OVERVIEW
The following Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help the reader understand our Company, our operations and our present business environment. MD&A is provided as a supplement to - and should be read in conjunction with - our condensed consolidated financial statements and the accompanying notes. All statements in the following discussion that are not statements of historical information or descriptions of current accounting policy are forward-looking statements. Please consider our forward-looking statements in light of the risks referred to in this report's introductory cautionary note and the risks mentioned in the Company's filings with the Securities and Exchange Commission, including those listed in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2008. This overview summarizes MD&A, which includes the following sections:

· Third Quarter in Review - highlights from the third quarter of 2009 outlining some of the major events that happened during the period and how they affected our financial performance.

· Results of Operations - an in-depth analysis of the results of operations of Alaska and Horizon for the three and nine months ended September 30, 2009. We believe this analysis will help the reader better understand our condensed consolidated statements of operations. This section also includes forward-looking statements regarding our view of the remainder of 2009.

· Liquidity and Capital Resources - an analysis of cash flows, sources and uses of cash, contractual obligations, commitments and off-balance sheet arrangements, and an overview of financial position.

Our filings with the Securities and Exchange Commission, including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports are accessible free of charge at www.alaskaair.com. The information contained on our website is not a part of this quarterly report on Form 10-Q.

THIRD QUARTER IN REVIEW
Our consolidated pretax income was $142.8 million during the third quarter of 2009 compared to a pretax loss of $133.0 million in the third quarter of 2008. The increase in our pretax earnings was primarily due to the $376.1 million decline in aircraft fuel costs and the decline in fleet transition costs from the third quarter of 2008, partially offset by a $97.8 million decline in operating revenues. The decline in fuel cost is primarily due to a 49% reduction in the cost per gallon of raw fuel and a $165.6 million reduction in net losses associated with our fuel-hedging portfolio. The 9.2% decline in operating revenues is more fully described below.

· Passenger revenue declined 7.1% because of continued demand weakness as compared to the prior year. In the third quarter, capacity across the Air Group network was reduced by just over 4% and consolidated unit operating revenue, excluding the change in Mileage Plan terms, declined by 1.4%. This compares with a 2.5% year-over-year decline in the second quarter of 2009. We believe that demand deterioration is moderating compared with the prior-year periods as evidenced by a year-over-year increase in passenger traffic at Alaska in the quarter. However, ticket yield continues to be under significant pressure.

· As previously announced, we began charging a $15 first bag service charge on July 7, 2009. This fee does not apply to our MVP or MVP Gold Mileage Plan members, for those traveling solely within the state of Alaska, or for certain other passengers. For the third quarter, the fee generated $23.5 million of incremental revenue. As previously disclosed, we believe this fee will generate at least $70 million of incremental revenue on an annual basis, and we expect to meet or exceed our estimate of at least $30 million of incremental revenue during the last half of 2009.

· Mileage Plan revenue increased by $14.2 million primarily as a result of an increase in the commission revenue recognized from the sale of Mileage Plan miles. See further discussion in the Alaska Airlines segment beginning on page 25.

· We recorded $42.3 million in the prior-year quarter associated with a change in our Mileage Plan program terms.

Other significant developments during the third quarter of 2009 and through the filing of this Form 10-Q are described below.

New Markets
In the third quarter, we announced that Alaska would begin daily non-stop service between Portland and Chicago on November 16, 2009. We launched previously announced service from Seattle to two new cities in Texas - Houston and Austin during the quarter, and our previously announced non-stop service between Seattle and Atlanta began in October.

Horizon also announced expanded seasonal service to Mammoth Lakes from San Jose, Reno, Seattle and Portland. The flights will operate from December 17, 2009 to April 11, 2010.

Labor Agreements
As previously disclosed, in August 2009, Alaska and its aircraft technicians reached an agreement on a two-year contract extension. The extended contract, which becomes amendable on October 17, 2011, provides technicians with a 1.5-percent pay scale increase in October 2009 and 2010. In addition, technicians will no longer participate in the company's Variable Pay Plan. Instead, they will participate in the Performance-Based Pay (PBP) Plan.

In October 2009, the International Association of Machinists presented its membership with two-year contract extension proposals for Alaska's clerical, office and passenger service employees, and its ramp service and stores agents. The proposed extension includes participation in the PBP incentive plan and a 1.5-percent pay scale increase in June 2010 and 2011. The vote by the covered employees is expected to be completed in December 2009.

Horizon Fleet Transition
Horizon's long-term goal is to transition to an all-Q400 fleet. In the first quarter of 2009, Horizon removed the final six Q200 aircraft from operations. We recorded a charge of $10.0 million in the first six months of 2009 associated with removing these aircraft from operation. In the third quarter, we reduced the total expected loss on the disposal of these aircraft by $1.2 million based on recent transactions. Subsequent to September 30, 2009, we successfully disposed of the remaining Q200 aircraft and, as such, have terminated the associated lease agreements.

Although we have been actively pursuing various alternatives to dispose of our 18 CRJ-700 aircraft in the most economically feasible way, the current economic conditions have hindered the remarketing efforts. As a result, the transition to an all-Q400 fleet will be delayed and we will continue to operate the CRJ-700 aircraft in our operating fleet. We expect to have three Q400 aircraft delivered in the fourth quarter of 2009, but we have successfully deferred 2010 and 2011 Q400 deliveries into future years to better manage our fleet size and capacity plans.

Outlook
Looking ahead, year-over-year advance booked load factor for November is up about 3.5 points for Alaska mainline flying and about 1.5 points for Horizon brand flying. December advance booked load factor is up about 1.5 points and down about one point for mainline Alaska and Horizon brand flying, respectively, although the trend has been for the year-over-year comparison to improve as the date of travel approaches. These advance booked load factors are on relatively flat expected capacity at Alaska and an expected decline of about 3% at Horizon brand flying for the fourth quarter.

We are continuing to see lower year-over-year unit revenues and ticket yields due to the current economic conditions and need to stimulate traffic with low fares and sale activity. We expect to continue to see year-over-year declines in unit revenue through the fourth quarter based on current bookings and fare sales. The impacts of our new first bag fee and new affinity card agreement, along with other revenue initiatives such as increases in on-board products, have helped to ease the impact of revenue declines from low ticket yields.

RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2009 TO THREE MONTHS ENDED
SEPTEMBER 30, 2008

Our consolidated net income for the third quarter of 2009 was $87.6 million, or $2.46 per diluted share, compared to a net loss of $86.5 million, or $2.40 per diluted share, in the third quarter of 2008. Significant items impacting the comparability between the periods are as follows:

· Both periods include adjustments to reflect the timing of net unrealized mark-to-market gains or losses related to our fuel hedge positions. In the third quarter of 2009 we recognized net mark-to-market gains of $7.3 million ($4.6 million after tax, or $0.13 per share) compared to losses of $218.2 million ($136.7 million after tax, or $3.79 per share) in the third quarter of 2008.

· The third quarter of 2008 included fleet transition charges of $22.2 million ($13.9 million after tax, or $0.38 per share) related to the planned transitions out of the MD-80 and CRJ-700 fleets.

· The third quarter of 2008 included restructuring charges of $3.7 million ($2.3 million after tax, or $0.06 per share) related to the reduction in work force at Alaska.

· The third quarter of 2008 also included a $42.3 million benefit ($26.5 million after tax, or $0.73 per share) related to a change in terms of our Mileage Plan program.

We believe disclosure of the impact of these individual charges is useful information to investors and other readers because:

· it is useful to monitor performance without these items as it improves a reader's ability to compare our results to the results of other airlines;

· our results excluding these items are the basis for our various employee incentive plans, thus the information allows investors to better understand the changes in variable incentive pay expense in our condensed consolidated statements of operations;

· our results excluding these items are most often used in internal management and board reporting and decision-making; and

· we believe it is the basis by which we are evaluated by industry analysts.

Our consolidated results are primarily driven by the results of our two operating carriers. Alaska reported pretax income of $124.8 million in the third quarter of 2009, while Horizon reported pretax income of $19.1 million. Financial and statistical data for Alaska and Horizon are shown on pages 25 and 32, respectively. An in-depth discussion of the results of Alaska and Horizon begins on pages 26 and 33, respectively.

Alaska Airlines Financial
and Statistical Data
(unaudited)

Three Months Ended September 30 Nine Months Ended September 30 % % Financial Data (in
millions): 2009 2008 Change 2009 2008 Change Operating Revenues:
Passenger $ 702.0 $ 751.2 (6.5 ) $ 1,844.3 $ 2,041.2 (9.6 ) Freight and mail 26.5 29.2 (9.2 ) 69.0 77.1 (10.5 ) Other - net 48.4 33.5 44.5 136.5 101.2 34.9 Change in Mileage Plan
terms - 42.3 NM - 42.3 NM Total mainline operating
revenues 776.9 856.2 (9.3 ) 2,049.8 2,261.8 (9.4 ) Passenger - purchased
capacity 81.9 85.7 (4.4 ) 211.4 233.9 (9.6 ) Total Operating Revenues 858.8 941.9 (8.8 ) 2,261.2 2,495.7 (9.4 )

Operating Expenses:
Wages and benefits 199.1 182.5 9.1 594.9 558.9 6.4 Variable incentive pay 20.8 4.9 324.5 44.0 10.8 307.4 Aircraft fuel, including
hedging gains and losses 166.6 479.1 (65.2 ) 405.9 864.0 (53.0 ) Aircraft maintenance 36.5 32.6 12.0 129.4 112.1 15.4 Aircraft rent 27.2 26.3 3.4 81.8 82.4 (0.7 ) Landing fees and other
rentals 43.0 42.3 1.7 124.4 126.9 (2.0 ) Contracted services 29.7 31.9 (6.9 ) 88.6 100.5 (11.8 ) Selling expenses 29.4 33.1 (11.2 ) 76.8 95.6 (19.7 ) Depreciation and
amortization 45.1 42.8 5.4 132.6 123.2 7.6 Food and beverage service 12.0 12.8 (6.3 ) 34.9 37.1 (5.9 ) Other 38.0 41.0 (7.3 ) 119.3 130.2 (8.4 ) New pilot contract
transition costs - - NM 35.8 - NM Restructuring charges - 3.7 NM - 3.7 NM Fleet transition costs -
MD-80 - 21.5 NM - 47.5 NM Total mainline operating
expenses 647.4 954.5 (32.2 ) 1,868.4 2,292.9 (18.5 ) Purchased capacity costs 74.7 85.6 (12.7 ) 206.3 246.8 (16.4 ) Total Operating Expenses 722.1 1,040.1 (30.6 ) 2,074.7 2,539.7 (18.3 )

Operating Income (Loss) 136.7 (98.2 ) 186.5 (44.0 )

Interest income 9.6 12.8 29.2 38.2 Interest expense (22.4 ) (23.5 ) (67.5 ) (67.5 ) Interest capitalized 1.4 4.8 5.7 16.1 Other - net (0.5 ) (3.3 ) (5.3 ) (2.7 )

Income (Loss) Before Income
Tax $ 124.8 $ (107.4 ) $ 148.6 $ (59.9 )

Mainline Operating
Statistics:
Revenue passengers (000) 4,240 4,532 (6.4 ) 11,796 13,037 (9.5 ) RPMs (000,000) "traffic" 5,020 5,012 0.2 13,812 14,410 (4.1 ) ASMs (000,000) "capacity" 6,097 6,306 (3.3 ) 17,469 18,628 (6.2 ) Passenger load factor 82.3 % 79.5 % 2.8 pts 79.1 % 77.4 % 1.7 pts Yield per passenger mile 13.98 ¢ 14.99 ¢ (6.7 ) 13.35 ¢ 14.17 ¢ (5.8 ) Operating revenue per ASM
(RASM) 12.74 ¢ 13.58 ¢ (6.2 ) 11.73 ¢ 12.14 ¢ (3.4 )
Change in Mileage Plan
terms per ASM 0.00 ¢ 0.67 ¢ NM 0.00 ¢ 0.23 ¢ NM Passenger revenue per ASM 11.51 ¢ 11.91 ¢ (3.4 ) 10.56 ¢ 10.96 ¢ (3.6 ) Operating expenses per ASM 10.62 ¢ 15.14 ¢ (29.9 ) 10.70 ¢ 12.31 ¢ (13.1 ) Aircraft fuel cost per ASM 2.73 ¢ 7.60 ¢ (64.1 ) 2.32 ¢ 4.64 ¢ (50.0 ) New pilot contract
transition costs per ASM 0.00 ¢ 0.00 ¢ NM 0.21 ¢ 0.00 ¢ NM Restructuring charges per
ASM 0.00 ¢ 0.06 ¢ NM 0.00 ¢ 0.02 ¢ NM Fleet transition costs per
ASM 0.00 ¢ 0.34 ¢ NM 0.00 ¢ 0.25 ¢ NM Aircraft fuel cost per
gallon $ 2.07 $ 5.57 (62.8 ) $ 1.77 $ 3.34 (47.0 ) Economic fuel cost per
gallon $ 2.15 $ 3.47 (38.0 ) $ 1.98 $ 3.14 (36.9 ) Fuel gallons (000,000) 80.1 86.0 (6.9 ) 229.9 258.3 (11.0 ) Average number of full-time
equivalent employees 9,002 9,594 (6.2 ) 8,987 9,785 (8.2 ) Aircraft utilization (blk
hrs/day) 9.9 10.8 (8.3 ) 9.9 10.8 (8.3 ) Average aircraft stage
length (miles) 1,044 981 6.4 1,027 975 5.3 Operating fleet at
period-end 116 110 6 a/c 116 110 6 a/c

Regional Operating
Statistics:
RPMs (000,000) 298 304 (2.0 ) 777 873 (11.0 ) ASMs (000,000) 383 391 (2.0 ) 1,058 1,153 (8.2 ) Passenger load factor 77.8 % 77.7 % 0.1 pts 73.4 % 75.7 % (2.3 )pts Yield per passenger mile 27.48 ¢ 28.19 ¢ (2.5 ) 27.21 ¢ 26.79 ¢ 1.6 Operating revenue per ASM 21.38 ¢ 21.92 ¢ (2.5 ) 19.98 ¢ 20.29 ¢ (1.5 ) Operating expenses per ASM 19.50 ¢ 21.89 ¢ (10.9 ) 19.50 ¢ 21.41 ¢ (8.9 )

NM = Not Meaningful

ALASKA AIRLINES
Alaska reported income before income taxes of $124.8 million during the third quarter of 2009 compared to a loss of $107.4 million in the third quarter of 2008. The improvement was driven by a $312.5 million decrease in fuel cost compared to the prior year and the lack of MD-80 fleet transition charges and restructuring charges in the current period, partially offset by an $83.1 decline in total operating revenues.

ALASKA REVENUES

Total operating revenues decreased $83.1 million, or 8.8%, during the third
quarter of 2009 as compared to the same period in 2008. The changes are
summarized in the following table:

                                               Three Months Ended September 30
(in millions)                                   2009              2008       % Change
Passenger revenue - mainline             $     702.0       $     751.2           (6.5 )
Freight and mail                                26.5              29.2           (9.2 )
Other - net                                     48.4              33.5           44.5
Change in Mileage Plan terms                       -              42.3             NM
Total mainline revenues                  $     776.9       $     856.2           (9.3 )
Passenger revenue - purchased capacity          81.9              85.7           (4.4 )
Total operating revenues                 $     858.8       $     941.9           (8.8 )

NM = Not Meaningful

Operating Revenues - Mainline
Mainline passenger revenue fell 6.5% on a 3.3% reduction in capacity and a 3.4% decline in passenger unit revenue. The decline in passenger unit revenue was driven by a 6.7% drop in yield from the prior-year period, partially offset by the 2.8-point increase in passenger load factor. The decline in yield reflects the overall economic climate and the resulting discounting of fares and is also a result of longer average trip lengths. Passenger revenue per available seat mile (PRASM) declined 1.3% in July, 3.5% in August, and 5.5% in September.

Our load factor in October 2009 was 77.0%, compared to 73.6% in October 2008. Our advance bookings currently suggest that load factors will be up about 3.5 points in November and 1.5 points in December compared to the prior year.

Ancillary revenue included in passenger revenue increased from $30.3 million in the third quarter of 2008 to $41.9 million in the third quarter of 2009. The increase is primarily due to the implementation of our first checked bag service charge in the current quarter, which generated $17.3 million.

Freight and mail revenue declined $2.7 million, or 9.2%, primarily as a result of lower mail volumes and yields, and lower freight fuel surcharges, partially offset by higher freight volumes and yield coming from strong seafood volumes in the third quarter.

Other - net revenue increased $14.9 million, or 44.5%, from the prior-year quarter. Mileage Plan revenue increased by $14.2 million primarily as a result of an increase in the commission revenue recognized from the sale of Mileage Plan miles. The increase in the commission component from the prior-year period is driven by two primary factors - 1) the decline in the fair value assigned to sold miles as our award structure changed in the fourth quarter of 2008 and 2) the increase in the rate paid to us by our affinity credit card partner for miles sold. The new affinity card agreement was effective January 1, 2009.

In the third quarter of 2008, we reduced the length of time that a Mileage Plan account could be inactive from three years to two years before the account is deleted. As a result of this change in terms, our Mileage Plan liability was reduced by $42.3 million in the prior-year period.

Passenger Revenue - Purchased Capacity

Passenger revenue - purchased capacity declined by $3.8 million to $81.9 million because of a 2.0% drop in capacity and a 2.5% decline in unit revenue compared to the prior year. Unit revenue declined as a result of a 2.5% decline in yield from the prior-year period on relatively flat load factor.

ALASKA EXPENSES
For the third quarter, total operating expenses declined $318.0 million compared
to the same period in 2008, mostly as a result of the significant decline in
fuel expense and the lack of fleet transition costs and restructuring charges,
partially offset by a $32.5 million increase in wages and benefits and variable
incentive pay. We believe it is useful to summarize operating expenses as
follows, which is consistent with the way expenses are reported internally and
evaluated by management:

                                              Three Months Ended September 30
(in millions)                                2009                2008       % Change
Mainline fuel expense                  $    166.6       $       479.1          (65.2 )
Mainline non-fuel operating expenses        480.8               475.4            1.1
Mainline operating expenses                 647.4               954.5          (32.2 )
Purchased capacity costs                     74.7                85.6          (12.7 )
Total Operating Expenses               $    722.1       $     1,040.1          (30.6 )

Mainline Operating Expenses
Total mainline operating costs for the third quarter of 2009 decreased $307.1 million, or 32.2%, compared to the same period of 2008. Significant individual expense variances from the third quarter of 2008 are described more fully below.

Wages and Benefits
Wages and benefits were up $16.6 million, or 9.1%, compared to the third quarter
of 2008. The primary components of wages and benefits are shown in the following
table:

                                                       Three Months Ended September 30
(in millions)                                          2009               2008         % Change
Wages                                          $      137.5       $      135.5              1.5
Pension and defined-contribution retirement
benefits                                               29.4               16.7             76.0
Medical benefits                                       19.8               17.3             14.5
Other benefits and payroll taxes                       12.4               13.0             (4.6 )
Total wages and benefits                       $      199.1       $      182.5              9.1

Wages increased 1.5% on a 6.2% reduction in full-time equivalent employees (FTE) compared to the third quarter of 2008. Wages have not declined in step with the FTE reduction because of higher wage rates for the pilot group in connection with their new contract and increased average wages for certain other employees stemming from higher average seniority following recent furloughs, which are generally seniority-based.

The nearly 76% increase in pension and other retirement-related benefits is primarily due to a $12.2 million increase in our defined-benefit pension cost driven by the significant decline in the market value of pension assets at the end of 2008.

Medical benefits increased 14.5% from the prior-year period primarily as a result of higher post-retirement medical cost for the pilot group in connection with their new contract.

We expect wages and benefits to be up in the fourth quarter of 2009 compared to the fourth quarter of 2008 for the same reasons mentioned above.

Variable Incentive Pay
Variable incentive pay expense increased from $4.9 million in the third quarter of 2008 to $20.8 million in the third quarter of 2009. The increase reflects higher year-over-year expense for the Air Group Performance Based Pay (PBP) incentive plan based on estimated full-year Air Group results and those estimated results compared to our original 2009 plan. The increase can also be attributed to the addition of pilots, flight attendants and mechanics to the PBP incentive plan, which results in a larger expected payout for 2009 than the incentive plans under which they were previously covered. We expect fourth quarter 2009 incentive pay will be higher than in the same period of 2008.

Aircraft Fuel
Aircraft fuel expense includes both raw fuel expense (as defined below) plus the effect of mark-to-market adjustments to our fuel hedge portfolio included in our condensed consolidated statement of operations as the value of that portfolio increases and decreases. Our aircraft fuel expense is very volatile, even between quarters, because it includes these gains or losses in the value of the underlying instrument as crude oil prices and refining margins increase or . . .