Alaska Air Group Reports Third Quarter Results

Alaska Air Group, Inc. today reported a third quarter net loss of $17.4 million, or $0.44 per diluted share, compared to net income of $90.2 million, or $2.71 per diluted share, in the third...

Alaska Air Group, Inc. today reported a third quarter net loss of $17.4 million, or $0.44 per diluted share, compared to net income of $90.2 million, or $2.71 per diluted share, in the third quarter of 2005. The 2006 results include charges related to the buyout of five MD-80 leases and a voluntary severance program in connection with a new labor contract, as well as mark-to-market fuel hedging losses related to contracts that settle in future quarters and the reclassification of previously recorded mark-to-market gains on hedges that settled during the quarter. The 2005 results included mark-to-market fuel hedging gains, a refund of Mexico navigation fees and a nominal adjustment to previously recorded restructuring charges. Excluding the impact of these items, the company would have reported net income in the third quarter of 2006 of $77.9 million, or $1.93 per diluted share, compared to $71.5 million, or $2.16 per diluted share, in the third quarter of 2005.

"The quarter’s adjusted net profit reflects the hard work of employees across our system and the progress we are making on our plan," said Bill Ayer, chairman and chief executive officer. "However, slower unit revenue growth toward the end of the quarter underscores the need to continue to reduce costs and improve processes in order to offer our customers a product they prefer at a price they are willing to pay."

In previous quarters, Alaska Air Group excluded from adjusted earnings its mark-to-market fuel hedging gains related to contracts that settle in future quarters. Consistent with that practice, the company excluded from the current quarter’s adjusted results the mark-to-market fuel hedging losses that settle in future quarters. While the recent decline in fuel prices has caused the value of the portfolio to decline, it is still in the money. The fuel hedging program saved the company approximately $27.4 million in economic fuel expense during the third quarter.

During the quarter, the company accrued an additional $1.7 million for Horizon Air employees and $3.3 million for Alaska Airlines employees in connection with various gain-sharing plans, for a year-to-date total accrual of approximately $24 million.

In addition, Alaska Airlines contributed $72 million to its defined benefit plans during 2006, and $265 million since Sept. 11, 2001.

Alaska Airlines’ passenger traffic in the third quarter increased 6.0 percent on a capacity increase of 5.6 percent. Alaska’s load factor increased 0.2 percentage points to 79.2 percent, compared to the same period in 2005. Alaska’s operating revenue per available seat mile (ASM) increased 4.4 percent, while its operating cost per ASM excluding fuel and the items noted above decreased 2.7 percent. Alaska’s pretax loss for the quarter was $27.9 million, compared to pretax income of $133.0 million in 2005. Again, excluding the items noted above, Alaska would have reported pretax income of $115.3 million for the quarter, compared to $106.0 million in the third quarter of 2005.

Horizon Air’s passenger traffic in the third quarter increased 5.7 percent on a 4.4 percent capacity increase. Horizon’s load factor increased by 0.9 percentage points to 75.9 percent, compared to the same period in 2005. Horizon’s operating revenue per ASM increased 9.9 percent, and its operating cost per ASM excluding fuel increased 8.4 percent. Horizon’s pretax income for the quarter was $5.9 million, compared to $17.3 million in 2005. Excluding the mark-to-market fuel hedge adjustments, Horizon’s pretax income would have been $15.1 million for the quarter, compared to $14.4 million in the third quarter of 2005.

Alaska Air Group had cash and short-term investments at Sept. 30, 2006, of approximately $1.1 billion compared to $983 million at Dec. 31, 2005. The company’s debt-to-capital ratio, assuming aircraft operating leases are capitalized at seven times annualized rent, was 69 percent as of Sept. 30, 2006, compared to 73 percent as of Dec. 31, 2005. The decrease from Dec. 31, 2005, is primarily due to the conversion to equity of the company’s senior convertible notes in April 2006, offset by the $41.0 million net loss for the nine months and an increase in the company’s outstanding debt resulting from new aircraft financings.

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 on pages 6 through 10.

A conference call regarding the third quarter 2006 results will be simulcast via the Internet at 8:30 a.m. Pacific time on Oct. 24, 2006. It can be accessed through the company’s Web site at alaskaair.com. For those unable to listen to the live broadcast, a replay will be available after the conclusion of the call at alaskaair.com.

References in this report 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 report contains forward-looking statements that 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. These statements relate to future events or our future financial performance and involve known and unknown risks and uncertainties that may cause our actual results or performance to be materially different from those indicated by any forward-looking statements. In some cases, you can identify forward- looking statements by terminology such as "forecast," "may," "will," "could," "should," "expect," "plan," "believe," "potential" or other similar words indicating future events or contingencies. Some of the things that could cause our actual results to differ from our expectations are: the competitive environment and other trends in our industry; changes in our operating costs including fuel, which can be volatile; our ability to meet our cost reduction goals; our inability to achieve or maintain profitability and fluctuations in our quarterly results; our significant indebtedness; the implementation of our growth strategy; the timing of the MD-80 fleet disposal, and the amounts of potential lease termination payments with lessors and sublease payments from sub lessees; compliance with our financial covenants; potential downgrades of our credit ratings and the availability of financing; the concentration of our revenue from a few key markets; general economic conditions, as well as economic conditions in the geographic regions we serve; actual or threatened terrorist attacks; global instability and potential U.S. military actions or activities; insurance costs; labor disputes; our ability to attract and retain qualified personnel; an aircraft accident or incident; liability and other claims asserted against us; operational disruptions; increases in government fees and taxes; changes in laws and regulations; our reliance on automated systems; and our reliance on third-party vendors and partners. For a discussion of these and other risk factors, see Item 1A of the Company’s Annual Report on Form 10-K for the year ended Dec. 31, 2005, and Item 1A of the Company’s Quarterly Report on Form 10-Q for the three and six months ended June 30, 2006. All of the forward- looking statements are qualified in their entirety by reference to the risk factors discussed therein. These risk factors may not be exhaustive. We operate in a continually changing business environment, and new risk factors emerge from time to time. Management cannot predict such new risk factors, nor can it assess the impact, if any, of such new risk factors on our business or events described in any forward-looking statements. We disclaim any obligation to publicly update or revise any forward-looking statements after the date of this press release to conform them to actual results.

Alaska Airlines and sister carrier, Horizon Air, together serve 88 cities through an expansive network throughout Alaska, the Lower 48, 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)
   (In Millions Except Per Share Amounts)

                                     Three Months         Nine Months
                                  Ended September 30   Ended September 30
                                   2006       2005     2006        2005

  Operating Revenues:
  Passenger                      $871.5     $777.4  $2,358.4    2,061.9
  Freight and mail                 26.7       26.1      74.8       71.3
  Other - net                      37.5       42.2     110.9      111.5
  Total Operating Revenues        935.7      845.7   2,544.1    2,244.7

  Operating Expenses:
  Wages and benefits              238.6      218.1     696.2      683.0
  Variable incentive pay            5.0        3.4      24.1       10.5
  Contracted services              37.6       30.8     114.3       96.2
  Aircraft fuel, including
   hedging gains and losses       290.8      141.2     653.7      327.4
  Aircraft maintenance             49.6       55.2     168.6      174.6
  Aircraft rent                    43.9       46.9     136.6      140.0
  Food and beverage service        13.5       13.7      38.3       37.9
  Selling expenses                 44.7       45.9     132.6      123.8
  Depreciation and amortization    40.5       36.3     114.1      105.8
  Landing fees and other rentals   52.9       50.8     152.4      152.2
  Other                            55.6       51.7     160.4      155.6
  Fleet transition costs           58.4         --     189.5         --
  Restructuring charges
   and adjustments                 28.6       (1.4)     32.4       20.7
  Total Operating Expenses        959.7      692.6   2,613.2    2,027.7
  Operating Income (Loss)         (24.0)     153.1     (69.1)     217.0

  Nonoperating Income (Expense):
  Interest income                  14.2        8.6      39.4       21.6
  Interest expense                (20.4)     (16.1)    (57.6)     (45.5)
  Interest capitalized              7.1        2.8      17.6        4.9
  Other - net                       0.2       (1.6)     (1.5)      (4.5)
                                    1.1       (6.3)     (2.1)     (23.5)
  Income (loss) before income tax
   and accounting change          (22.9)     146.8     (71.2)     193.5
  Income tax expense (benefit)     (5.5)      56.6     (30.2)      76.0
  Income (loss) before
   accounting change             $(17.4)     $90.2    $(41.0)    $117.5
  Cumulative effect of
   accounting change, net of tax     --         --        --      (90.4)
  Net Income (Loss)              $(17.4)     $90.2    $(41.0)     $27.1
  Basic Earnings (Loss) Per Share:
    Income (loss) before
     accounting change           $(0.44)     $3.28    $(1.10)     $4.31
    Cumulative effect
     of accounting change            NA         NA        NA      (3.32)
    Net Income (Loss) Per Share  $(0.44)     $3.28    $(1.10)     $0.99
  Diluted Earnings (Loss) Per Share:
    Income (loss) before
     accounting change           $(0.44)     $2.71    $(1.10)     $3.62
    Cumulative effect
     of accounting change            NA         NA        NA      (2.69)
    Net Income (Loss) Per Share  $(0.44)      $2.71   $(1.10)     $0.93
  Shares Used for Computation:
  Basic                          39.954      27.502   37.172     27.274
  Diluted                        39.954      33.857   37.172     33.523


                          Alaska Air Group, Inc.

   CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

                                             September 30,   December 31,
  (In Millions)                                       2006           2005

  Cash and marketable securities                    $1,108           $983

  Total current assets                              $1,697         $1,540
  Property and equipment-net                         2,251          2,032
  Other assets                                         192            220
  Total assets                                      $4,140         $3,792

  Current liabilities                               $1,380         $1,165
  Long-term debt                                       946            969
  Other liabilities and credits                        849            830
  Shareholders' equity                                 965            828
  Total liabilities and shareholders' equity        $4,140         $3,792


              Alaska Airlines Financial and Statistical Data

                           Three Months Ended        Nine Months Ended
                              September 30              September 30
                                          %                          %
                          2006   2005  Change     2006     2005  Change
  Financial Data (in millions):
  Operating Revenues:
  Passenger             $698.4 $624.1   11.9   $1,882.5  $1,656.6   13.6
  Freight and mail        25.7   25.2    2.0       71.8      68.4    5.0
  Other - net             35.8   40.0  (10.5)     106.0     103.9    2.0
  Total
   Operating Revenues    759.9  689.3   10.2    2,060.3   1,828.9   12.7

  Operating Expenses:
  Wages and benefits     190.3  171.7   10.8      552.9     548.7    0.8
  Variable incentive pay   3.3    2.8   17.9       17.3       7.5  130.7
  Contracted services     32.3   27.6   17.0       98.4      87.0   13.1
  Aircraft fuel,
   including hedging
   gains and losses      251.5  121.8  106.5      567.2     283.6  100.0
  Aircraft maintenance    32.4   43.2  (25.0)     118.6     143.5  (17.4)
  Aircraft rent           26.4   29.5  (10.5)      84.6      87.2   (3.0)
  Food and
   beverage service       12.6   13.0   (3.1)      36.1      36.0    0.3
  Selling expenses        36.8   35.6    3.4      110.0     102.2    7.6
  Depreciation
   and amortization       35.2   31.9   10.3       99.6      92.9    7.2
  Landing fees
   and other rentals      40.5   38.8    4.4      117.9     117.2    0.6
  Other                   40.8   39.6    3.0      118.4     118.9   (0.4)
  Fleet transition costs  58.4     --     NM      189.5        --     NM
  Restructuring charges
   and adjustments        28.6   (1.4)    NM       32.4      20.7     NM
  Total
   Operating Expenses    789.1  554.1   42.4    2,142.9   1,645.4   30.2

  Operating
   Income (Loss)         (29.2) 135.2     NM      (82.6)    183.5     NM

  Interest income         14.6    9.2              41.2      23.1
  Interest expense       (19.9) (13.0)            (53.5)    (36.9)
  Interest capitalized     6.1    2.6              15.5       4.5
  Other - net              0.5   (1.0)             (0.7)     (3.7)
                           1.3   (2.2)              2.5     (13.0)

  Income (Loss) Before
   Income Tax and
   Accounting Change    $(27.9) $133.0    NM     $(80.1)   $170.5     NM

  Operating Statistics:
  Revenue
   passengers (000)      4,710  4,632    1.7     13,058    12,715    2.7
  RPMs (000,000)
   "traffic"             4,873  4,598    6.0     13,579    12,812    6.0
  ASMs (000,000)
   "capacity"            6,150  5,822    5.6     17,523    16,735    4.7
  Passenger load factor  79.2%  79.0% 0.2pts      77.5%     76.6% 0.9pts
  Yield per
   passenger mile
   (in cents)            14.33  13.57    5.6      13.86     12.93    7.2
  Operating revenue
   per ASM
   (in cents)            12.36  11.84    4.4      11.76     10.93    7.6
  Operating expenses
   per ASM
   (in cents) (a)        12.83   9.52   34.8      12.23      9.83   24.4
  Operating expense
   per ASM excluding
   fuel, fleet transition
   costs, and restructuring
   charges and adjustments
   (in cents) (a)         7.33   7.53   (2.7)      7.73      8.04   (3.9)
  GAAP fuel
   cost per gallon (a)   $2.68  $1.34  100.3      $2.12     $1.08   96.7
  Economic fuel
   cost per gallon (a)   $2.08  $1.56   33.5      $1.90     $1.46   29.7
  Fuel gallons (000,000)  93.9   90.4    3.9      267.2     260.8    2.5
  Average number of
   full-time
   equivalent employees  9,467  8,961    5.6      9,267     9,108    1.7
  Aircraft utilization
   (blk hrs/day)          11.4   10.9    4.6       11.1      10.8    2.8
  Average aircraft
   stage length (miles)    920    887    3.7        921       895    2.9
  Operating fleet
   at period-end           112    110    1.8        112       110    1.8

  NM = Not Meaningful
  (a) See Note A.


                Horizon Air Financial and Statistical Data

                           Three Months Ended        Nine Months Ended
                              September 30              September 30
                                          %                          %
                          2006   2005  Change     2006     2005  Change

  Financial Data (in millions):
  Operating Revenues:
  Passenger             $173.9 $151.2   15.0     $478.1   $405.8  17.8
  Freight and mail         1.0    1.0    0.0        3.0      2.9   3.4
  Other - net              1.4    1.5   (6.7)       4.1      6.8 (39.7)
  Total Operating
   Revenues              176.3  153.7   14.7      485.2    415.5  16.8

  Operating Expenses:
  Wages and benefits      47.3   44.7    5.8      140.3    128.6   9.1
  Variable incentive pay   1.7    0.6  183.3        6.8      3.0 126.7
  Contracted services      6.7    6.1    9.8       20.1     17.7  13.6
  Aircraft fuel,
   including hedging
   gains and losses       39.3   19.4  102.6       86.5     43.8  97.5
  Aircraft maintenance    17.2   11.9   44.5       50.0     31.1  60.8
  Aircraft rent           17.5   17.5    0.0       52.0     52.8  (1.5)
  Food and
   beverage service        0.9    0.7   28.6        2.2      1.9  15.8
  Selling expenses         8.8    8.1    8.6       25.2     22.1  14.0
  Depreciation
   and amortization        4.9    4.1   19.5       13.6     12.0  13.3
  Landing fees
   and other rentals      12.7   12.2    4.1       35.3     35.7  (1.1)
  Other                   13.6   10.1   34.7       37.0     31.0  19.4
  Total
   Operating Expenses    170.6  135.4   26.0      469.0    379.7  23.5

  Operating Income         5.7   18.3     NM       16.2     35.8    NM

  Interest income          1.0    0.3               2.7      1.0
  Interest expense        (1.8)  (1.6)             (5.8)    (4.3)
  Interest capitalized     1.0    0.2               2.1      0.4
  Other - net               --    0.1                --      0.1
                           0.2   (1.0)             (1.0)    (2.8)

  Income Before
   Income Tax and
   Accounting Change      $5.9  $17.3     NM      $15.2    $33.0    NM

  Operating Statistics:
  Revenue
   passengers (000)      1,832  1,755    4.4      5,171    4,868   6.2
  RPMs (000,000)
   "traffic"               722    683    5.7      2,032    1,843  10.3
  ASMs (000,000)
   "capacity"              951    911    4.4      2,729    2,542   7.4
  Passenger load factor  75.9%  75.0% 0.9pts      74.5%    72.5% 2.0pts
  Yield per
   passenger mile
   (in cents)            24.09  22.14    8.8      23.53    22.02   6.9
  Operating revenue
   per ASM
   (in cents)            18.54  16.87    9.9      17.78    16.35   8.8
  Operating expenses
   per ASM
   (in cents)(a)         17.94  14.86   20.7      17.19    14.94  15.1
  Operating expense
   per ASM excluding fuel
   (in cents) (a)        13.81  12.73    8.4      14.02    13.21   6.1
  GAAP fuel
   cost per gallon (a)   $2.71  $1.41   92.8      $2.13    $1.13  88.6
  Economic fuel
   cost per gallon (a)   $2.08  $1.62   28.3      $1.92    $1.54  24.8
  Fuel gallons (000,000)  14.5   13.7    5.8       40.6     38.6   5.2
  Average number
   of full-time
   equivalent employees  3,706  3,508    5.6      3,592    3,428   4.8
  Aircraft utilization
   (blk hrs/day)           8.8    9.0   (2.2)       8.8      8.6   2.3
  Operating fleet
   at period-end            69     65    6.2         69       65   6.2

  NM = Not Meaningful
  (a) See Note A.


  Note A:

Pursuant to Item 10 of Regulation S-K, 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. The non-GAAP financial measures provide management the ability to measure and monitor performance both with and without the cost of aircraft fuel (including the gains and losses associated with our fuel hedging program where appropriate), fleet transition costs, and restructuring charges and adjustments. Because the cost and availability of aircraft fuel are subject to many economic and political factors beyond our control and we record changes in the fair value of our hedge portfolio in our income statement, it is our view that the measurement and monitoring of performance without fuel is important. In addition, we believe the disclosure of financial performance without fleet transition costs, restructuring charges, and the navigation fee refund is useful to investors. Finally, these non-GAAP financial measures are also more comparable to financial measures reported to the Department of Transportation by other major network airlines.

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)
                                  Three Months Ended    Nine Months Ended
                                    September 30,         September 30
                                   2006       2005      2006       2005
  Unit cost reconciliations:

  Operating expenses              $789.1     $554.1   $2,142.9   $1,645.4
  ASMs (000,000)                   6,150      5,822     17,523     16,735
  Operating expenses per ASM       12.83       9.52      12.23       9.83
   (in cents)

  Operating expenses              $789.1     $554.1   $2,142.9   $1,645.4
  Less: aircraft fuel             (251.5)    (121.8)    (567.2)    (283.6)
  Less: fleet transition costs     (58.4)        --     (189.5)        --

  Add: navigation fee refund          --        4.7         --        4.7
  Less: restructuring charges
   and adjustments                 (28.6)       1.4      (32.4)     (20.7)
  Operating expenses excluding
   fuel, fleet transition costs,
   the navigation fee refund,
   and restructuring charges
   and adjustments                $450.6     $438.4   $1,353.8   $1,345.8
  ASMs (000,000)                   6,150      5,822     17,523     16,735
  Operating expenses per ASM
   excluding fuel, fleet transition
   costs, the navigation fee
   refund, and restructuring
   charges and adjustments
   (in cents)                       7.33       7.53       7.73       8.04

  Reconciliation to GAAP income (loss) before taxes and accounting change:
  Income (loss) before taxes
   and accounting change,
   excluding mark-to-market
   hedging gains (losses),
   fleet transition costs,
   the navigation fee refund,
   and restructuring charges
   and adjustments                $115.3     $106.0     $202.5      $85.3
  Mark-to-market hedging gains
   (losses) included
   in aircraft fuel                (56.2)      19.9      (60.7)     100.2
  Less: fleet transition costs     (58.4)        --     (189.5)        --
  Add: navigation fee refund
   and related interest received      --        5.7         --        5.7
  Less: restructuring charges
   and adjustments                 (28.6)       1.4      (32.4)     (20.7)
  GAAP income (loss) before
   taxes and accounting
   change as reported             $(27.9)    $133.0     $(80.1)    $170.5

  Aircraft fuel reconciliations:*
  ($ in millions except per gallon amounts)
                                      Three Months Ended September 30,
                                   2006                 2005
                                            Cost/Gal             Cost/Gal
  Raw or "into-plane" fuel cost   $218.9      $2.33     $179.5      $1.99
  Less: gains on settled hedges    (23.6)     (0.25)     (37.8)     (0.43)
  Economic fuel expense*          $195.3      $2.08     $141.7      $1.56
  Less: mark-to-market gains
   and losses related to hedges
   that settle in future
   periods and the reclassification
   of previously recorded
   mark-to-market gains
   on settled hedges                56.2       0.60      (19.9)     (0.22)
  GAAP fuel expense*              $251.5      $2.68     $121.8      $1.34
  Fuel gallons (000,000)            93.9                  90.4


                                      Nine Months Ended September 30,
                                   2006                 2005
                                            Cost/Gal             Cost/Gal
  Raw or "into-plane" fuel cost   $585.5      $2.19     $465.2      $1.78
  Less: gains on settled hedges    (79.0)     (0.29)     (81.4)     (0.32)
  Economic fuel expense*          $506.5      $1.90     $383.8      $1.46
  Less: mark-to-market gains
   and losses related to hedges
   that settle in future
   periods and the reclassification
   of previously recorded
   mark-to-market gains
   on settled hedges                60.7       0.22     (100.2)     (0.38)
  GAAP fuel expense*              $567.2      $2.12     $283.6      $1.08
  Fuel gallons (000,000)           267.2                 260.8


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

  Horizon Air Industries, Inc.
   ($ in millions)
                                  Three Months Ended    Nine Months Ended
                                    September 30,         September 30
                                   2006       2005      2006       2005
  Unit cost reconciliations:
  Operating expenses              $170.6     $135.4     $469.0     $379.7
  ASMs (000,000)                     951        911      2,729      2,542
  Operating expenses per ASM
   (in cents)                      17.94      14.86      17.19      14.94

  Operating expenses              $170.6     $135.4     $469.0     $379.7
  Less: aircraft fuel              (39.3)     (19.4)     (86.5)     (43.8)
  Operating expenses
   excluding fuel                 $131.3     $116.0     $382.5     $335.9
  ASMs (000,000)                     951        911      2,729      2,542
  Operating expenses per ASM
   excluding fuel
   (in cents)                      13.81      12.73      14.02      13.21

  Reconciliation to GAAP income before taxes and accounting change:
  Income before taxes and
   accounting change,
   excluding mark-to-market
   hedging gains (losses)          $15.1      $14.4      $23.7      $17.4
  Mark-to-market hedging gains
   (losses) included
   in aircraft fuel                 (9.2)       2.9       (8.5)      15.6
  GAAP income before
   taxes and accounting
   change as reported               $5.9      $17.3      $15.2      $33.0

  Aircraft fuel reconciliations:*
  ($ in millions except per gallon amounts)
                                      Three Months Ended September 30,
                                   2006                 2005
                                            Cost/Gal             Cost/Gal
  Raw or "into-plane" fuel cost    $33.9      $2.34      $28.0      $2.04
  Less: gains on settled hedges     (3.8)     (0.26)      (5.7)     (0.42)
  Economic fuel expense*           $30.1      $2.08      $22.3      $1.62
  Less: mark-to-market gains
   and losses related to hedges
   that settle in future
   periods and the reclassification
   of previously recorded
   mark-to-market gains
   on settled hedges                 9.2       0.63       (2.9)     (0.21)
  GAAP fuel expense*               $39.3      $2.71      $19.4      $1.41
  Fuel gallons (000,000)            14.5                  13.7


                                      Nine Months Ended September 30,
                                   2006                 2005
                                            Cost/Gal             Cost/Gal
  Raw or "into-plane" fuel cost    $90.8      $2.24      $71.6      $1.85
  Less: gains on settled hedges    (12.8)     (0.32)     (12.2)     (0.31)
  Economic fuel expense*           $78.0      $1.92      $59.4      $1.54
  Less: mark-to-market gains
   and losses related to hedges
   that settle in future
   periods and the reclassification
   of previously recorded
   mark-to-market gains
   on settled hedges                 8.5       0.21      (15.6)     (0.41)
  GAAP fuel expense*               $86.5      $2.13      $43.8      $1.13
  Fuel gallons (000,000)            40.6                  38.6

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

Air Group Net Income (Loss) and EPS Reconciliation:

The following table summarizes Alaska Air Group, Inc.’s net income (loss) and earnings (loss) per share during 2006 and 2005 excluding the cumulative effect of the accounting change, mark-to-market hedging gains (losses) and related reclassifications, fleet transition costs, the navigation refund, and restructuring charges and adjustments, as reported in accordance with GAAP (in millions except per share amounts):

                                       Three Months Ended September 30,
                                        2006**                  2005
                                             Diluted              Diluted
                                  Dollars      EPS       Dollars     EPS
  Net income and diluted EPS
   excluding mark-to-market
   hedging gains (losses),
   fleet transition costs,
   the navigation fee refund,
   and restructuring charges
   and adjustments*                $77.9      $1.93      $71.5      $2.16
  Effect of dilutive shares*          NA       0.02         NA         NA
  Mark-to-market hedging gains
   (losses), net of tax            (40.9)     (1.03)      14.2       0.42
  Fleet transition costs,
   net of tax                      (36.5)     (0.91)        --         --
  Restructuring charges
   and adjustments, net of tax     (17.9)     (0.45)       0.9       0.02
  Navigation fee refund,
   net of tax                         --         --        3.6       0.11
  Reported GAAP amounts           $(17.4)    $(0.44)     $90.2      $2.71

                                       Nine Months Ended September 30,
                                        2006**                  2005
                                             Diluted              Diluted
                                  Dollars      EPS       Dollars     EPS
  Net income and diluted EPS
   excluding the cumulative
   effect of the accounting
   change, mark-to-market
   hedging gains (losses),
   fleet transition costs,
   the navigation fee refund,
   and restructuring charges
   and adjustments*               $141.1      $3.56      $54.4      $1.74
  Effect of dilutive shares
   and interest on
   convertible bonds *                NA       0.24         NA         NA
  Cumulative effect
   of accounting change,
   net of tax                         --         --      (90.4)     (2.69)
  Mark-to-market hedging gains
   (losses), net of tax            (43.3)     (1.16)      72.4       2.16
  Fleet transition costs,
   net of tax                     (118.5)     (3.19)        --         --

  Restructuring charges
   and adjustments, net of tax     (20.3)     (0.55)     (12.9)     (0.39)
  Navigation fee refund,
   net of tax                         --         --        3.6       0.11
  Reported GAAP amounts           $(41.0)    $(1.10)     $27.1      $0.93

* Diluted earnings per share for the three and nine months ended September 30, 2006, excluding the impact of the mark-to-market losses on fuel hedges, fleet transition costs, and restructuring charges and adjustments has been calculated using the dilutive weighted average number of shares outstanding of 40.4 million and 40.0 million, respectively.

In order to reconcile the diluted earnings per share on an adjusted basis to the GAAP loss per share for the three and nine months ended September 30, 2006, the table above includes $0.02 per share and $0.24 per share, respectively, which represents the impact of the additional shares that were used in the adjusted diluted earnings per share. Additionally, $1.6 million of interest, net of tax, on the convertible senior notes that were outstanding during the first quarter of the year was added back to earnings for the three months ended September 30, 2006 in order to derive the diluted earnings per share on an adjusted basis.

The per share impact of the mark-to-market losses on fuel hedges, fleet transition costs, and restructuring and impairment charges have been presented in the table above using the basic shares outstanding of 40.0 million and 37.2 million fully diluted shares outstanding for the three months and nine months ended September 30, 2006, respectively.

** The tax rate used on all of the adjusting items for 2006 was our composite tax rate of 37.5%, yielding an effective tax rate on our adjusted net income amounts of 39.8% and 35.8 % for the three and nine months ended September 30, 2006, respectively.

The following table summarizes Alaska Air Group, Inc.’s basic and diluted per share calculations for income (loss) before the accounting change and net income (loss) (in millions except per share amounts):

                                  Three Months Ended    Nine Months Ended
                                    September 30,        September 30,
                                   2006       2005      2006       2005

  Basic Earnings (Loss) Per Share:
  Income (loss)
   before accounting change       $(17.4)     $90.2     $(41.0)    $117.5
  Weighted average
   shares outstanding             39.954     27.502     37.172     27.274
  Income (loss) per share
   before accounting change       $(0.44)     $3.28     $(1.10)     $4.31

  Cumulative effect of
   accounting change, net of tax      NA         NA         NA     $(90.4)
  Weighted average shares outstanding NA         NA         NA     27.274
  Per share cumulative effect
   of accounting change               NA         NA         NA     $(3.32)

  Net income (loss)               $(17.4)     $90.2     $(41.0)     $27.1
  Weighted average
   shares outstanding             39.954     27.502     37.172     27.274
  Net income (loss) per share     $(0.44)     $3.28     $(1.10)     $0.99


  Diluted Earnings (Loss) Per Share:
  Income (loss)
   before accounting change       $(17.4)     $90.2     $(41.0)    $117.5
  Interest on convertible notes,
   net of tax                         NA        1.5         NA        4.0
  Income (loss) before
   accounting change for
   diluted calculation            $(17.4)     $91.7     $(41.0)    $121.5
  Weighted average
   shares outstanding             39.954     33.857     37.172     33.523
  Income (loss) per share
   before accounting change       $(0.44)     $2.71     $(1.10)     $3.62

  Cumulative effect of
   accounting change, net of tax      NA         NA         NA     $(90.4)
  Weighted average shares outstanding NA         NA         NA     33.523
  Per share cumulative effect
   of accounting change               NA         NA         NA     $(2.69)

  Net income (loss)               $(17.4)     $90.2     $(41.0)     $27.1
  Interest on convertible notes,
   net of tax                         NA        1.5         NA        4.0
  Net income (loss) for
   diluted calculation            $(17.4)     $91.7     $(41.0)     $31.1
  Weighted average
   shares outstanding             39.954     33.857     37.172     33.523
  Net income (loss) per share     $(0.44)     $2.71     $(1.10)     $0.93

  Forecasted Financial Measures

During our quarterly earnings conference call, we expect to discuss forward-looking forecasted unit cost information for the remainder of 2006. This forecasted unit cost information includes non-GAAP unit cost estimates which are summarized in the following table together with the most directly comparable GAAP unit cost for both Alaska Airlines, Inc. and Horizon Air Industries, Inc.:

                                      Alaska Airlines

                   Forecast    Forecast   Forecast   Forecast    Forecast
                         of          of         of     of re-    of total
                   cost per   fuel cost      fleet structuring   operating
                  available         per transition    charges    cost per
                 seat mile,   available      costs        per   available
                  excluding        seat        per  available  seat mile,
                   fuel and        mile  available       seat as reported
                 impairment     (cents)       seat       mile        on a
                    charges        (See       mile    (cents)  GAAP basis
                    (cents)     Note 1)    (cents)                (cents)

  Fourth quarter 2006  7.9         3.2         --         --        11.1

  Full year 2006       7.8         3.2        0.8        0.1        11.9


                                          Horizon Air


                                                     Forecast of total
                          Forecast of        Forecast   operating cost
                             cost per         of fuel    per available
                            available        cost per    seat mile, as
                           seat mile,       available    reported on a
                       excluding fuel       seat mile       GAAP basis
                              (cents)    (See Note 1)          (cents)

  Fourth quarter 2006            14.7             3.3             18.0

  Full year 2006                 14.2             3.4             17.6

Note 1: Our forecast of fuel cost is based on anticipated gallons consumed and estimated fuel cost per gallon. The estimate also includes the expected benefit from settled hedges, net of the reclassification of previously recognized mark-to-market hedge portfolio gains and losses. Given the volatility of fuel prices and the mark-to-market adjustments on our fuel hedge portfolio, readers should be cautioned that actual fuel expense could differ significantly from the forecast above.

FCMN Contact: maria.koenig@alaskaair.com

SOURCE: Alaska Air Group, Inc.

CONTACT: media, Amanda Tobin Bielawski, Media Relations Manager,
+1-206-392-5134, or investors/analysts, Shannon Alberts, Managing Director of
Investor Relations, +1-206-392-5218, both of Alaska Air Group, Inc.