizon Air, as well as a reconciliation of the reported non-GAAP financial measures, can be found in the accompanying tables.

A conference call regarding the third quarter 2008 results will be simulcast via the Internet at 8:30 a.m. Pacific time on Oct. 23, 2008. It can be accessed through the company’s Web site at alaskaair.com/investors. For those unable to listen to the live broadcast, a replay will be available after the conclusion of the call at alaskaair.com/investors.

References in this news release to "Air Group," "company," "we," "us" and "our" refer to Alaska Air Group, Inc. and its subsidiaries, unless otherwise specified. Alaska Airlines, Inc. and Horizon Air Industries, Inc. are referred to as "Alaska" and "Horizon," respectively, and together as our "airlines."

This news release contains forward-looking statements subject to the safe harbor protection provided by 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. 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. For a comprehensive discussion of potential risk factors, see Item 1A of the company’s Annual Report on Form 10-K for the year ended Dec. 31, 2007. Some of these risks include increased competition, significant fuel costs, general economic conditions, labor costs and relations, our significant indebtedness, inability to meet cost reduction goals, terrorist attacks, seasonal fluctuations in our financial results, an aircraft accident, laws and regulations, and government fees and taxes. 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 expressly 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.

Alaska Airlines and sister carrier Horizon Air together serve 90 cities through an expansive network in Alaska, the Lower 48, Hawaii, Canada and Mexico. For reservations, visit alaskaair.com. For more news and information, visit the Alaska Airlines/Horizon Air Newsroom at alaskaair.com/newsroom.

                            Alaska Air Group, Inc.

  CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

                                       Three Months Ended  Nine Months Ended
  (in millions, except per share          September 30,    September 30,(1)
   amounts)                               2008    2007      2008      2007
  Operating Revenues:
  Passenger                              $952.8  $920.2  $2,592.0  $2,452.2
  Freight and mail                         30.5    27.0      80.4      75.6
  Other - net                              39.6    41.6     120.8     124.8
  Change in Mileage Plan terms             42.3      -       42.3        -
  Total Operating Revenues              1,065.2   988.8   2,835.5   2,652.6

  Operating Expenses:
  Wages and benefits                      232.1   241.1     711.2     715.8
  Variable incentive pay                    6.3     2.9      15.0      17.2
  Aircraft fuel, including hedging
   gains and losses                       575.6   243.1   1,039.6     655.8
  Aircraft maintenance                     47.4    59.2     159.6     176.7
  Aircraft rent                            40.2    45.2     126.1     133.2
  Landing fees and other rentals           56.8    58.1     169.7     169.3
  Contracted services                      40.2    40.4     128.3     118.8
  Selling expenses                         41.7    42.7     120.3     122.8
  Depreciation and amortization            52.1    46.6     152.9     132.3
  Food and beverage service                13.5    12.9      39.2      36.9
  Other                                    52.7    55.7     171.4     167.7
  Restructuring charges                     3.7      -        3.7        -
  Fleet transition costs - MD-80           21.5      -       47.5        -
  Fleet transition costs - CRJ-700          0.7      -        6.8        -
  Fleet transition costs - Q200             0.7     3.9       9.7      10.6
  Total Operating Expenses              1,185.2   851.8   2,901.0   2,457.1
  Operating Income (Loss)                (120.0)  137.0     (65.5)    195.5

  Nonoperating Income (Expense):
  Interest income                          10.7    13.8      31.5      42.0
  Interest expense                        (25.9)  (22.8)    (74.3)    (66.3)
  Interest capitalized                      5.9     7.1      18.5      20.9
  Other - net                              (3.7)   (0.3)     (3.4)     (1.2)
                                          (13.0)   (2.2)    (27.7)     (4.6)
  Income (loss) before income tax        (133.0)  134.8     (93.2)    190.9
  Income tax expense (benefit)            (46.5)   53.0     (32.5)     74.0
  Net Income (Loss)                      $(86.5)  $81.8    $(60.7)   $116.9

  Basic Earnings (Loss) Per Share:       $(2.40)  $2.02    $(1.67)    $2.89
  Diluted Earnings (Loss) Per Share:     $(2.40)  $2.01    $(1.67)    $2.86
  Shares Used for Computation:
  Basic                                  36.069  40.483    36.383    40.433
  Diluted                                36.069  40.775    36.383    40.941

  (1) See note on page 6 for information regarding an immaterial correction
      of amounts in the nine-month periods ended September 30, 2008 and
      2007. The correction reduced net income or loss by $1.5 million ($0.04
      per share) for the nine months ended September 30, 2008 and $0.7
      million ($0.02 per share) for the nine months ended September 30,
      2007.



                           Alaska Air Group, Inc.

  CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

                                            September 30,      December 31,
  (in millions)                                     2008              2007

  Cash and marketable securities                  $1,067              $823

  Total current assets                             1,679             1,391
  Property and equipment-net                       3,218             2,962
  Other assets                                       169               138
  Total assets                                    $5,066            $4,491

  Current liabilities                             $1,540            $1,374
  Long-term debt                                   1,613             1,125
  Other liabilities and credits                      987               966
  Shareholders' equity                               926             1,026
  Total liabilities and shareholders' equity      $5,066            $4,491

  Debt to Capitalization, adjusted for
   operating leases                              75%:25%           70%:30%

  Number of common shares outstanding             36.209            38.051



  Air Group Net Income (Loss) and EPS Reconciliation:

  The following table summarizes Alaska Air Group, Inc.'s net income
  (loss) and amounts per share during 2008 and 2007 excluding the benefit
  of the change in Mileage Plan expiration terms, restructuring and MD-80
  and CRJ-700 fleet transition costs, and to reflect the timing of gain or
  loss recognition resulting from mark-to-market fuel-hedge accounting as
  reported in accordance with GAAP (in millions except per share amounts):

                                        Three Months Ended September 30,
                                              2008             2007
                                                  Diluted         Diluted
                                         Dollars    EPS*  Dollars   EPS
  Net income and diluted EPS, excluding
   the items noted below                  $39.9    $1.10   $78.8   $1.93
  Change in Mileage Plan terms, net of
   tax                                     26.5     0.73     -       -
  Restructuring charges, net of tax        (2.3)   (0.06)    -       -
  Fleet transition costs - MD-80, net
   of tax                                 (13.5)   (0.37)    -       -
  Fleet transition costs - CRJ-700, net
   of tax                                  (0.4)   (0.01)    -       -
  Adjustments to reflect the timing of
   gain or loss recognition resulting
   from mark-to-market fuel-hedge
   accounting, net of tax                (136.7)   (3.79)    3.0    0.08
  Reported GAAP amounts                  $(86.5)  $(2.40)  $81.8   $2.01



                                        Nine Months Ended September 30,(1)
                                              2008             2007
                                                  Diluted          Diluted
                                         Dollars    EPS    Dollars   EPS
  Net income (loss) and diluted EPS,
   excluding the items noted below       $(12.0)  $(0.33)  $109.5   $2.67
  Change in Mileage Plan terms, net of
   tax                                     26.5     0.73      -       -
  Restructuring charges, net of tax        (2.3)   (0.06)     -       -
  Fleet transition costs - MD-80, net
   of tax                                 (29.8)   (0.82)     -       -
  Fleet transition costs - CRJ-700, net
   of tax                                  (4.2)   (0.12)     -       -
  Adjustments to reflect the timing of
   gain or loss recognition resulting
   from mark-to-market fuel-hedge
   accounting, net of tax                 (38.9)   (1.07)     7.4    0.19
  Reported GAAP amounts                  $(60.7)  $(1.67)  $116.9   $2.86

  * Diluted EPS, excluding special items was calculated using diluted
    weighted-average shares outstanding of 36.232 million.

  (1) Correction of amounts presented for nine months ended September 30,
  2008 and 2007
      During the third quarter, we discovered an error in our calculation of
      stock-based compensation expense for certain awards granted after
      January 1, 2006.  The error resulted in a $2.3 million understatement
      of wages and benefits in the first quarter of 2008, a $1.1 million
      understatement of expense in the first quarter of 2007 and a $2.9
      million understatement of expense in 2006.  We have concluded that
      these items are not material to those periods, and in accordance with
      SEC Staff Accounting Bulletin No. 108, we will make appropriate
      adjustments to our previously filed financial statements when they are
      presented in future Exchange Act reports.

      Our results for the nine months ended September 30, 2008 and 2007 have
      been adjusted for this item. We have also adjusted our Financial and
      Statistical data schedules, unit cost reconciliations, and
      reconciliations between GAAP and adjusted amounts for both Alaska and
      Horizon.

      Impact to 2008 reported amounts:
      The impact was to increase Air Group wages and benefits expense and
      total operating expenses and reduce the pretax result by $2.3 million
      ($1.9 million at Alaska and $0.4 million at Horizon). The after tax
      impact to Air Group was $1.5 million or $0.04 per share for the first
      quarter 2008. This amount impacts the first quarter of 2008 and thus
      the nine-month period ended September 30, 2008.

      Impact to 2007 reported amounts:
      The impact was to increase Air Group wages and benefits expense and
      total operating expenses and reduce the pretax result by $1.1 million
      ($1.0 at Alaska and $0.1 at Horizon). The after tax impact to Air
      Group was $0.7 million or $0.02 per share. This amount impacts the
      first quarter of 2008 and thus the nine-month period ended September
      30, 2007. Our total 2007 results  will also be impacted by the same
      amount.



              Alaska Airlines Financial and Statistical Data

                         Three Months Ended          Nine Months Ended
                           September 30,              September 30, (c)
  Financial Data
  (in millions):      2008     2007   %Change   2008      2007    %Change
  Operating Revenues:
  Passenger          $751.2    $725.2     3.6  $2,041.2  $1,934.4    5.5
  Freight and mail     29.2      25.9    12.7      77.1      72.9    5.8
  Other - net          33.5      35.4    (5.4)    101.2     105.8   (4.3)
  Change in Mileage
   Plan terms          42.3         -      NM      42.3         -     NM
  Total mainline
   operating revenues 856.2     786.5     8.9   2,261.8   2,113.1    7.0
  Passenger -
   purchased capacity  85.7      81.2     5.5     233.9     209.5   11.6
  Total Operating
   Revenues           941.9     867.7     8.6   2,495.7   2,322.6    7.5


  Operating Expenses:
  Wages and benefits  182.5     189.0    (3.4)    558.9     562.9   (0.7)
  Variable
   incentive pay        4.9       1.4   250.0      10.8      11.2   (3.6)
  Aircraft fuel,
   including hedging
   gains and losses   479.1     204.3   134.5     864.0     555.3   55.6
  Aircraft
   maintenance         32.6      39.0   (16.4)    112.1     107.8    4.0
  Aircraft rent        26.3      29.1    (9.6)     82.4      83.3   (1.1)
  Landing fees and
   other rentals       42.3      43.3    (2.3)    126.9     127.3   (0.3)
  Contracted services  31.9      31.6     0.9     100.5      91.2   10.2
  Selling expenses     33.1      34.3    (3.5)     95.6      99.3   (3.7)
  Depreciation and
   amortization        42.8      35.1    21.9     123.2     106.1   16.1
  Food and beverage
   service             12.8      12.2     4.9      37.1      34.8    6.6
  Other                41.0      42.0    (2.4)    130.2     125.0    4.2
  Restructuring
   charges              3.7         -      NM       3.7         -     NM
  Fleet transition
   costs - MD-80       21.5         -      NM      47.5         -     NM
  Total mainline
   operating
   expenses           954.5     661.3    44.3   2,292.9   1,904.2   20.4
  Purchased capacity
   costs               85.6      80.6     6.2     246.8     222.1   11.1
  Total Operating
   Expenses         1,040.1     741.9    40.2   2,539.7   2,126.3   19.4

  Operating Income
   (Loss)             (98.2)    125.8             (44.0)    196.3

  Interest income      12.8      17.2              38.2      49.7
  Interest expense    (23.5)    (22.4)            (67.5)    (64.9)
  Interest
   capitalized          4.8       6.8              16.1      19.1
  Other - net          (3.3)        -              (2.7)     (0.4)
                       (9.2)      1.6             (15.9)      3.5

  Income (Loss)
   Before Income
   Tax              $(107.4)   $127.4            $(59.9)   $199.8

  Mainline Operating
   Statistics:
  Revenue
   passengers (000)   4,532     4,878    (7.1)   13,037    13,367   (2.5)
  RPMs (000,000)
   "traffic"          5,012     5,067    (1.1)   14,410    13,953    3.3
  ASMs (000,000)
   "capacity"         6,306     6,354    (0.8)   18,628    18,188    2.4
  Passenger load
   factor              79.5%     79.7%  (0.2)pts   77.4%     76.7%  0.7pts
  Yield per
   passenger
   mile(in cents)     14.99     14.31     4.8     14.17     13.86    2.2
  Operating revenue
   per ASM "RASM"
   (in cents)         13.58     12.38     9.7     12.14     11.62    4.5
  Change in
   Mileage Plan
   terms per ASM
   (in cents)          0.67      0.00      NM      0.23      0.00     NM
  RASM excluding
   change in Mileage
   Plan terms
   (in cents)         12.91     12.38     4.3     11.91     11.62    2.5
  Passenger revenue
   per ASM(in cents)  11.91     11.41     4.4     10.96     10.64    3.0
  Operating expense
   per ASM (c)
   (in cents)         15.14     10.41    45.4     12.31     10.47   17.6
  Operating expense
   per ASM excluding
   fuel, restructuring
   charges and fleet
   transition
   costs (a) (c)
   (in cents)          7.14      7.19    (0.7)     7.40      7.42   (0.3)
  GAAP fuel cost
   per gallon         $5.57     $2.20   153.2     $3.34     $2.08   60.6
  Economic fuel cost
   per gallon (b)     $3.47     $2.24    54.9     $3.14     $2.11   48.8
  Fuel gallons
   (000,000)           86.0      93.2    (7.7)    258.3     267.1   (3.3)
  Average number of
   full-time
   equivalent
   employees          9,594     9,753    (1.6)    9,785     9,681    1.1
  Aircraft
   utilization
   (blk hrs/day)       10.8      11.2    (3.6)     10.8      11.0   (1.8)
  Average aircraft
   stage length
   (miles)              981       925     6.1       975       920    6.0
  Operating fleet
   at period-end        110       114   (4 a/c)     110       114  (4 a/c)

  Regional Operating
   Statistics:
  RPMs (000,000)        304       319    (4.7)      873       812    7.5
  ASMs (000,000)        391       399    (2.0)    1,153     1,067    8.1
  Passenger load
   factor              77.7%     79.9%  (2.2)pts   75.7%     76.1%  (0.4)pts
  Yield per passenger
   mile(in cents)     28.19     25.45    10.7     26.79     25.80    3.8
  Operating revenue
   per ASM(in cents)  21.92     20.35     7.7     20.29     19.63    3.3
  Operating expenses
   per ASM
   (in cents)         21.89     20.20     8.4     21.41     20.82    2.8

  NM = Not Meaningful
  (a) See page 9 for a reconciliation of these non-GAAP measures and a
      discussion about why these measures may be important to investors.
  (b) See page 11 for a reconciliation of economic fuel cost.
  (c) See note on page 6 for information regarding an immaterial adjustment
      in the nine-month periods ended September 30, 2008 and 2007.



                  Horizon Air Financial and Statistical Data

                            Three Months Ended        Nine Months Ended
                              September 30,           September 30, (d)
  Financial Data (in
   millions):              2008    2007   % Change  2008    2007   % Change
  Operating Revenues:
  Passenger - brand
   flying                $121.0  $108.4      11.6  $331.4  $292.1      13.5
  Passenger - capacity
   purchase arrangements
   (a)                     80.4    86.1      (6.6)  230.5   237.5      (2.9)
     Total passenger
      revenue             201.4   194.5       3.5   561.9   529.6       6.1
  Freight and mail          0.8     0.7      14.3     2.1     1.8      16.7
  Other - net               1.9     1.7      11.8     6.2     5.1      21.6
  Total Operating
   Revenues               204.1   196.9       3.7   570.2   536.5       6.3

  Operating Expenses:
  Wages and benefits       47.9    51.0      (6.1)  147.2   150.2      (2.0)
  Variable incentive pay    1.4     1.5      (6.7)    4.2     6.0     (30.0)
  Aircraft fuel,
   including hedging
   gains and losses        96.5    38.8     148.7   175.6   100.5      74.7
  Aircraft maintenance     14.8    20.2     (26.7)   47.5    68.9     (31.1)
  Aircraft rent            13.9    16.1     (13.7)   43.7    49.9     (12.4)
  Landing fees and other
   rentals                 14.7    15.1      (2.6)   43.6    42.8       1.9
  Contracted services       7.1     7.1        -     22.0    19.9      10.6
  Selling expenses          8.6     8.4       2.4    24.7    23.5       5.1
  Depreciation and
   amortization             9.0    11.2     (19.6)   28.8    25.3      13.8
  Food and beverage
   service                  0.7     0.7        -      2.1     2.1        -
  Other                     9.7    11.2     (13.4)   33.7    35.7      (5.6)
  Fleet transition costs
   - CRJ-700                0.7      -         NM     6.8      -         NM
  Fleet transition costs
   - Q200                   0.7     3.9     (82.1)    9.7    10.6      (8.5)
  Total Operating
   Expenses               225.7   185.2      21.9   589.6   535.4      10.1

  Operating Income
   (Loss)                 (21.6)   11.7             (19.4)    1.1

  Interest income           1.1     1.1               3.8     3.4
  Interest expense         (5.5)   (4.8)            (16.9)  (12.1)
  Interest capitalized      1.0     0.3               2.3     1.8
  Other - net              (0.1)     -                0.1    (0.1)
                           (3.5)   (3.4)            (10.7)   (7.0)

  Income (Loss) Before
   Income Tax            $(25.1)   $8.3            $(30.1)  $(5.9)

  Combined Operating
   Statistics: (a)
  Revenue passengers
   (000)                  1,989   2,104      (5.5)  5,754   5,622       2.3
  RPMs (000,000)
   "traffic"                721     837     (13.9)  2,074   2,195      (5.5)
  ASMs (000,000)
   "capacity"               945   1,084     (12.8)  2,831   2,982      (5.1)
  Passenger load factor   76.3%   77.2%   (0.9)pts  73.3%   73.6%   (0.3)pts
  Yield per passenger
   mile(in cents)         27.93   23.24      20.2   27.09   24.13      12.3
  Operating revenue per
   ASM(in cents)          21.60   18.16      18.9   20.14   17.99      12.0
  Passenger revenue per
   ASM(in cents)          21.31   17.94      18.8   19.85   17.76      11.8
  Operating expenses per
   ASM (d)(in cents)      23.88   17.08      39.8   20.83ยข  17.95      16.0
  Operating expense per
   ASM excluding fuel
   and CRJ-700 fleet
   transition costs (b)
   (d)(in cents)          13.60   13.51       0.7   14.38   14.58      (1.4)
  GAAP fuel cost per
   gallon                 $5.61   $2.26     148.2   $3.37   $2.13      58.2
  Economic fuel cost per
   gallon (c)             $3.45   $2.30      50.0   $3.18   $2.18      45.9
  Fuel gallons (000,000)   17.2    17.2       0.0    52.1    47.2      10.4
  Average number of
   full-time equivalent
   employees              3,687   3,963      (7.0)  3,777   3,882      (2.7)
  Aircraft utilization
   (blk hrs/day)            8.5     8.8      (3.4)    8.4     8.7      (3.4)
  Average aircraft stage
   length (miles)           362     398      (9.0)    360     391      (7.9)
  Operating fleet at
   period-end                63      74    (11 a/c)    63      74   (11 a/c)

  NM = Not Meaningful

  (a) Represents combined information for Horizon flights operated under
      Capacity Purchase Agreements (CPAs) with Alaska and as Frontier Jet
      Express (through November 2007).  See page 10 for additional line of
      business information.
  (b) See page 10 for a reconciliation of these non-GAAP measures and a
      discussion about why these measures may be important to investors.
  (c) See page 11 for a reconciliation of economic fuel cost.
  (d) See note on page 6 for information regarding an immaterial adjustment
      in the nine-month periods ended September 30, 2008 and 2007.



   Note A:  Pursuant to Regulation G, we are providing disclosure of the
   reconciliation of reported non-GAAP financial measures to their most
   directly comparable financial measures reported on a GAAP basis. We
   believe that consideration of this measure of unit costs excluding fuel,
   purchased capacity costs, and other noted items may be important to
   investors for the following reasons:

   *    Cost per available seat mile (ASM) excluding fuel, purchased
        capacity costs, and other special items is one of the most important
        measures used by managements of both Alaska and Horizon and the Air
        Group Board of Directors in assessing quarterly and annual cost
        performance and, for Alaska Airlines, the operating results of the
        "mainline" operation, which includes the operation of aircraft
        branded in Alaska Airlines livery.

   *    Cost per ASM excluding fuel, purchased capacity costs, and other
        items as specified in our governing documents is an important metric
        used in the employee incentive plan that covers company management
        and executives.

   *    By eliminating fuel expense from our unit cost metrics, we believe
        that we have better visibility into the results of our non-fuel
        cost-reduction initiatives.  Our industry is highly competitive, and
        characterized by high fixed costs, so even a small reduction in non-
        fuel operating costs can result in a significant improvement in
        operating results.  In addition, we believe that all domestic
        carriers are similarly impacted by changes in jet fuel costs over
        the long run, so it is important for management (and thus investors)
        to understand the impact of (and trends in) company specific cost
        drivers such as labor rates and productivity, airport costs, and
        maintenance costs, which are more controllable by management.

   *    Cost per ASM excluding fuel and purchased capacity costs is a
        measure commonly used by industry analysts and we believe it is the
        basis by which they compare our airlines to others in the industry.
        The measure is also the subject of frequent questions from current
        or prospective investors.

   *    By eliminating the impact of certain noted or "special" items,
        management is provided the ability to measure and monitor
        performance both with and without these special items.  Management
        believes that the disclosure of the impact of certain items such as
        the fleet transition costs is important to the reader as it provides
        information on significant items that are not indicative of future
        performance.  Industry analysts and investors consistently measure
        the Company's performance without these items for better
        comparability between periods and between other airlines.

   *    Although we disclose our ''mainline'' unit revenues for Alaska to
        eliminate those revenues associated with purchased capacity flying
        performed by others on our behalf, we do not (nor are we able to)
        present unit revenues excluding the impact that rising fuel costs
        have had on ticket prices.  This is a limitation of our non-GAAP
        measure that excludes fuel from unit costs, as economic fuel
        represents approximately 35% to 40% of our total mainline operating
        expenses (excluding special items), and fluctuations in our fuel
        prices are often the driver of changes in unit revenues in the mid-
        to long term.  We would caution the readers of these financial
        statements not to place undue reliance on unit costs excluding fuel
        as a measure or predictor of future profitability.


The following tables reconcile our non-GAAP financial measures to the most directly comparable GAAP financial measures for both Alaska Airlines, Inc. and Horizon Air Industries, Inc.:

  Alaska Airlines, Inc.
  (in millions, except for per ASM unit information)

                                       Three Months Ended  Nine Months Ended
                                          September 30,     September 30,(1)

  Mainline unit cost reconciliations:      2008    2007      2008      2007
  Mainline operating expenses            $954.5  $661.3  $2,292.9  $1,904.2
  Mainline ASMs                           6,306   6,354    18,628    18,188

  Mainline operating expenses
   per ASM(in cents)                      15.14   10.41     12.31     10.47

  Mainline operating expenses            $954.5  $661.3  $2,292.9  $1,904.2
  Less: aircraft fuel                    (479.1) (204.3)   (864.0)   (555.3)
  Less: restructuring charges              (3.7)     -       (3.7)       -
  Less: fleet transition costs - MD-80    (21.5)     -      (47.5)       -
  Mainline operating expenses excluding
   fuel, restructuring charges
   and fleet transition costs            $450.2  $457.0  $1,377.7  $1,348.9
  Mainline ASMs                           6,306   6,354    18,628    18,188
  Mainline operating expenses per ASM
   excluding fuel, restructuring charges
   and fleet transition costs(in cents)    7.14    7.19      7.40      7.42



                                        Three Months Ended Nine Months Ended
                                            September 30,   September 30,(1)
  Reconciliation to GAAP income (loss)
  before taxes :                            2008     2007     2008     2007
  Income before taxes, excluding items
   noted below                             $56.6   $123.4     $1.4   $190.5
  Change in Mileage Plan terms              42.3       -      42.3       -
  Restructuring charges                     (3.7)      -      (3.7)      -
  Fleet transition costs - MD-80           (21.5)      -     (47.5)      -
  Adjustments to reflect timing of gain
   or loss recognition resulting from
   mark-to-market accounting on fuel
   hedges                                 (181.1)     4.0    (52.4)     9.3
  GAAP income (loss) before taxes as
   reported                              $(107.4)  $127.4   $(59.9)  $199.8

  (1) See note on page 6 for information regarding an immaterial adjustment
      of amounts in the nine-month periods ended September 30, 2008 and
      2007.



   Horizon Air Industries, Inc.
  (in millions, except for per ASM unit information)

                                      Three Months Ended  Nine Months Ended
                                          September 30,    September 30,(1)

  Unit cost reconciliations:              2008    2007     2008     2007
  Operating expenses                    $225.7   $185.2   $589.6   $535.4
  ASMs                                     945    1,084    2,831    2,982

  Operating expenses per ASM(in cents)   23.88    17.08    20.83    17.95

  Operating expenses                    $225.7   $185.2   $589.6   $535.4
  Less: aircraft fuel                    (96.5)   (38.8)  (175.6)  (100.5)
  Less: fleet transition costs - CRJ-
   700                                    (0.7)      -      (6.8)      -

  Operating expenses excluding fuel
   and CRJ-700 fleet transition costs   $128.5   $146.4   $407.2   $434.9
   ASMs                                    945    1,084    2,831    2,982

  Operating expenses per ASM excluding
   fuel and CRJ-700 fleet transition
   costs(in cents)                       13.60    13.51    14.38    14.58

  Unit cost reconciliations-excluding
   all fleet transition costs:
  Operating expenses                    $225.7   $185.2   $589.6   $535.4
  Less: aircraft fuel                    (96.5)   (38.8)  (175.6)  (100.5)
  Less: fleet transition costs - CRJ-
   700                                    (0.7)      -      (6.8)      -
  Less: fleet transition costs - Q200     (0.7)    (3.9)    (9.7)   (10.6)
  Operating expenses excluding fuel
   and all fleet transition costs       $127.8   $142.5   $397.5   $424.3
   ASMs                                    945    1,084    2,831    2,982

  Operating expenses per ASM excluding
   fuel and all fleet transition costs
   (in cents)                            13.52    13.15    14.04    14.23

  Reconciliation to GAAP income (loss)
   before taxes:
  Income (loss) before taxes,
   excluding mark-to-market fuel
   hedging gains (losses)
   and CRJ-700 fleet transition costs    $12.7     $7.5   $(13.6)   $(8.4)
  Fleet transition costs - CRJ-700        (0.7)      -      (6.8)      -
  Adjustments to reflect timing of
   gain or loss recognition resulting
   from mark-to-market accounting on
   fuel hedges                           (37.1)     0.8     (9.7)     2.5
  GAAP income (loss) before taxes as
   reported                             $(25.1)    $8.3   $(30.1)   $(5.9)

  (1) See note on page 6 for information regarding an immaterial adjustment
      of amounts in the nine-month periods ended September 30, 2008 and
      2007.


  Line of Business Information:

Horizon brand flying includes those routes in the Horizon system not covered by the Alaska and Frontier Capacity Purchase Agreements (CPA). Horizon bears the revenue risk in those markets and, as a result, traffic, yield and load factor impact revenue recorded by Horizon. In CPA arrangements, Horizon is (or was, as was the case with the Frontier CPA which ended in November 2007) insulated from market revenue factors and is guaranteed contractual revenue amounts based on operational capacity. As a result, yield and load factor information is not presented.

                  Three Months Ended September 30, 2008

                                  Capacity and Mix            Load Factor
                         2008      2007                              Point
                        Actual    Actual   Change  Current %         Change
                      (000,000) (000,000)  Y-O-Y    Total    Actual  Y-O-Y

  Brand Flying           568        562     1.1%     60%      75.0%   0.3
  Alaska CPA             377        384    (1.8%)    40%         NM    NM
  Frontier CPA             -        138  (100.0%)     0%         NM    NM
  System Total           945      1,084   (12.8%)   100%      76.3%  (0.9)

  NM= Not Meaningful

                                             Yield              RASM

                                          Actual   Change   Actual    Change
                                        (in cents) Y-O-Y  (in cents)  Y-O-Y

  Brand Flying                            28.23     9.5%     21.63     9.8%
  Alaska CPA                                 NM       NM     21.52     8.5%
  Frontier CPA                               NM       NM        NM       NM
  System Total                            27.93    20.2%     21.60    18.9%

  NM= Not Meaningful



                         Nine Months Ended September 30, 2008

                                  Capacity and Mix            Load Factor
                         2008      2007                              Point
                        Actual    Actual   Change  Current %         Change
                      (000,000) (000,000)  Y-O-Y    Total    Actual  Y-O-Y

  Brand Flying          1,736      1,518   14.4%     61%      71.1%   (1.2)
  Alaska CPA            1,095      1,014    8.0%     39%         NM     NM
  Frontier CPA              -        450 (100.0%)     0%         NM     NM
  System Total          2,831      2,982   (5.1%)   100%      73.3%    0.3

  NM= Not Meaningful

                                              Yield              RASM

                                          Actual   Change   Actual    Change
                                        (in cents) Y-O-Y  (in cents)  Y-O-Y

  Brand Flying                            26.80     7.0%    19.53     (0.9%)
  Alaska CPA                                 NM       NM    21.11      3.2%
  Frontier CPA                               NM       NM       NM        NM
  System Total                            27.09    12.3%    20.14     12.0%

  NM= Not Meaningful



  Alaska Airlines Fuel Reconciliation
  (in millions, except for per gallon amounts)

                                 Three Months Ended September 30,
                                  2008                        2007
                          Dollars       Cost/Gal     Dollars       Cost/Gal
  Raw or "into-plane"
   fuel cost              $334.5        $3.89       $222.4        $2.39
  Minus gains during the
   period on settled
   hedges                  (36.5)       (0.42)       (14.1)       (0.15)
  Economic fuel expense   $298.0        $3.47       $208.3        $2.24
  Minus the gain or plus
   the loss recognized
   during current period for
   contracts settling in
   future periods          119.5         1.39        (14.0)       (0.15)
  Plus the reversal of
   cumulative gains
   recognized in prior
   periods for contracts
  settled in current period 61.6         0.71         10.0         0.11
  Net adjustments          181.1         2.10         (4.0)       (0.04)
  GAAP fuel expense       $479.1        $5.57       $204.3        $2.20
  Fuel gallons              86.0                      93.2



                                  Nine Months Ended September 30,
                                  2008                      2007
                          Dollars       Cost/Gal    Dollars      Cost/Gal
  Raw or "into-plane"
   fuel cost              $918.8        $3.56       $585.2        $2.19
  Minus gains during the
   period on settled
   hedges                 (107.2)       (0.42)       (20.6)       (0.08)
  Economic fuel expense   $811.6        $3.14       $564.6        $2.11
  Minus the gain
   recognized during
   current period for
   contracts settling in
   future periods          (54.0)       (0.21)       (31.0)       (0.11)
  Plus the reversal of
   cumulative gains
   recognized in prior
   periods for contracts
   settled in current
   period                  106.4         0.41         21.7         0.08
  Net adjustments           52.4         0.20         (9.3)       (0.03)
  GAAP fuel expense       $864.0        $3.34       $555.3        $2.08
  Fuel gallons             258.3                     267.1



  Horizon Air Fuel Reconciliation
  (in millions, except for per gallon amounts)

                                 Three Months Ended September 30,
                                  2008                       2007
                          Dollars       Cost/Gal     Dollars     Cost/Gal
  Raw or "into-plane"
   fuel cost               $66.9        $3.89        $42.3        $2.46
  Minus gains during the
   period on settled hedges (7.5)       (0.44)        (2.7)       (0.16)
  Economic fuel expense    $59.4        $3.45        $39.6        $2.30
  Minus the gain or plus
   the loss recognized
   during current period
   for contracts settling
   in future periods        24.5         1.42         (2.7)       (0.15)
  Plus the reversal of
   cumulative gains
   recognized in prior
   periods for contracts
   settled in current
   period                   12.6         0.74          1.9         0.11
  Net adjustments           37.1         2.16         (0.8)       (0.04)
  GAAP fuel expense        $96.5        $5.61        $38.8        $2.26
  Fuel gallons              17.2                      17.2


                                   Nine Months Ended September 30,
                                  2008                      2007
                          Dollars       Cost/Gal     Dollars     Cost/Gal
  Raw or "into-plane"
   fuel cost              $187.9        $3.61       $106.9        $2.26
  Minus gains during the
   period on settled
   hedges                  (22.0)       (0.43)        (3.9)       (0.08)
  Economic fuel expense   $165.9        $3.18       $103.0        $2.18
  Minus the gain
   recognized during
   current period for
   contracts
   settling in future
   periods                 (11.8)       (0.22)        (6.7)       (0.14)
  Plus the reversal of
   cumulative gains
   recognized in prior
   periods for contracts
   settled in current
   period                   21.5         0.41          4.2         0.09
  Net adjustments            9.7         0.19         (2.5)       (0.05)
  GAAP fuel expense       $175.6        $3.37       $100.5        $2.13
  Fuel gallons              52.1                      47.2

First Call Analyst:
FCMN Contact: maria.koenig@alaskaair.com

SOURCE: Alaska Air Group, Inc.

CONTACT: Media, Caroline Boren of Alaska Airlines, +1-206-392-5101; or
Dan Russo of Horizon Air, +1-206-431-4513; or Investor|analysts, Shannon
Alberts of Alaska Air Group, +1-206-392-5218