Alaska Airlines and Horizon Air 2007 Annual Report Download

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2007 AN N U A L RE P O R T

Table of contents

  • Page 1
    2 0 0 A N N U A L R E P O R T

  • Page 2
    2007 marked not only Alaska's 75th anniversary but the passing of Alaska Air Group's former Chairman and CEO and long-time board member Bruce Kennedy. Bruce led Alaska... - not only through his leadership and contributions to the Alaska Air Group companies, but through his generous service to others, ...

  • Page 3
    Alaska Air Group 2007 Annual Report

  • Page 4

  • Page 5
    .... Our strategic plans at Alaska Airlines and Horizon Air revolve around living up to our promises to all our stakeholders. When customers buy tickets on our airlines, they expect us to get...Let's look at how we performed in 2007 and what we're doing in 2008 to better position ourselves to live up to our...

  • Page 6
    ... of Alaska Air Group's $3.5 billion in total revenues We're proud of the progress we've made lowering our non-fuel unit costs. During the past six years we've achieved $298 million in annual reductions at Alaska Airlines and $174 million at Horizon Air (measured in terms of 2007 available seat...

  • Page 7
    ..., accounting for 28 percent of Alaska Air Group's total operating expense on an economic basis in 2007. And even though Alaska was able to grow while consuming the same amount of fuel as the year before (through our transition to more fuel-efficient 737-800s), the airline's fuel bill still rose by...

  • Page 8
    ... Air Alaska Airlines 143 130 145 $125 118 118 122 124 $100 90 81 81 82 84* 92* 94* $75 $50 2001 2002 2003 2004 2005 2006 2007 *Includes Frontier Jet Express flying under a capacity purchase agreement. Unit revenues and unit costs are lower for this flying than for the rest of Horizon...

  • Page 9
    ...filled Horizon Air Alaska Airlines 75.9 72.9 72.8 70.0 68.4 68.1 63.9 62.4 69.3 74.1 76.6 73.4 76.2 Santa Rosa, Calif., and Loreto, Mexico, to its route map ...space. 70 65 60 55 50 62.9 2001 2002 2003 2004 2005 2006 2007 Customers won't pay for something they don't value. That's why we ...

  • Page 10
    ...summer. Recently, a Horizon flight from Los Angeles to Eugene was canceled and all the passengers were re-routed on other flights....airline industry is an understatement. At this point, experts are predicting that the industry could post results 6 William S. Ayer Chairman, President and CEO Alaska Air...

  • Page 11
    Notice of Annual Meeting of Shareholders and Proxy Statement Å Proxy

  • Page 12

  • Page 13
    ...Box 68947 Seattle, Washington 98168 To our Stockholders: The Annual Meeting of Stockholders of Alaska Air Group, Inc. will be held at the Museum of...and tabulated. By using the internet or telephone to vote, you help Alaska Air Group reduce postage and proxy tabulation costs. • To vote by internet, ...

  • Page 14

  • Page 15
    ALASKA AIR GROUP, INC. NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT TABLE OF CONTENTS ANNUAL MEETING INFORMATION ...QUESTIONS AND ANSWERS ......SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE ...INDEPENDENT AUDITORS ...AUDIT COMMITTEE REPORT ...SECURITY OWNERSHIP OF CERTAIN...

  • Page 16

  • Page 17
    ...MAY 20, 2008. Stockholders may access, view and download this proxy statement and our 2007 Annual Report over the Internet on our website located at http...because you owned shares of common stock in Alaska Air Group as of the record date for the annual meeting. This proxy statement describes issues on...

  • Page 18
    ... ultimate record holder) to grant proxies or to vote at the meeting. Listed below are the various means - internet, phone and mail - you can use to vote your shares without attending the annual meeting. internet, please do not mail in your proxy card (unless you intend for it to revoke your prior...

  • Page 19
    ...internet or telephone using each of the identification numbers. What other business may be properly brought before...to the Company on or before December 21, 2007. Aside from nominations for director, the only ...proposal if it is properly presented at the Annual Meeting. You may revoke your proxy and...

  • Page 20
    ...whether you use the internet or phone or return the enclosed voting ...annual meeting for election to the Board of Directors. Although Mr. Nieman has filed his own 4 How are shares voted that are held in a Company 401(k) plan? On the record date, 1,589,009 shares were held in trust for Alaska Air...

  • Page 21
    ... Vanguard and Fidelity, sent a proxy statement, an annual report and a voting instruction form to each participant who held..., meaning that the persons receiving the highest number of "for" votes, up to the total number of directors to be elected at the Annual Meeting, will be elected. The Company has...

  • Page 22
    ... Directors. By accepting Mr. Nieman's notice of nomination for the 2008 Annual Meeting, the Company does not waive its rights to challenge any future notice...is unable to stand for election? The Board of Directors may reduce the number of seats on the Board or it may designate a substitute nominee. If...

  • Page 23
    ... 98188. A stockholder of record may examine the list for any legally valid purpose related to the annual meeting. Where can I find the voting results of the meeting? We will publish the final results in our quarterly report on Form 10-Q for the second quarter of 2008. You can read or print a copy...

  • Page 24
    ... directors effective as of the Annual Meeting on May 20, 2008. ...Alaska Air Group and Alaska Airlines as Chairman, President and CEO and Chairman of Horizon Air. Prior to 2000, he worked in various marketing, planning and operational capacities at Alaska Airlines and Horizon Air. In December 2007...

  • Page 25
    ... a nonprofit organization dedicated to the development of Alaska Native peoples and their communities. In January 2007, Mr. Mallott was appointed to the Board... company. He also serves on the boards of Alaska Airlines, Horizon Air, Seatab Software, the Western Washington University Foundation, Western...

  • Page 26
    ... of Alaska Airlines and ... the 2008 Annual Meeting. Mr...Alaska Venture Capital Group (AVCG LLC) where he serves as the Managing Director. In 2007, Mr. Thompson was appointed to the board of Tetra Tech. He also serves on the boards of Horizon Air, Coeur d'Alene Mines Corporation, and serves on a number...

  • Page 27
    .... 2008 PERFORMANCE INCENTIVE PLAN General At the Annual Meeting, stockholders will be asked to approve the Alaska Air Group, Inc. 2008 Performance Incentive Plan (the... the 2008 Plan based, in part, on a belief that the number of shares currently available under the 2004 Plan does not give the ...

  • Page 28
    ... to awards under the 2008 Plan equals the sum of: (1) 2,100,000 shares, plus (2) the number of shares available for additional award grant purposes under the 2004 Plan as of the date of the Annual Meeting and determined immediately prior to the termination of the authority to grant new awards under...

  • Page 29
    ...any reason are cancelled or terminated, after the date of the Annual Meeting without being exercised that would otherwise become available for award ...are delivered in respect of a dividend equivalent right, only the actual number of shares delivered with respect to the award shall be counted against ...

  • Page 30
    Plan. The Company may not increase the applicable share limits of the 2008 Plan by repurchasing shares of common stock on the market (by using cash received through the exercise of stock options or otherwise). Stock appreciation rights may be granted in connection with other awards or independently...

  • Page 31
    ... equivalents where the deferred amounts are denominated in shares. Adjustments As is customary in incentive plans of this nature, each share limit and the number and kind of shares available under the 2008 Plan and any outstanding awards, as well as the exercise or purchase prices of awards, and...

  • Page 32
    ... stock dividends, or other similar events that change the number or kind of shares outstanding, and extraordinary dividends or ... approval will be required for any amendment that proposes to increase the maximum number of shares that may be delivered with respect to awards granted under the ...

  • Page 33
    ...portion of the annual retainer for each of our non-employee directors is paid in the form of deferred stock units. As of 2008, the number of stock ...had been in existence in fiscal year 2007, the Company expects that its award grants for fiscal year 2007 would not have been substantially different ...

  • Page 34
    ... is presented after giving effect to purchases under the ESPP for the purchase period that ended November 30, 2007. Of the aggregate number of shares that remained available for future issuance, 684,830 shares were available under the 2004 Plan, and 369,280 shares were available under the ...

  • Page 35
    ... in person or represented by proxy and entitled to vote on the proposal. Any broker non-votes will not be counted in determining the number of shares necessary for approval of the proposal, assuming a quorum is obtained. Abstentions will have the same effect as a vote against Proposal 2. THE BOARD...

  • Page 36
    ...all auditing and non-auditing services they are to perform; • review annual and quarterly financial statements and filings made with the SEC; and • ...the internal audit charter. 3. Prepare the Audit Committee Report required for the annual proxy statement. Audit Committee Pursuant to its charter,...

  • Page 37
    ... Approve salaries of other elected executive officers of Alaska Airlines and Horizon Air. 4. Set annual goals under the PerformanceBased Pay plan and administer .... 12. Produce the report on executive compensation required for the annual proxy statement. 13. Annually review and reassess the adequacy...

  • Page 38
    ...2007, the Committee reviewed its charter and recommended that the Board of Directors modify the charter to update the fiduciary functions of the Alaska Air... of airline safety.... the Board and annually review compensation paid...committees held the following number of meetings in 2007: • Audit Committee ...

  • Page 39
    ... charitable contribution made by the Company to the University of Alaska where Mr. Hamilton is currently employed as President. After ... such business is immaterial with respect to the Company's or the organization's annual revenues; or c. the receipt of cash or in-kind contributions from the...

  • Page 40
    ... "Company" includes all Alaska Air Group subsidiaries and other affiliates...in May (with respect to elections held at a regular annual meeting of stockholders), and that such notice include: • The...Committee solicits ideas for possible candidates from a number of sources including, but not limited to,...

  • Page 41
    ...continue to own the required percentage of shares through the date of the annual meeting with respect to which the candidate is nominated. • The name or...name, age, business and residence address, principal occupation or employment, number of shares of the Company's stock beneficially owned, if any,...

  • Page 42
    ... first-class mail, postage prepaid, to the following address: Board of Directors Alaska Air Group, Inc. PO Box 68947 Seattle, WA 98168 The Corporate Secretary and General...will also be considered on the basis of the Committee's annual evaluations of the effectiveness of the Board, its committees and ...

  • Page 43
    ...who presides over executive sessions of the non-employee directors) or with the non-employee directors as a group, may write to: Board of Directors Alaska Air Group, Inc. PO Box 68947 Seattle, WA 98168 Depending on the subject matter, management will: • forward the communication to the director or...

  • Page 44
    ... in telephone updates that occur between meetings; • an annual retainer of $8,000 to the Audit Committee chair and $5,000 to other committee chairs; • an annual retainer of $1,000 to non-employee directors who also served on the Boards of Directors of Alaska Airlines or Horizon Air; 28

  • Page 45
    ...number of units to be determined by dividing the retainer amount by the closing price of our common stock on the date of the annual...provided transportation on Alaska Airlines and Horizon Air. Included in the... 2007. During the years that Mr. Kennedy was employed by the Company, he accrued annual ...

  • Page 46
    ... the Company's 2007 CEO certification required by Section 303a.12(a) of the NYSE Listed Company Manual has been filed with the NYSE. In addition, the Company's CEO and CFO certifications required under Section 302 of the Sarbanes-Oxley Act are filed as exhibits to the Company's Annual Report on Form...

  • Page 47
    ..., in the transaction. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act... paid in connection with the audit of Air Group's employee benefit plans in both years... and amounts: 2007 KPMG LLP Audit Fees for the Company's Annual Financial Statements and...

  • Page 48
    ... Committee recommended to the Board of Directors that the audited financial statements be included in Alaska Air Group's Annual Report on Form 10-K for the fiscal year ended December 31, 2007. Review of Our Company's Audited Financial Statements The Audit Committee has reviewed and discussed with...

  • Page 49
    ... Consists of the aggregate total of shares of common stock held by the reporting person either directly or indirectly, including 401(k) plan holdings. (2) Total beneficial...and Exchange Commission and represents the sum of the columns "Number of Shares of Common Stock Owned" and "Options Exercisable ...

  • Page 50
    ... as of March 14, 2008. Name and Address of Beneficial Owner Number of Shares Owned Percent of Outstanding Shares(1) Donald Smith & Co., Inc...Smith") on February 8, 2008. Donald Smith stated in the Schedule 13G that the reported securities are owned by its advisory clients, no one of which, to Donald ...

  • Page 51
    ...Horizon Air Industries, Inc.; and Gregg Saretsky and Kevin Finan, two elected officers of subsidiary Alaska Airlines who have or had policy-making roles at the Alaska Air...pay, proportion of annual cash pay to long-term incentive pay), and setting compensation levels. In 2007, Deloitte Consulting ...

  • Page 52
    ... to year depending on performance, among other things). Annual incentives and long-term equitybased incentives are intended to ... substantial emphasis on "at risk" pay that is tied to performance objectives. For 2007, the Committee approved target-level compensation for Mr. Ayer that is 80% "at...

  • Page 53
    ...compared to their industry peers. For 2007, the peer group consisted of Air Tran Holdings, AMR Corporation, Continental Airlines Inc., Delta Air Lines Inc., Frontier Airline Holdings, Jet Blue Airways Corporation, Northwest Airlines Corporation, Southwest Airlines Corporation, UAL Corporation and US...

  • Page 54
    ... 2007. Performance-Based Annual Incentives Our Named Executive Officers are eligible to earn annual ...Airlines) 2005, 2006 and 2007 Base Salary Alaska Air Group, Inc. 2007 Base Salary (Air Group peers) Air Tran Holdings AMR Corporation Continental Airlines, Inc. Delta Air Lines, Inc. Frontier Airline...

  • Page 55
    ...2007, the Performance-Based Pay Plan metrics were set as follows: Goal Weight Threshold Alaska Horizon Target Alaska Horizon Maximum Alaska Horizon Operational Performance • Safety on-the-job...improve year-over-year performance. The 2007 Alaska Air Group Profitability target was established by ...

  • Page 56
    ...-driven culture. The Committee issues annual equity grants to provide incentives to...individual's performance of his or her job responsibilities; and • the accounting impact...incentive through the vesting period. Performance Shares For 2007, the Company granted the Named Executive Officers ...

  • Page 57
    ...on the compensation deferred. Please see the "2007 Pension Benefits" and "2007 Nonqualified Deferred Compensation" tables and information following ...exams, AD&D insurance, and Alaska Airlines Boardroom membership. In terms of total direct compensation, the CEO's annual sum will be approximately 2%...

  • Page 58
    ..., until ultimate expiration of the agreement 36 months later. In 2007, the Compensation Committee also revised the Company's equity award agreements ...portion of compensation paid under its current program (including the annual incentives and stock option grants described above) satisfies the ...

  • Page 59
    ..., the Compensation Committee recommended to our Board of Directors that the Compensation Discussion and Analysis section be included in the Company's 2007 Annual Report on Form 10-K on file with the SEC. Compensation Committee of the Board of Directors COMPENSATION COMMITTEE INTERLOCKS AND INSIDER...

  • Page 60
    ...023 64,973 1,107,052 997,063 Jeffrey D. Pinneo(6) 2007 237,000 President and CEO 2006 237,000 (Horizon Air Industries) 0 0 180,694 167,630 117,593 142...'s Consolidated Financial Statements, included as part of the Company's 2007 Annual Report filed on Form 10-K with the SEC and incorporated herein...

  • Page 61
    ...Alaska Airlines Board Room membership; gas allowance; annual...Mr. Finan retired on January 1, 2008. The amount reported in Column (i) for Mr. Finan also includes payments ... the Company dated April 25, 2007. Mr. Finan received a retirement...prior service at Alaska. At that time, Horizon Air, which does...

  • Page 62
    ... 0 3,200 0 0 2,700 0 0 2,500 0 2,300 0 All Other Option Awards: Grant Date Number of Exercise or Fair Value Securities Base Price of Stock and Underlying of Option Option Options Awards Awards (#) ... Statements, included as part of the Company's 2007 Annual Report filed on Form 10-K with the SEC and...

  • Page 63
    ... not include any dividend rights. Performance Shares Column (g) of the table above reports awards of performance shares granted to our Named Executive Officers for 2007. Columns (f) and (h) show threshold and maximum payout potential, respectively, for each award. Like restricted stock units, each...

  • Page 64
    ... by each of our Named Executive Officers as of December 31, 2007, including the vesting dates for the portions of these awards that had...5,202 10,125 6,750 2,887 0 0 97,654 Market Value of Shares Number of Number or Units Securities of Shares of Stock Underlying or Units of That Unexercised Option ...

  • Page 65
    ... Column (h) and Column (j) are determined by multiplying the number of shares or units reported in Column (g) and Column (i), respectively, by $25....01 (the closing price of our common stock on the last trading day of fiscal 2007). (2)...

  • Page 66
    ... amounts shown in Column (c) above for option awards are determined by multiplying (i) the number of shares of our common stock to which the exercise of the option related, by...Statements, included as part of the Company's 2007 Annual Report filed on Form 10-K with the SEC and incorporated herein by ...

  • Page 67
    ...Alaska Air Group, Inc. 1995 Elected Officers Supplementary Retirement Plan (the "Supplementary Retirement Plan"). The tax law limits the compensation on which annual retirement benefits are based. For 2007...defined-benefit retirement plan for salaried Alaska Airlines employees hired prior to April 1,...

  • Page 68
    ... of their Performance-Based Pay awards on a deferred basis. For 2007, Messrs. Ayer and Finan elected to defer their Performance-Based Pay... or other contributions to any employee's account under this plan. For 2007, amounts deferred under the Deferred Compensation Plan were credited with interest at...

  • Page 69
    ... plan incentive or the average of his annual incentive payments for the three years preceding the... options and restricted stock units and the target number of performance stock units generally become vested upon...the circumstances described above on December 31, 2007. As described above, except for the...

  • Page 70
    (5) For purposes of this calculation, we have assumed that the executive's outstanding stock options would be assumed by the acquiring company pursuant to a change of control. This calculation is an estimate for proxy disclosure purposes only. Payments on an actual change in control may differ based...

  • Page 71
    .... They entrench the current management, even when it's doing a poor job. They water down • Thus future shareholder proposals on the above topics could obtain significant support. • The voting figures at our 2007 annual meeting were withheld from shareholders for two months - except for certain...

  • Page 72
    ...Expert. • Plus Ms. Bedient received our most withheld votes in 2007. The above concerns show there is need for improvement and reinforces the...a stockholder proposal that received 56 a majority of affirmative votes at our annual meeting, the Company adopted a policy on rights plans that is designed...

  • Page 73
    ... is expressly required by Article II, Section 5 of the Company's Bylaws and is also clearly described in the Company's proxy statement for its 2007 annual meeting of stockholders, as well as in this proxy statement under the heading "Questions and Answers - How many votes must the nominees have to...

  • Page 74
    ... Proposalist Terry Dayton, a Horizon Air communications agent, has notified the Alaska Air Group, Inc. ("AAG") that he intends to present the following proposal at the 2008 Annual Meeting. SUPPORTING STATEMENT Cumulative voting won 54% support at Aetna and 56% support at Alaska Airlines in 2005. It...

  • Page 75
    ...must receive a majority of the votes cast in uncontested elections. In any non-contested election of directors, any director nominee who receives a greater number of votes "withheld" from his or her election than votes "for" such election shall immediately tender his or her resignation. The Board is...

  • Page 76
    ...on pay" resolutions with companies in 2007, averaging a 42% vote. In ... executive compensation, as reported each year. VOTE...Horizon Air aircraft mechanic of 514 EM Watts Road, Scappoose, Oregon, has notified the Alaska Air Group, Inc. that he intends to present the following proposal at the 2008 Annual...

  • Page 77
    ... 5 THE BOARD OF DIRECTORS RECOMMENDS A VOTE AGAINST PROPOSAL 555 FOR THE FOLLOWING REASONS: The Board believes that Alaska Air Group shareholders already have a 'say on executive pay' via annual elections for the Board of Directors, direct communication with the Board, and periodic votes on equity...

  • Page 78
    ... be a "Participant" in the Company's solicitation of proxies in connection with the Annual Meeting. Set forth below are the name and principal occupation of each member of ... William S. Ayer Chairman, President and CEO Alaska Air Group, Inc. and Alaska Airlines, Inc. P.O. Box 68900 Seattle, WA 98168...

  • Page 79
    ..., WA 98168. Information Regarding Ownership of the Company's Securities by Participants The number of shares of common stock beneficially owned by each director and Mr. Tilden at... Relations and Assistant Secretary of Alaska Airlines, Inc. and Assistant Secretary of Alaska Air Group, Inc. Karen A. ...

  • Page 80
    ... following table sets forth all transactions that may be deemed purchases or sales of the Company's common stock by the Participants since January 1, 2006. Number of Shares of Common Stock Purchased or (Sold/ Exchanged) Participants Date Footnote Shannon K. Alberts 01/01/06 - 12/31/06 02/28/06...

  • Page 81
    ... in lieu of all or a portion of their annual cash retainers. See "2007 Director Compensation" in this Proxy Statement. As of... March 14, 2008, the following Participants have employee stock options for the indicated number of shares ...

  • Page 82
    ...is required to provide an annual report and proxy statement to ... us at the address and phone number at the end of the ...Alaska Air Group, Inc., P.O. Box 68947, Seattle, WA 98168, or by calling (206) 392-5131. SUBMISSION OF PROPOSALS FOR NEXT ANNUAL MEETING The Company expects to hold its next annual...

  • Page 83
    ...OF PLAN The purpose of this Alaska Air Group, Inc. 2008 Performance Incentive Plan (this "Plan") of Alaska Air Group, Inc., a Delaware corporation...such committee shall be comprised solely of one or more directors or such number of directors as may be required under applicable law. A committee may ...

  • Page 84
    ... receive an award under this Plan; (b) grant awards to Eligible Persons, determine the price at which securities will be offered or awarded and the number of securities to be offered or awarded to any of such persons, determine the other specific terms and conditions of such awards consistent with...

  • Page 85
    conditions, in such circumstances as the Administrator may deem appropriate, in each case subject to Sections 4 and 8.6, and provided that in no case (except due to an adjustment contemplated by Section 7 or any repricing that may be approved by stockholders) shall such an adjustment constitute a ...

  • Page 86
    ... to an adjustment made under Section 7.1. 4.2 Share Limits. The maximum number of shares of Common Stock that may be delivered pursuant to awards granted... the sum of the 2,100,000 shares set forth above, plus the number of shares available under the 2004 Plan for additional award grant purposes as ...

  • Page 87
    ...respect of a dividend equivalent right granted under this Plan, only the actual number of shares delivered with respect to the award shall be counted against the...stock appreciation right or stock option granted under this Plan, the number of underlying shares as to which the exercise related shall be...

  • Page 88
    ...such options shall be treated as nonqualified stock options. In reducing the number of options treated as ISOs to meet the $100,000 limit, the...or Common Stock, equal to the excess of the fair market value of a specified number of shares of Common Stock on the date the SAR is exercised over the "base ...

  • Page 89
    ...applied under generally accepted accounting principles or in the financial reporting of the Corporation or of its Subsidiaries. To qualify ... shall be subject to the limit set forth in Section 4.2(b). The maximum number of shares of Common Stock which may be delivered pursuant to Performance-Based ...

  • Page 90
    ... party payment in such manner as may be authorized by the Administrator; • the delivery of previously owned shares of Common Stock; • by a reduction in the number of shares otherwise deliverable pursuant to the award; or A-8

  • Page 91
    ... closing price (in regular trading) for a share of Common Stock on the Exchange for the next preceding day on which sales of Common Stock were reported on the Exchange. The Administrator may, however, provide with respect to one or more awards that the fair market value shall equal the closing price...

  • Page 92
    5.7.3 Further Exceptions to Limits on Transfer. The exercise and transfer restrictions in Section 5.7.1 shall not apply to: (a) transfers to the Corporation (for example, in connection with the expiration or termination of the award), (b) the designation of a beneficiary to receive benefits in the ...

  • Page 93
    ... similar, unusual or extraordinary corporate transaction in respect of the Common Stock; then the Administrator shall equitably and proportionately adjust (1) the number and type of shares of Common Stock (or other securities) that thereafter may be made the subject of awards (including the specific...

  • Page 94
    unless the Administrator has made a provision for the substitution, assumption, exchange or other continuation or settlement of the award or the award would otherwise continue in accordance with its terms in the circumstances: (1) unless otherwise provided in the applicable award agreement, each ...

  • Page 95
    this Plan or under awards are subject to compliance with all applicable federal and state laws, rules and regulations (including but not limited to state and federal securities law and federal margin requirements) and to such approvals by any listing, regulatory or governmental authority as may, in ...

  • Page 96
    ...to such rules and subject to such conditions as the Administrator may establish, that the Corporation reduce the number of shares to be delivered by (or otherwise reacquire) the appropriate number of shares, valued in a consistent manner at their fair market value or at the sales price in accordance...

  • Page 97
    8.8 Governing Law; Construction; Severability. 8.8.1 Choice of Law. This Plan, the awards, all documents evidencing awards and all other related documents shall be governed by, and construed in accordance with the laws of the State of Delaware. 8.8.2 Severability. If a court of competent ...

  • Page 98
    ... Subsidiaries in connection with a business or asset acquisition or similar transaction) shall not be counted against the Share Limit or other limits on the number of shares available for issuance under this Plan. 8.11 Non-Exclusivity of Plan. Nothing in this Plan shall limit or be deemed to limit...

  • Page 99
    Annual Report on Form 10-K Å Form 10-K

  • Page 100

  • Page 101
    ...] For the fiscal year ended December 31, 2007 OR ' TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to Commission File Number 1-8957 ALASKA AIR GROUP, INC. A Delaware Corporation 91-1292054 (I.R.S. Employer...

  • Page 102
    ALASKA AIR GROUP, INC. ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2007 TABLE OF CONTENTS PART I ...ITEM 1. OUR BUSINESS ...WHERE YOU CAN FIND MORE INFORMATION ...OUR AIRLINES ...ALASKA ...HORIZON ...INDUSTRY CONDITIONS ...FUEL ...MARKETING AND COMPETITION ...ALLIANCES WITH OTHER ...

  • Page 103
    ... in this Form 10-K, the terms "Air Group," "our," "we" and the "Company" refer to Alaska Air Group, Inc. and its subsidiaries, unless the context indicates otherwise. Alaska Airlines, Inc. and Horizon Air Industries, Inc. are referred to as "Alaska" and "Horizon," respectively, and together as our...

  • Page 104
    ... our control. Our forward-looking statements are based on the information currently available to us and speak only as of the date on which this report was filed with the SEC. We expressly disclaim any obligation to issue any updates or revisions to our forward-looking statements, even if subsequent...

  • Page 105
    ...of air travelers. For example, Horizon was named the "2007 Regional Airline of the Year" by Air Transport World, a leading industry publication, and Alaska ... is not a part of this annual report on Form 10-K. OUR AIRLINES ALASKA Alaska Airlines is an Alaska corporation that was organized in 1932 and...

  • Page 106
    ... JetExpress through the end of November 2007 under an agreement with Frontier Airlines. Horizon terminated this agreement with Frontier at that time and has redeployed the nine CRJ-700s back into the Air Group route structure. In 2007, Horizon carried 7.6 million revenue passengers. Approximately 92...

  • Page 107
    ...advantage, the LCCs and recently reorganized airlines have and continue to exert downward ... on the East Coast, putting both Alaska and Horizon at a competitive disadvantage. Fuel costs...2007, 26% in 2006, and 20% in 2005. Currently, a one-cent change in our hedged fuel price per gallon affects annual...

  • Page 108
    ...December 31, 2007 are as follows: Codeshare- Codeshare- Other Airline Alaska Flight # On Flight # Flights Frequent on Flights Operated by Flyer Operated by Alaska/ Agreement Other Airline Horizon Major U.S. or International Airlines American Airlines/ American Eagle ...Air France ...British Airways...

  • Page 109
    ...Alaska and Horizon carry approximately 3.2% of all U.S. domestic passenger traffic. We compete with one or more domestic or foreign airlines on most of our routes, including Southwest Airlines, United Airlines, Northwest Airlines, Continental Airlines, American Airlines, Delta Air...In October 2007, we...

  • Page 110
    ... December 31, 2007, compared to 14,485 (10,454 at Alaska and 4,031 at Horizon) as of ... the labor organization may strike and the airline may resort to "self-help," including the...Alaska's union contracts at December 31, 2007 were as follows: Union Employee Group Number of Employees Contract Status Air...

  • Page 111
    Horizon's union contracts at December 31, 2007 were as follows: Union Employee Group Number of Employees Contract Status ...Alaska Airlines, Inc. President and Chief Executive Officer of Horizon Air Industries, Inc. Vice President/Finance and Controller of Alaska Air Group, Inc. and Alaska Airlines...

  • Page 112
    ...Alaska Airlines in 2002, and in 2007 he was elected Executive Vice President/ Flight and Marketing. Mr. Johnson became Vice President/Controller and Treasurer of Horizon Air..., alliance agreements between domestic major airlines, international route authorities and certain consumer protection matters...

  • Page 113
    ... security measures equal to the amount the air carriers paid for screening passengers and property in 2000. We paid $12.6 million to the TSA for this security charge in 2007, 2006 and 2005. The Department of Justice has jurisdiction over airline antitrust matters. The U.S. Postal Service has...

  • Page 114
    ... of aircraft, number of flights, or the time of day that airlines can operate. ...Alaska, Horizon or another partner airline. At December 31, 2007 and 2006, the deferred revenue and the total liability for providing free travel on Alaska and Horizon and for estimated payments to partner airlines...

  • Page 115
    ...state of Alaska. In...During 2006 and 2007, our insurance ...airlines. Pursuant to authority granted in the Air...route systems. OTHER GOVERNMENT MATTERS We have elected to participate in the Civil Reserve Air Fleet program, whereby we have agreed to make available to the federal government a certain number...

  • Page 116
    ...airlines like Horizon, also faces competition from ground transportation alternatives, such as buses, trains or automobiles. The U.S. and Mexico recently amended their bilateral agreement relating to commercial air...airlines have reduced domestic routes and the number... December 31, 2007 and 2006, ...

  • Page 117
    ...of operations. We compete against the major U.S. airlines and other businesses for labor in many highly ... that we seek. In 2005, Alaska and the Air Line Pilots Association (ALPA) were unable... amendable on May 1, 2007, and Alaska is currently in negotiations with ALPA. Horizon is also in negotiations...

  • Page 118
    ...secured financing for a number of these commitments,...air traffic congestion at airports or other air.... Any general reduction in airline passenger traffic as a result... to and from our Seattle hub. In 2007, traffic to and from Seattle accounted for ...Alaska is required to comply with specific financial covenants...

  • Page 119
    ... security breaches and perceived safety threats; and result in a grounding of commercial air traffic by the FAA. increased airline insurance premiums and significantly reduced the insurance coverage available to airlines for third-party claims resulting from acts of terrorism, war or similar events...

  • Page 120
    ... alternatives, which would harm our business. We rely on partner airlines for codeshare and frequent flyer marketing arrangements. Alaska and Horizon are parties to marketing agreements with a number of domestic and international air carriers, or "partners," including but not limited to American...

  • Page 121
    ... rates and charges to air carriers. Additional laws, regulations...airlines and could negatively impact our financial performance. We are dependent on a limited number of suppliers for aircraft and parts. Alaska is dependent on Boeing as its sole supplier for aircraft and many aircraft parts. Horizon...

  • Page 122
    ...2007: Aircraft Type Passenger Average Age Capacity Owned Leased Total in Years Alaska Airlines Boeing 737-400 ...Boeing 737-400C ...Boeing 737-400F ...Boeing 737-700 ...Boeing 737-800 ...Boeing 737-900 ...Boeing MD-80 . . Horizon Air... even though the number of aircraft remains consistent. 22

  • Page 123
    ... in Kent, Washington. Alaska's major facilities outside of Seattle include a regional headquarters building, an air cargo facility and a ...in the state of Alaska. At other airports throughout our system, those services are contracted to various third-party vendors. Horizon owns its Seattle corporate ...

  • Page 124
    ... common stock is listed on the New York Stock Exchange (symbol: ALK). The following table shows the trading range of Alaska Air Group, Inc. common stock on the New York Stock Exchange. 2007 High Low 2006 High Low $100 million of its common stock over a period of twelve months. As of December 31...

  • Page 125
    ...** $200 $180 $160 $140 $120 $100 $80 $60 $40 $20 $0 12/02 12/03 12/04 12/05 12/06 12/07 Alaska Air Group, Inc. S&P 500 Dow Jones US Airlines Index * $100 invested on 12/31/02 in stock or index-including reinvestment of dividends. Fiscal year ending December 31. ** The Dow...

  • Page 126
    ...to fixed charges (b) ...Statistics Alaska Airlines Mainline Operating Data: Revenue passengers...number of full-time equivalent employees ...Operating fleet at period-end ...Horizon Air...17.7 million, $12.6 million, $7.0 million, and $5.3 million for 2007, 2006, 2005, 2004, 2003, 2002, 2001, 2000, 1999, ...

  • Page 127
    ...' equity ...Ratio of earnings to fixed charges (b) ...STATISTICS Alaska Airlines Mainline Operating Data: Revenue passengers (000) ...Revenue passenger miles... per ASM ...Average number of full-time equivalent employees ...Operating fleet at period-end ...Horizon Air Combined Operating Data ...

  • Page 128
    ...MD&A, which includes the following sections: • YEAR IN REVIEW In 2007, we reported consolidated net income of $125.0 million compared to a net ...expenses in 2007. See "Results of Operations" below for further discussion of changes in revenues and operating expenses for both Alaska and Horizon. •...

  • Page 129
    ... Accomplishments from 2007 include: • Alaska marked its 75th anniversary with several celebration events and the unveiling of the "Starliner 75," a new Boeing 737-800 aircraft painted in a vintage DC-3 livery. Horizon was named "2007 Regional Airline of the Year" by Air Transport World...

  • Page 130
    ... contract with Alaska's pilots became amendable May 1, 2007, and the contract with Horizon's pilots became amendable September 12, 2006. We hope to reach negotiated agreements with each of these groups that recognize the important contributions that they make to both of our airlines, without harming...

  • Page 131
    ... capacity costs." Horizon records the payment from Alaska as "Passenger revenue." The Air Group planning department works to strategically deploy certain Horizon aircraft by Frontier JetExpress In November 2007, Horizon discontinued its contract flying with Frontier Airlines as Frontier JetExpress...

  • Page 132
    ...Alaska mainline capacity by 3% and reduce Horizon total system capacity by 4% in 2008 compared to 2007. The expected capacity increase at Alaska is due primarily to the anticipated delivery of 17 new B737-800 aircraft in 2008 and the annualization... County route and Alaska will shift to Horizon its ...

  • Page 133
    ... are primarily driven by the results of our two operating carriers. Alaska reported pretax income of $216.0 million in 2007, while Horizon reported a pretax loss of $10.6 million in 2007. Financial and statistical data for Alaska and Horizon are shown on pages 34 and 35, respectively. An in-depth...

  • Page 134
    ALASKA AIRLINES FINANCIAL AND STATISTICAL DATA Quarter Ended December 31 % 2007 2006 Change Financial Data (in millions): ...per gallon ...$ 2.48 $ 1.98 Fuel gallons (000,000) ...87.2 87.1 Average number of full-time equivalent employees ...9,672 9,485 Aircraft utilization (blk hrs/day) ...10.7 ...

  • Page 135
    HORIZON AIR FINANCIAL AND STATISTICAL DATA Quarter Ended December 31 % 2007 2006 Change Year Ended December 31 % 2006 Change 2005 % Change 2007...000) ...17.6 13.7 Average number of full-time equivalent employees ...Horizon flights, including those operated under Capacity Purchase Agreements with Alaska...

  • Page 136
    ... $377.4 million, or 14.0%, in 2007 as compared to 2006. The new Capacity Purchase Agreement with Horizon described above made up $265.0 million of the increase, with mainline revenues (defined as passenger revenues from those flights operating on Alaska Airlines jets plus freight, mail and other...

  • Page 137
    ... aircraft without a commensurate increase in the number of passengers. Our advance bookings currently suggest...points in the first quarter of 2008 compared to the same period in 2007. Load Factor by Quarter 80% 78% 76% 10.00 74% ...aggregate impact to Air Group revenues. In 2006, Horizon recorded $221.5...

  • Page 138
    ...2007, purchased capacity costs exceeded passenger revenue-purchased capacity by $21.4 million. However, the reported...Horizon, offset by a decline in mainline operating costs. The components of Alaska...2007, primarily as a result of the following: • a 3.8% increase in full-time equivalents. The number...

  • Page 139
    • an increase in the number of flight attendants as we transition to B737800s, which have four flight ... Pay Variable incentive pay for 2007 decreased $14.2 million or 51.3%, compared to 2006. The decrease results from lower annual expense under the various Air Group profit-based incentive plans as...

  • Page 140
    ... for most internal management reporting and incentive pay plans. Our economic fuel expense is calculated as follows: Years Ended December 31 % 2007 2006 Change $765.6 ... all of our owned MD-80 aircraft during the second quarter of 2007 and the addition of two new leased B737-800 aircraft in the ...

  • Page 141
    ... operating costs per mainline ASM are summarized below: Years Ended December 31 2007 2006 %Change Total mainline operating expenses per ASM (CASM) ...10.54...of both Alaska and Horizon and the Air Group Board of Directors in assessing quarterly and annual cost performance. For Alaska Airlines, these...

  • Page 142
    ...basis by which they compare our airlines to others in the industry. The... from similar measures in 2007. Our primary goal in...Alaska and "local" markets where Horizon's regional jets are used to maximize returns (or minimize losses) to Air Group and allow Alaska to deploy its larger jets to other routes...

  • Page 143
    HORIZON AIR Horizon reported a loss before income taxes of $10.6 million during 2007 compared to income before income taxes of $...) and % of ASMs Passenger revenue from Horizon "brand" flying . . Revenue from CPA with Alaska ...Passenger revenue- Alaska revenue share markets ...Revenue from CPA with ...

  • Page 144
    ...includes routes in the Horizon system not covered by the Alaska CPA. Horizon has the inventory and revenue risk in these markets. Passenger revenue from Horizon ...the CPA with Alaska totaled $283.4 million during 2007. Under the CPA, the fee paid by Alaska is based on Horizon's actual operating costs...

  • Page 145
    ...by Frontier. We expect to see a year-over-year increase in the number of gallons consumed in 2008 as we see the full effect of the ...gallon of approximately $2.59. 45 Å Form 10-K Like Alaska, our fuel hedge protection declined substantially in 2007 as the strike price of our hedges was closer to...

  • Page 146
    ...2007, primarily because of fewer CRJ-700 engine events. However, actual results could differ materially if the maintenance schedule is modified or we are forced to perform unforeseen maintenance activities. reduction efforts. Like Alaska's, Horizon...the reduction in the number of leased Q200 aircraft...

  • Page 147
    ... "2007 Compared With 2006" section. Alaska reported a 2006 loss before income taxes of $92.2 million, while Horizon reported income before income taxes of $11.7 million. Financial and statistical data for Alaska and Horizon are shown on pages 34 and 35, respectively. ALASKA AIRLINES Alaska reported...

  • Page 148
    ... scheduled for delivery in 2006, but none was actually delivered until 2007. These delays kept the cargo operations from increasing capacity and thereby ... in Seattle in the second quarter of 2005. ALASKA AIRLINES MAINLINE EXPENSES Total mainline operating expenses increased $513.1 million, or ...

  • Page 149
    ... as a result of a significant improvement in Air Group's 2006 profit, as defined in the ...-dollar engine maintenance events, a decline in the number and change in the mix of airframe events, ...of crude oil on the last date of the reporting period and can fluctuate significantly from period to period...

  • Page 150
    ...for Alaska was approximately $1.5 million. A large portion of this rate increase and retroactive charge was reversed and returned in 2007. ...increase in incentive payments to Horizon for certain flying under the former revenue-sharing arrangement. HORIZON AIR Horizon reported pretax income of $11.7...

  • Page 151
    ...flying (including "brand" flying and Alaska revenue share markets), offset by a...on the last date of the reporting period and can fluctuate significantly from... 1.93 $ 1.58 28.8 5.8 22.2 HORIZON EXPENSES Operating expenses for 2006 increased $104.9... increase in the average number of full-time equivalent...

  • Page 152
    ...$0.9 million, or 1.3%, in 2006 primarily resulting from the annualization of lower rates on extended leases and fewer leased engines...and we use it to gauge the effectiveness of our costreduction efforts. Like Alaska, Horizon's efforts to reduce unit costs focus not only on controlling the actual ...

  • Page 153
    .... The deferred revenue is recognized as passenger revenue when awards are issued and flown on Alaska or Horizon, and as other-net revenue for awards issued and flown on partner airlines. At December 31, 2007, we had approximately 114 billion miles outstanding, resulting in an aggregate liability and...

  • Page 154
    ...in the financial statements and requires recognition of the funded status in other comprehensive income. 4. The number of awards redeemed for travel on Alaska or Horizon versus other airlines: The cost for Alaska or Horizon to carry an award passenger is typically lower than the cost we will pay to...

  • Page 155
    ... million in 2007, 2006, and 2005, respectively. The calculation of pension expense and the corresponding liability requires the use of a number of important ... approximately $9.4 million. With the exception of the plan covering Alaska's pilots, all of our defined-benefit pension plans are closed...

  • Page 156
    ...financial statements for further discussion about the impairment of the MD-80s. In 2007, Horizon announced plans to phase out its remaining leased Q200 aircraft by the end ...interests (previously referred to as minority interests) to be reported as a component of equity, which changes the accounting ...

  • Page 157
    ...to-capital assuming aircraft operating leases are capitalized at seven times annualized rent ... $ 822.8 1,124.6 1,024.0 $ 26.... pts (2) pts During the year ended December 31, 2007, our cash and marketable securities declined $191.1 million to...deliveries. We do have a number of options for both B737-...

  • Page 158
    ..., all of which were paid for with cash on hand. Six were subsequently financed with fixed and variable-rate debt arrangements. Horizon took delivery of 13 Q400s, all of which were paid for with cash on hand. During 2007, Alaska sold and leased back 20 MD-80 aircraft. Bank Line-of-Credit Facility...

  • Page 159
    ... six months of the year. In addition to the 16 purchased aircraft above, Alaska has committed to an operating lease arrangement with a third party for one B737... shown above using interest rates in effect as of December 31, 2007. (3) Includes minimum obligations under our long-term power-by-the-hour...

  • Page 160
    ...fixed the interest rates on certain existing variable-rate debt agreements in 2005 and 2006. Additionally, several of our new debt arrangements in 2006 and 2007 were fixed-rate arrangements and we converted our variable-rate $150 million senior notes to equity in 2006. We continue to enter into both...

  • Page 161
    ... INFORMATION (unaudited) (in millions, except per share) 1st Quarter 2007 2006 2nd Quarter 2007 2006 3rd Quarter 2007** 2006 4th Quarter 2007 2006 Operating revenues ...$759.4 $ 735.4 $904.4 $873.0 ... financial statements when they are presented in future Exchange Act reports. 61 Å Form 10-K

  • Page 162
    ... audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Alaska Air Group, Inc.'s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control- Integrated Framework issued by the Committee of...

  • Page 163
    [THIS PAGE INTENTIONALLY LEFT BLANK] Å Form 10-K

  • Page 164
    ALASKA AIR GROUP, INC. CONSOLIDATED BALANCE SHEETS As of December 31 (In millions) 2007 2006 ASSETS Current Assets Cash and cash equivalents ...$ 204.3 Marketable securities (including securities loaned of $109.8 and $108.4) ...618.5 Total cash and marketable securities ...Securities ...

  • Page 165
    ALASKA AIR GROUP, INC. CONSOLIDATED BALANCE SHEETS As of December 31 (In millions except share amounts) 2007 2006 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable ...Accrued aircraft rent ...Accrued wages, vacation and payroll taxes ...Other accrued liabilities ...Air...2007-...

  • Page 166
    ALASKA AIR GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended December 31 (In millions except per share amounts) 2007 2006 2005 Operating Revenues ... service ...Other ...Fleet transition costs-Alaska ...Fleet transition costs-Horizon ...Restructuring charges and adjustments ...Total ...

  • Page 167
    ALASKA AIR GROUP, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (In millions) Capital in Accumulated Common Excess Treasury Deferred Other Shares Common of Stock, Stock-Based Comprehensive Retained ...

  • Page 168
    ALASKA AIR GROUP, INC. CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY-(Continued) Capital in Accumulated ... net of $4.4 million of unamortized issuance costs ...Balances at December 31, 2006 ...2007 net income ...Other comprehensive income (loss): Related to marketable securities: Change in fair ...

  • Page 169
    ALASKA AIR GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31 (In millions) 2007 2006 2005 Cash flows from operating ......Increase in prepaid expenses and other current assets ...Increase in air traffic liability ...Increase (decrease) in other current liabilities ...Increase ...

  • Page 170
    ... 31, 2007 NOTE 1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Basis of Presentation The consolidated financial statements include the accounts of Alaska Air Group, Inc. (Air Group or the Company) and its subsidiaries, Alaska Airlines, Inc. (Alaska) and Horizon Air...

  • Page 171
    ...Alaska and Horizon employees, respectively, are covered under agreements that are currently in negotiations or become amendable prior to December 31, 2008. The airline...them. As of December 31, 2007 and 2006, the Company had ... disbursement accounts, which is reported as a current liability. The amount...

  • Page 172
    ... are being depreciated through 2009, as that is the expected date that Horizon will no longer be operating the Q200 fleet. "Related flight equipment" ... million, and $2.3 million during the years ended December 31, 2007, 2006, and 2005, respectively. Workers Compensation and Employee Health-Care...

  • Page 173
    ...based on accumulated mileage. For miles earned by flying on Alaska, Horizon and other airline partners, the estimated cost of providing free travel awards is... 2007 Revenue Recognition Passenger revenue is recognized when the passenger travels. Tickets sold but not yet used are reported as air ...

  • Page 174
    ... at December 31, 2007 and 2006, respectively, associated with Mileage Plan awards issued but not yet flown. Alaska's Mileage Plan revenue is...ended December 31, 2007, 2006, and 2005, respectively. The Company uses the asset and liability approach for accounting and reporting income taxes. Deferred...

  • Page 175
    ... that tax benefits realized from stock award exercise gains in excess of stockbased compensation expense recognized for financial statement purposes be reported as cash flows from financing activities rather than as operating cash flows. Previously, the Company applied the intrinsic value method in...

  • Page 176
    ...number of employees that withdrew their participation in the severance program. See Note 10 for further discussion. NOTE 2. FLEET TRANSITION AND IMPAIRMENT Alaska...the fleet in the first half of 2008. On April 23, 2007, Horizon announced an order for 15 additional Q400 aircraft, with options to ...

  • Page 177
    ... consolidated balance sheets. NOTE 4. MARKETABLE SECURITIES At December 31, 2007 and 2006 all of the Company's marketable securities, including securities ...carried at fair value, with the unrealized gains and losses reported in shareholders' equity under the caption "Accumulated Other Comprehensive ...

  • Page 178
    ... and 2006, respectively. At December 31, 2007, substantially all of the Company's borrowings were secured by flight equipment, future delivery positions, and real property. Alaska has a $172 million variable-rate revolving pre-delivery payment (PDP) facility with a syndicate of lenders to provide...

  • Page 179
    ...Alaska Airlines from distributing any funds to Alaska Air Group in the form of dividends and limit the amount of funds Alaska Airlines can loan to its affiliates. In April 2007...-charge coverage ratios, Subsequent Event In January 2008, Horizon executed a fixed-rate debt arrangement to finance 13 of...

  • Page 180
    ... options to purchase an additional 20 Q400 aircraft. At December 31, 2007, the Company had firm purchase commitments for 46 total aircraft requiring remaining aggregate payments of approximately $1.0 billion. Alaska and Horizon expect to finance the firm orders and, to the extent exercised, the...

  • Page 181
    ...2007 and 2006, the rate of compensation increase used varied from 3.52% to 4.53%, depending on the plan and the related workgroup. The Company's investment policy focuses on achieving maximum returns at a reasonable risk for pension assets over a full market cycle. The Company uses a number... Alaska ...

  • Page 182
    ... funded ...The accumulated benefit obligation for the qualified defined-benefit pension plans was $939.0 million and $964.8 million at December 31, 2007 and 2006, respectively. The $1,051.3 49.7 60.9 (1.3) - - (51.1) (52.6) $1,056.9 $ 835.9 74.8 52.5 (52.6) $ 910.6 $ (146.3) 86.2% $ 989.1 52.3 56...

  • Page 183
    ... to be paid over the next ten years under the defined-benefit pension plans from the assets of those plans as of December 31, 2007 are as follows (in millions): Qualified 2008 2009 2010 2011 2012 2013 ...- 2017 ...$ 28.1 38.4 50.1 52.5 57.5 $391.6 Nonqualified $ 2.0 2.2 2.2 2.2 2.4 $14.2 $ 49.7 60...

  • Page 184
    ... following effect on the Company's postretirement medical plans during 2007, 2006 and 2005 (in millions): 2007 2006 2005 The estimated amortization of prior service cost (...expected benefit payments. 84 Employee Incentive-Pay Plans Alaska and Horizon have four separate plans that pay employees based...

  • Page 185
    ... in 2007, 2006 and 2005 was $20.8 million, $36.8 million, $20.0 million, respectively. The plans are summarized below: • The Profit Sharing Plan is based on Air Group profitability. Alaska's pilots, ramp service and clerical, office and passenger service employees, and certain Horizon employees...

  • Page 186
    EPS calculations were as follows (in millions except per-share amounts): 2007 2006 2005 Basic Earnings (Loss) Per Share Income (loss) before accounting change ...Weighted-average shares outstanding ...EPS before accounting change ...Cumulative effect of accounting change, ...

  • Page 187
    ... an immediate 3% pay increase. Additionally, Alaska offered a voluntary severance package to a number of flight attendants that included, among other...for the years ended December 31, 2007, 2006 and 2005 (in millions): Accrual for Severance and Related Costs 2007 2006 2005 Balance at beginning of ...

  • Page 188
    ... DETAIL OF OTHER FINANCIAL STATEMENT CAPTIONS Receivables Receivables consisted of the following at December 31 (in millions): 2007 Airline traffic receivables ...Mileage Plan receivables ...Receivables from fuel-hedging counterparties ...Other receivables ...Allowance for doubtful accounts ...$ 59...

  • Page 189
    ... When options granted under the 1997 Plan are exercised, shares are issued from the Company's treasury shares. The total number of outstanding options from the 1997 Plan as of December 31, 2007 is 448,995. Substantially all grantees are 25% vested after one year, 50% after two years, 75% after three...

  • Page 190
    ... outstanding RSUs: WeightedAverage Grant Date Fair Value $32.89 40.42 28.41 33.04 $35.57 Number of Units Non-vested at December 31, 2006 ...Granted ...Vested ...Forfeited ...Non-vested at December 31, 2007 ...449,250 69,726 (118,410) (7,840) 392,726 Range of Exercise prices Outstanding: $10 to $20...

  • Page 191
    ...expense related to PSUs of $0.4 million for the year ended December 31, 2007. calculated using the Black-Scholes model in the same manner as the Company...tax benefits as of the date of adoption was $26.2 million. This number includes a $24.5 million increase in the tax liability and a corresponding ...

  • Page 192
    ...The Company will continue to reassess the need for a valuation allowance during each future reporting period. The components of income tax expense (benefit) were as follows (in millions): 2007 Current tax expense (benefit): Federal ...$12.8 State ...4.8 Total current ...Deferred tax expense (benefit...

  • Page 193
    ... credit exposure with any one institution. The Company's trade receivables do not represent a significant concentration of credit risk at December 31, 2007 due to the frequency that settlement takes place and the dispersion across many industry and government segments. Long-term debt at December 31...

  • Page 194
    ... operating and reporting segments, consisting of Alaska and Horizon. These segments are more fully described in Note 1 under Nature of Operations. Financial information for Alaska and Horizon follows (in millions): 2007 2006 2005 Operating revenues: Alaska-mainline(1) ...Alaska-purchased capacity...

  • Page 195
    2007 2006 2005 Capital expenditures(4): Alaska(3) ...Horizon ...Consolidated ...Total assets at end of period: Alaska(3) ...Horizon ...Other(2) ...Elimination of inter-company... the parent company, Alaska Air Group, Inc., including its investments in Alaska and Horizon, which are eliminated ...

  • Page 196
    ...retained earnings for 2006. Horizon Fleet Subsidy In connection with the purchase of certain aircraft, the manufacturer paid Horizon a "market subsidy" ... the direct expense method is the predominant method used in the airline industry. Accordingly, effective January 1, 2005, the Company wrote off...

  • Page 197
    ...alleging that Alaska violated the CBA by, among other things, subcontracting the ramp service operation in Seattle. The dispute was referred to an arbitrator and hearings on the grievance commenced in January 2007, with a final hearing date in August. It is likely that a decision from the arbitrator...

  • Page 198
    ... regarding its assessment of the Company's internal control over financial reporting as of December 31, 2007, which report appears on page 99. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING During 2007, Alaska and Horizon converted to an integrated Human Resources, Benefits and Payroll system...

  • Page 199
    ...INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholders Alaska Air Group, Inc.: We have audited Alaska Air Group, Inc.'s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control - Integrated Framework issued by...

  • Page 200
    ITEM 9B. OTHER INFORMATION None 100

  • Page 201
    ... herein by reference from the definitive Proxy Statement for Air Group's 2008 Annual Meeting of Stockholders to be filed with the Securities ...and Exchange Commission within 120 days after the end of the fiscal year ended December 31, 2007...

  • Page 202
    PART IV ITEM 15. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES The following documents are filed as part of this report: 1. Qualifying Accounts, for the years ended December 31, 2007, 2006 and 2005 on page 107. 2. Financial Statement Schedules: Financial Statement Schedule II, Valuation and...

  • Page 203
    ... 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ALASKA AIR GROUP, INC. By: /s/ WILLIAM S. AYER Date: February 20, 2008 William S. Ayer, Chairman and Chief Executive Officer...

  • Page 204
    ...exhibits are numbered in ...2007 Aircraft General Terms Agreement, dated June 15, 2005, between the Boeing Company and Alaska Airlines, Inc. (Filed as Exhibit 10.1 to Registrant's Quarterly Report...Horizon Air Industries, Inc. and Bombardier Inc. (Filed as Exhibit 10.1 to Registrant's Quarterly Report...

  • Page 205
    ..., filed on August 15, 1997 and incorporated herein by reference.) Alaska Airlines, Inc. and Alaska Air Group, Inc. Supplementary Retirement Plan for Elected Officers, as amended November 7, 1994 (Filed as Exhibit 10.15 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1997...

  • Page 206
    10.18.1* Consulting Agreement by and between Kevin Finan and Alaska Airlines, Inc. (Filed as Exhibit 10.2 to Registrant's Current Report on Form 8-K, filed on April 30, 2007 and incorporated herein by reference.) Statement of Computation of Ratio of Earnings to Fixed Charges Subsidiaries of ...

  • Page 207
    Schedule II ALASKA AIR GROUP, INC. VALUATION AND QUALIFYING ACCOUNTS (In Millions) Beginning Balance ... accounts ...Obsolescence allowance for flight equipment spare parts ...Year Ended December 31, 2007 Reserve deducted from asset to which it applies: Allowance for doubtful accounts ...Obsolescence...

  • Page 208
    EXHIBIT 31.1 CERTIFICATIONS I, William S. Ayer, certify that: 1. 2. I have reviewed this annual report on Form 10-K of Alaska Air Group, Inc. for the period ended December 31, 2007; Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a ...

  • Page 209
    EXHIBIT 31.2 CERTIFICATIONS I, Bradley D. Tilden, certify that: 1. 2. I have reviewed this annual report on Form 10-K of Alaska Air Group, Inc. for the period ended December 31, 2007; Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a ...

  • Page 210
    ...18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Alaska Air Group, Inc. (the "Company") on Form 10-K for the period ended December 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the...

  • Page 211
    ...18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Alaska Air Group, Inc. (the "Company") on Form 10-K for the period ended December 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the...

  • Page 212
    Reconciliation Between Adjusted Results and Amounts Calculated Under Generally Accepted Accounting Principles (GAAP) Alaska Air Group, Inc. 2007 2006 2005 2004 2003 Adjusted net income (loss before accounting change ...$ 92.3 $ 137.7 $ 55.0 $ 5.2 $(30.8) Government compensation, net of tax ...- - -...

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    ...Alaska Air Group Directors William S. Ayer Chairman, President & CEO Alaska Air Group & Alaska Airlines Patricia M. Bedient Executive Vice President & CFO Weyerhaeuser Company Phyllis J. Campbell President & CEO The Seattle Foundation Mark R. Hamilton President University of Alaska... Horizon Air ...

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    ...Alaska Airlines and Horizon Air, Seattle-based carriers that collectively serve 92 destinations in the United States, Canada, and Mexico. Alaska Air Group was organized as a Delaware corporation in 1985. Alaska Airlines, Inc., an Alaska... KPMG LLP Seattle, Washington Annual Meeting 2 p.m., Tuesday, ...

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    P.O. Box 68947 • Seattle, WA 98168-0947 www.alaskaair.com Alaska Airlines Reservations 1-800-ALASKAAIR (252-7522) www.horizonair.com Horizon Air Reservations 1-800-547-9308