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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

(Mark One)

(X)  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-8957

ALASKA AIR GROUP, INC.

Delaware		91-1292054
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

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

Registrant’s telephone number, including area code: (206) 431-7040

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No

APPLICABLE ONLY TO CORPORATE ISSUERS:

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

     The registrant has 26,549,161 common shares, par value $1.00, outstanding at July 31, 2002.

During 2002, the Company changed its accounting policies relating to the accrual for certain lease return costs and capitalization of software development costs. In addition, the Company changed its accounting for aircraft purchase commitments assumed by a third party. The Company also made other corrections and certain reclassifications of deferred income taxes and other balance sheet and income statement items, none of which have a significant impact to previously reported equity or net earnings. Because the previous accounting methods and classifications are not considered to be in compliance with generally accepted accounting principles in the United States of America, the Company’s previously issued consolidated financial statements for the years ended December 31, 1999, 2000, and 2001, including the interim periods within those years, and for the three and six months ended June 30, 2002, have been restated.

 

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This amendment to the Company’s Quarterly Report on Form 10-Q for the three and six months ended June 30, 2002 amends and restates only those items of the previously filed Form 10-Q which have been affected by the restatement. In order to preserve the nature and character of the disclosures set forth in such items as originally filed, no attempt has been made in this amendment to modify or update such disclosures except as required to reflect the effects of the restatement and to make non-substantive revisions to the notes to the consolidated financial statements. For additional information regarding the restatement, see Note 2 to the Consolidated Financial Statements.

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PART I. FINANCIAL STATEMENTS
	ITEM 1. Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
	ITEM 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition
	ITEM 3. Quantitative and Qualitative Disclosure About Market Risk
	ITEM 4. Submission of Matters to a Vote of Security Holders
PART II. OTHER INFORMATION
	ITEM 1. Legal Proceedings
	ITEM 5. Other Information
	ITEM 6. Exhibits and Reports on Form 8-K
Signatures
	I, John F. Kelly, certify that:
EXHIBIT 99.1
EXHIBIT 99.2

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PART I. FINANCIAL STATEMENTS

ASSETS
		Restated				Restated
		December 31,				June 30,
(In Millions)		2001				2002
Current Assets
Cash and cash equivalents		$	490.8			$	270.4
Marketable securities			169.8				434.9
Receivables - net			83.8				100.1
Inventories and supplies - net			70.2				70.8
Prepaid expenses and other assets			104.4				134.4
Total Current Assets			919.0				1,010.6
Property and Equipment
Flight equipment			2,003.6				2,008.0
Other property and equipment			403.8				423.5
Deposits for future flight equipment			112.4				87.8
			2,519.8				2,519.3
Less accumulated depreciation and amortization			698.3				757.1
Total Property and Equipment - Net			1,821.5				1,762.2
Intangible Assets			51.4				—
Other Assets			158.6				172.7
Total Assets		$	2,950.5			$	2,945.5

See accompanying notes to consolidated financial statements.

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CONSOLIDATED BALANCE SHEETS (unaudited)
Alaska Air Group, Inc.

LIABILITIES AND SHAREHOLDERS’ EQUITY
			Restated				Restated
			December 31,				June 30,
(In Millions Except Share Amounts)			2001				2002
Current Liabilities
Accounts payable			$	124.6			$	130.0
Accrued aircraft rent				80.3				69.7
Accrued wages, vacation and payroll taxes				77.8				85.1
Other accrued liabilities				209.0				197.9
Air traffic liability				217.1				284.7
Current portion of long-term debt and capital lease obligations				43.2				45.7
Total Current Liabilities				752.0				813.1
Long-Term Debt and Capital Lease Obligations				852.2				852.1
Other Liabilities and Credits
Deferred income taxes				173.4				165.8
Deferred revenue				204.3				218.6
Other liabilities				117.3				123.7
				495.0				508.1
Shareholders’ Equity
Common stock, $1 par value Authorized: 100,000,000 shares Issued: 2001 - 29,268,869 shares 2002 - 29,285,569 shares				29.3				29.3
Capital in excess of par value				482.6				482.9
Treasury stock, at cost: 2001 - 2,740,501 shares 2002 - 2,736,408 shares				(62.5	)			(62.5	)
Accumulated other comprehensive income (loss)				(2.5	)			6.1
Retained earnings				404.4				316.4
				851.3				772.2
Total Liabilities and Shareholders’ Equity			$	2,950.5			$	2,945.5

See accompanying notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Alaska Air Group, Inc.

Three Months Ended June 30			Restated				Restated
(In Millions Except Per Share Amounts)			2001				2002
Operating Revenues
Passenger			$	533.6			$	525.4
Freight and mail				24.0				21.2
Other - net				25.2				29.1
Total Operating Revenues				582.8				575.7
Operating Expenses
Wages and benefits				194.0				211.8
Contracted services				21.9				22.4
Aircraft fuel				89.8				75.2
Aircraft maintenance				47.3				42.3
Aircraft rent				46.3				46.8
Food and beverage service				15.4				17.0
Commissions				16.3				11.5
Other selling expenses				32.8				33.5
Depreciation and amortization				32.2				34.0
Loss on sale of assets				0.4				0.1
Landing fees and other rentals				30.4				36.0
Other				47.0				50.1
Total Operating Expenses				573.8				580.7
Operating Income (Loss)				9.0				(5.0	)
Nonoperating Income (Expense)
Interest income				4.8				5.7
Interest expense				(10.6	)			(11.6	)
Interest capitalized				2.9				0.6
U.S. government compensation				—				0.1
Other - net				0.4				6.4
				(2.5	)			1.2
Income (loss) before income tax				6.5				(3.8	)
Income tax expense (benefit)				3.0				(0.9	)
Net Income (Loss)			$	3.5			$	(2.9	)
Basic Earnings (Loss) Per Share			$	0.13			$	(0.11	)
Diluted Earnings (Loss) Per Share			$	0.13			$	(0.11	)
Shares used for computation:
	Basic			26.481				26.548
	Diluted			26.526				26.548

See accompanying notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Alaska Air Group, Inc.

Six Months Ended June 30			Restated				Restated
(In Millions Except Per Share Amounts)			2001				2002
Operating Revenues
Passenger			$	1,011.1			$	981.3
Freight and mail				44.6				38.3
Other - net				43.5				56.2
Total Operating Revenues				1,099.2				1,075.8
Operating Expenses
Wages and benefits				385.5				414.7
Contracted services				43.7				47.1
Aircraft fuel				179.5				139.9
Aircraft maintenance				100.0				85.5
Aircraft rent				92.5				93.3
Food and beverage service				29.4				31.3
Commissions				31.7				23.9
Other selling expenses				64.6				63.7
Depreciation and amortization				62.6				66.3
Loss (gain) on sale of assets				1.2				(0.5	)
Landing fees and other rentals				58.4				65.8
Other				95.1				99.4
Total Operating Expenses				1,144.2				1,130.4
Operating Loss				(45.0	)			(54.6	)
Nonoperating Income (Expense)
Interest income				12.0				10.1
Interest expense				(22.7	)			(23.5	)
Interest capitalized				7.1				0.8
U.S. government compensation				—				0.1
Other - net				(0.5	)			10.9
				(4.1	)			(1.6	)
Loss before income tax and accounting change				(49.1	)			(56.2	)
Income tax benefit				(16.9	)			(19.6	)
Loss before accounting change				(32.2	)			(36.6	)
Cumulative effect of accounting change				—				(51.4	)
Net Loss			$	(32.2	)		$	(88.0	)
Basic and Diluted Loss Per Share:
Loss before accounting change			$	(1.22	)		$	(1.38	)
Cumulative effect of accounting change				—				(1.94	)
Net Loss Per Share			$	(1.22	)		$	(3.32	)
Shares used for computation:
	Basic			26.476				26.540
	Diluted			26.476				26.540

See accompanying notes to consolidated financial statements.

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RESTATED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (unaudited)
Alaska Air Group, Inc.

																			Accumulated
			Common								Capital in				Treasury				Other
			Shares				Common				Excess of				Stock,				Comprehensive				Retained
(In Millions)			Outstanding				Stock				Par Value				at Cost				Income (Loss)				Earnings				Total
Balances at December 31, 2001:
As previously reported				26.528			$	29.3			$	482.5			$	(62.6	)		$	(3.9	)		$	375.0			$	820.3
Prior period adjustment (see Note 2)												0.1				0.1				1.4				29.4				31.0
As restated				26.528			$	29.3			$	482.6			$	(62.5	)		$	(2.5	)		$	404.4			$	851.3
Net loss for the six months ended June 30, 2002																								(88.0	)			(88.0	)
Other comprehensive income (loss):
Related to marketable securities:
	Change in fair value																			(1.0	)
	Reclassification to earnings																			0.7
	Income tax effect																			0.1
																				(0.2	)							(0.2	)
Related to fuel hedges:
	Change in fair value																			22.4
	Reclassification to earnings																			(8.5	)
	Income tax effect																			(5.1	)
																				8.8								8.8
Total comprehensive loss																												(79.4	)
Treasury stock sales				0.005																								0.0
Stock issued under stock plans				0.016								0.3																0.3
Balances at June 30, 2002				26.549			$	29.3			$	482.9			$	(62.5	)		$	6.1			$	316.4			$	772.2

See accompanying notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Alaska Air Group, Inc.

								Restated				Restated
Six Months Ended June 30 (In Millions)								2001				2002
Cash flows from operating activities:
Net loss								$	(32.2	)		$	(88.0	)
Adjustments to reconcile net loss to net cash provided by operating activities:
	Cumulative effect of accounting change								—				51.4
	Depreciation and amortization								62.6				66.3
	Amortization of airframe and engine overhauls								36.9				31.0
	Changes in derivative fair values								2.9				(8.5	)
	Loss (gain) on disposition of assets								1.2				(0.5	)
	Decrease in deferred income taxes								(2.4	)			(12.5	)
	Increase in accounts receivable - net								(33.6	)			(16.3	)
	Decrease (increase) in other current assets								1.5				(22.0	)
	Increase in air traffic liability								87.5				67.6
	Increase (decrease) in other current liabilities								11.6				(4.4	)
	(Decrease) increase in deferred revenue and other-net								(9.8	)			17.5
Net cash provided by operating activities									126.2				81.6
Cash flows from investing activities:
Proceeds from disposition of assets									0.2				2.3
Purchases of marketable securities									(243.8	)			(358.5	)
Sales and maturities of marketable securities									265.0				93.0
Property and equipment additions:
	Aircraft purchase deposits								(27.0	)			(15.8	)
	Capitalized overhauls								(29.1	)			(31.7	)
	Aircraft								(220.9	)			(1.0	)
	Other flight equipment								(36.9	)			(9.9	)
	Other property								(20.4	)			(19.9	)
Aircraft deposits returned									32.4				39.1
Restricted deposits and other									(0.5	)			(6.6	)
Net cash used in investing activities									(281.0	)			(309.0	)
Cash flows from financing activities:
Proceeds from issuance of long-term debt									136.5				25.5
Long-term debt and capital lease payments									(47.7	)			(18.8	)
Proceeds from issuance of common stock									0.6				0.3
Net cash provided by financing activities									89.4				7.0
Net change in cash and cash equivalents									(65.4	)			(220.4	)
Cash and cash equivalents at beginning of period									101.4				490.8
Cash and cash equivalents at end of period								$	36.0			$	270.4
Supplemental disclosure of cash paid (refunded) during the period for:
	Interest (net of amount capitalized)							$	22.7			$	23.6
	Income taxes								(0.1	)			(20.8	)
Noncash investing and financing activities								None				None

See accompanying notes to consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Alaska Air Group, Inc.

Note 1. Basis of Presentation and Significant Accounting Policies

     These consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) and they require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities, as well as the reported amounts of revenues and expenses. Significant estimates include assumptions used to record liabilities, expenses and revenue associated with the Company’s Mileage Plan, estimated useful lives of property and equipment and the amounts of certain accrued liabilities. Actual results may differ from these estimates.

     As further discussed in Note 2, in 2002, the Company restated its consolidated financial statements for the year ended December 31, 2001, and for all quarterly periods during the year ended December 31, 2001. The Company also restated its consolidated financial statements for the three and six months ended June 30, 2002.

     Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets”. Under this Statement the Company’s goodwill will no longer be amortized, but instead will be tested for impairment on a minimum of an annual basis. The impact of discontinuing amortization of existing goodwill has resulted in an increase of net income of $1.0 million for the six months ended June 30, 2002. During the second quarter of 2002, the Company completed the first step of its impairment test related to its $51.4 million of goodwill. The test was performed using Alaska and Horizon as separate reporting units. In the fourth quarter of 2002, the Company completed the second step of its impairment test and determined that all of the Company’s goodwill was impaired. As a result, the Company recorded a one-time, non-cash charge, effective January 1, 2002, of $51.4 million ($12.5 million for Alaska and $38.9 million for Horizon) to write off all of its goodwill. This charge is reflected as a cumulative effect of accounting change in the Consolidated Statement of Operations for the six months ended June 30, 2002.

     In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, “Accounting for Asset Retirement Obligations” (effective for the Company on January 1, 2003). This Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company expects that adoption of SFAS No. 143 will not have a material impact on the Company’s consolidated financial statements.

     In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. This Statement supersedes SFAS No. 121, “Accounting for the Impairment of Long-

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Lived Assets and for Long-Lived Assets to Be Disposed Of” and APB Opinion No. 30, “Reporting the Results of Operations – Reporting the Effects of Disposal of a Segment of Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions”. Adoption of this Statement, in the fiscal year beginning January 1, 2002, did not have a material impact on the Company’s consolidated financial statements.

     In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections”. This Statement requires that only certain debt extinguishment transactions be classified as an extraordinary item. Additionally, under this Statement, capital leases that are modified so that the resulting agreement is an operating lease, shall be accounted for under the sale-leaseback provisions of SFAS No. 98. The Statement also includes minor modifications to existing GAAP literature. Provisions of the Statement are effective for the Company commencing in May 2002 through January 2003.

     In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)”. The Statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. The Statement is effective for the Company on January 1, 2003.

     We do not expect a significant impact on our financial position or results of operations from adoption of SFAS No. 145 or 146.

Note 2. Restatement of Quarterly Financial Statements

Leased Aircraft Return Costs

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remaining lease term, if shorter than the life of the overhaul. Additionally, under the new method, since the amount of cash payments by themselves cannot be reasonably predicted at the inception of the lease, the Company will accrue cash payments expected to be made to lessors over the last few years of the lease when probable and estimable.

Internally Developed Software

Aircraft Purchase Commitments

In the Company’s filing of its Form 10-Q for the quarterly period ended June 30, 2002, the Company previously restated its financial statements for the three and six months ended June 30, 2001 and as of December 31, 2001. Subsequently, the Company identified other corrections and certain reclassifications, which have been restated in this filing. Amounts shown “as previously reported” for June 30, 2001 and December 31, 2001 in the accompanying tables reflect the Company’s original reporting of its financial statements as of and for the respective periods.

The effects of the restatement for the three months and six months ended June 30, 2001 are as follows:

		Three Months Ended								Six Months Ended
		June 30, 2001								June 30, 2001
		As Previously								As Previously
		Reported				Restated				Reported				Restated
		(in millions, except per share amounts)
Total Operating Revenues		$	579.3			$	582.8			$	1,095.3			$	1,099.2
Total Operating Expenses		$	568.0			$	573.8			$	1,133.5			$	1,144.2
Operating Income (Loss)		$	11.3			$	9.0			$	(38.2	)		$	(45.0	)
Net Income (Loss)		$	4.7			$	3.5			$	(28.4	)		$	(32.2	)
Basic and Diluted Earnings (Loss) per Share		$	0.18			$	0.13			$	(1.07	)		$	(1.22	)

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The effects of the restatement for the three months and six months ended June 30, 2002 are as follows:

				Three Months Ended												Six Months Ended
				June 30, 2002												June 30, 2002
				As Previously												As Previously
				Reported				Restated								Reported				Restated
				(in millions, except per share amounts)
Total Operating Revenues				$	574.1			$	575.7							$	1,071.0			$	1,075.8
Total Operating Expenses				$	580.9			$	580.7							$	1,128.9			$	1,130.4
Operating Loss				$	(6.8	)		$	(5.0	)						$	(57.9	)		$	(54.6	)
Net Loss Before Accounting Change				$	(4.5	)		$	(2.9	)						$	(38.6	)		$	(36.6	)
Net Loss				$	(4.5	)		$	(2.9	)						$	(38.6	)		$	(88.0	)
Basic and Diluted Loss Per Share Before Accounting Change				$	(0.17	)		$	(0.11	)						$	(1.45	)		$	(1.38	)
Basic and Diluted Loss Per Share				$	(0.17	)		$	(0.11	)						$	(1.45	)		$	(3.32	)

The effects of the restatement on selected balance sheet items are as follows:

		December 31, 2001								June 30, 2002
		As Previously								As Previously
		Reported				Restated				Reported				Restated
						(in millions)
Current Assets		$	900.4			$	919.0			$	1,013.0			$	1,010.6
Property and Equipment-Net		$	1,825.0			$	1,821.5			$	1,754.3			$	1,762.2
Current Liabilities		$	756.2			$	752.0			$	817.1			$	813.1
Long-Term Debt		$	863.3			$	852.2			$	852.1			$	852.1
Shareholders’ Equity		$	820.3			$	851.3			$	820.5			$	772.2	*

*Includes $51.4 million cumulative effect of the accounting change in connection with the impairment of goodwill upon the adoption of SFAS No. 142.

Note 3. Frequent Flyer Program

		Restated December 31, 2001				Restated June 30, 2002
		(In millions)
Current Liabilities:
Other accrued liabilities		$	65.7			$	76.8
Other Liabilities and Credits:
Deferred revenue			150.7				166.5
Other liabilities			31.9				32.6
Total		$	248.3			$	275.9

Note 4. Other Assets

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Note 5. Earnings per Share

		Three Months Ended June 30								Six Months Ended June 30
		Restated 2001				Restated 2002				Restated 2001				Restated 2002
Basic
Income (loss) before accounting change		$	3.5			$	(2.9	)		$	(32.2	)		$	(36.6	)
Average shares outstanding			26.481				26.548				26.476				26.540
Earnings (loss) per share before accounting change		$	0.13			$	(0.11	)		$	(1.22	)		$	(1.38	)
Diluted
Income (loss) before accounting change		$	3.5			$	(2.9	)		$	(32.2	)		$	(36.6	)
Average shares outstanding			26.481				26.548				26.476				26.540
Assumed exercise of stock options			.045				—				—				—
Diluted EPS shares			26.526				26.548				26.476				26.540
Earnings (loss) per share before accounting change		$	0.13			$	(0.11	)		$	(1.22	)		$	(1.38	)

Note 6. Operating Segment Information

					Three Months Ended June 30								Six Months Ended June 30
					Restated 2001				Restated 2002				Restated 2001				Restated 2002
Operating revenues:
		Alaska			$	474.7			$	478.7			$	893.3			$	890.9
		Horizon				113.9				103.1				215.9				196.3
		Elimination of intercompany revenues				(5.8	)			(6.1	)			(10.0	)			(11.4	)
			Consolidated		$	582.8			$	575.7			$	1,099.2			$	1,075.8
Income (loss) before income tax and accounting change:
	Alaska				$	8.1			$	(0.1	)		$	(30.6	)		$	(41.8	)
	Horizon					(0.8	)			(2.8	)			(17.1	)			(13.0	)
	Other					(0.8	)			(0.9	)			(1.4	)			(1.4	)
	Consolidated				$	6.5			$	(3.8	)		$	(49.1	)		$	(56.2	)

							Restated				Restated
							June 30,				June 30,
							2001				2002
Total assets at end of period:
	Alaska						$	2,471.3			$	2,801.9
	Horizon							260.0				220.3
	Other							875.7				795.4
	Elimination of intercompany accounts							(926.9	)			(872.1	)
	Consolidated						$	2,680.1			$	2,945.5

Note 7. U.S. Government Compensation

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Alaska Airlines Financial and Statistical Data

		Three Months Ended June 30												Six Months Ended June 30
		Restated				Restated				%				Restated				Restated				%
Financial Data (in millions):		2001				2002				Change				2001				2002				Change
Operating Revenues:
Passenger		$	434.1			$	433.6				-0.1	%		$	816.9			$	807.6				-1.1	%
Freight and mail			21.4				20.0				-6.5	%			39.7				35.9				-9.6	%
Other - net			19.2				25.1				30.7	%			36.7				47.4				29.2	%
Total Operating Revenues			474.7				478.7				0.8	%			893.3				890.9				-0.3	%
Operating Expenses:
Wages and benefits			157.5				174.5				10.8	%			312.2				340.2				9.0	%
Contracted services			19.2				19.4				1.0	%			38.0				41.2				8.4	%
Aircraft fuel			74.1				64.2				-13.4	%			148.1				119.4				-19.4	%
Aircraft maintenance			32.6				36.1				10.7	%			67.1				71.7				6.9	%
Aircraft rent			35.0				31.8				-9.1	%			70.3				63.6				-9.5	%
Food and beverage service			14.7				16.2				10.2	%			27.9				30.1				7.9	%
Commissions			18.2				14.2				-22.0	%			34.1				28.4				-16.7	%
Other selling expenses			26.6				27.8				4.5	%			52.6				52.7				0.2	%
Depreciation and amortization			25.2				28.5				13.1	%			48.8				56.7				16.2	%
Loss on sale of assets			0.3				0.2				NM				1.2				0.2				NM
Landing fees and other rentals			23.4				28.5				21.8	%			44.8				52.1				16.3	%
Other			37.7				37.5				-0.5	%			75.7				73.8				-2.5	%
Total Operating Expenses			464.5				478.9				3.1	%			920.8				930.1				1.0	%
Operating Income (Loss)			10.2				(0.2	)			NM				(27.5	)			(39.2	)			42.5	%
Interest income			6.0				6.1								14.5				11.1
Interest expense			(10.6	)			(11.6	)							(22.7	)			(23.5	)
Interest capitalized			1.9				0.4								5.0				0.5
U.S. government compensation			0.0				0.1								0.0				0.1
Other - net			0.6				5.1								0.1				9.2
			(2.1	)			0.1								(3.1	)			(2.6	)
Income (Loss) Before Income Tax and Accounting Change		$	8.1			$	(0.1	)			NM			$	(30.6	)		$	(41.8	)			36.6	%
Operating Statistics:
Revenue passengers (000)			3,698				3,616				-2.2	%			6,896				6,809				-1.3	%
RPMs (000,000)			3,290				3,372				2.5	%			6,185				6,349				2.7	%
ASMs (000,000)			4,683				4,929				5.2	%			9,111				9,396				3.1	%
Passenger load factor			70.3	%			68.4	%			(1.9	)pts			67.9	%			67.6	%			(0.3	)pts
Breakeven load factor			69.8	%			69.5	%			(0.3	)pts			71.9	%			72.5	%			0.6	pts
Yield per passenger mile			13.19	¢			12.86	¢			-2.5	%			13.21	¢			12.72	¢			-3.7	%
Operating revenue per ASM			10.14	¢			9.71	¢			-4.2	%			9.80	¢			9.48	¢			-3.3	%
Operating expenses per ASM			9.92	¢			9.72	¢			-2.0	%			10.11	¢			9.90	¢			-2.1	%
Expense per ASM excluding fuel			8.34	¢			8.41	¢			0.9	%			8.48	¢			8.63	¢			1.7	%
Fuel cost per gallon			92.3	¢			78.0	¢			-15.5	%			94.6	¢			75.9	¢			-19.8	%
Fuel gallons (000,000)			80.3				82.3				2.5	%			156.5				157.3				0.5	%
Average number of employees			10,201				10,222				0.2	%			10,202				10,019				-1.8	%
Aircraft utilization (blk hrs/day)			11.1				10.8				-2.5	%			11.0				10.4				-5.5	%
Operating fleet at period-end			100				102				2.0	%			100				102				2.0	%

NM = Not Meaningful

Note: Certain reclassifications have been made to the June 30, 2001 restated statements of operations to conform to the June 30, 2002 presentation.

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Horizon Air Financial and Statistical Data

		Three Months Ended June 30												Six Months Ended June 30
		Restated				Restated				%				Restated				Restated				%
Financial Data (in millions):		2001				2002				Change				2001				2002				Change
Operating Revenues:
Passenger		$	104.4			$	96.4				-7.7	%		$	202.6			$	182.7				-9.8	%
Freight and mail			2.6				1.2				-53.8	%			4.9				2.4				-51.0	%
Other - net			6.9				5.5				-20.3	%			8.4				11.2				33.3	%
Total Operating Revenues			113.9				103.1				-9.5	%			215.9				196.3				-9.1	%
Operating Expenses:
Wages and benefits			36.6				37.2				1.6	%			73.3				74.5				1.6	%
Contracted services			3.4				4.2				23.5	%			7.1				8.1				14.1	%
Aircraft fuel			15.7				11.0				-29.9	%			31.4				20.5				-34.7	%
Aircraft maintenance			14.7				6.2				-57.8	%			32.9				13.8				-58.1	%
Aircraft rent			11.3				14.9				31.9	%			22.3				29.7				33.2	%
Food and beverage service			0.7				0.8				14.3	%			1.5				1.2				-20.0	%
Commissions			3.1				2.1				-32.3	%			6.0				4.4				-26.7	%
Other selling expenses			6.2				5.7				-8.1	%			12.0				11.0				-8.3	%
Depreciation and amortization			6.7				5.1				-23.9	%			13.1				9.0				-31.3	%
Loss (gain) on sale of assets			0.1				(0.1	)			NM				0.0				(0.7	)			NM
Landing fees and other rentals			7.3				7.8				6.8	%			14.2				14.2				0.0	%
Other			8.7				12.3				41.4	%			18.6				25.0				34.4	%
Total Operating Expenses			114.5				107.2				-6.4	%			232.4				210.7				-9.3	%
Operating Loss			(0.6	)			(4.1	)			NM				(16.5	)			(14.4	)			-12.7	%
Interest income			0.0				0.4								0.0				0.4
Interest expense			(1.0	)			(0.5	)							(2.1	)			(1.0	)
Interest capitalized			1.0				0.1								2.1				0.3
Other - net			(0.2	)			1.3								(0.6	)			1.7
			(0.2	)			1.3								(0.6	)			1.4
Loss Before Income Tax and Accounting Change		$	(0.8	)		$	(2.8	)			NM			$	(17.1	)		$	(13.0	)			-24.0	%
Operating Statistics:
Revenue passengers (000)			1,250				1,192				-4.6	%			2,427				2,287				-5.8	%
RPMs (000,000)			358				374				4.6	%			693				703				1.4	%
ASMs (000,000)			575				607				5.5	%			1,119				1,138				1.7	%
Passenger load factor			62.2	%			61.7	%			(0.5	)pts			62.0	%			61.8	%			(0.2	)pts
Breakeven load factor			62.7	%			63.9	%			1.2	pts			67.5	%			67.0	%			(0.5	)pts
Yield per passenger mile			29.19	¢			25.76	¢			-11.7	%			29.24	¢			25.99	¢			-11.1	%
Operating revenue per ASM			19.80	¢			16.99	¢			-14.2	%			19.29	¢			17.25	¢			-10.6	%
Operating expenses per ASM			19.90	¢			17.66	¢			-11.2	%			20.77	¢			18.51	¢			-10.9	%
Expense per ASM excluding fuel			17.17	¢			15.85	¢			-7.7	%			17.96	¢			16.71	¢			-7.0	%
Fuel cost per gallon			98.4	¢			80.8	¢			-17.9	%			99.2	¢			79.1	¢			-20.3	%
Fuel gallons (000,000)			16.0				13.6				-15.0	%			31.6				25.9				-18.0	%
Average number of employees			3,786				3,417				-9.7	%			3,855				3,435				-10.9	%
Aircraft utilization (blk hrs/day)			8.1				7.5				-6.6	%			8.1				7.3				-9.9	%
Operating fleet at period-end			63				62				-1.6	%			63				62				-1.6	%

         NM = Not Meaningful

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

As discussed in Note 2 to the consolidated financial statements, in 2002 the Company restated its consolidated financial statements for the year ended December 31, 2001 and the interim periods within that year. The Company also restated its consolidated financial statements for the three and six months ended June 30, 2002. The accompanying management’s discussion and analysis gives effect to the restatement.

Results of Operations

Alaska Airlines

Freight and mail revenues decreased 6.5% primarily due to lower freight volumes attributable to increased security restrictions. Other-net revenues increased 30.7%, due to increased revenue related to the sale of miles in Alaska’s frequent flyer program, new security fee reimbursement revenue and higher essential air service subsidy rates.

Total operating expenses increased 3.1% compared to 2001, while our cost per ASM decreased by 2.0%. Our cost per ASM excluding fuel increased by .9%. Explanations of significant year-over-year changes in the components of operating expenses are as follows:

•

Wages and benefits increased 10.8% due to an 10.6% increase in average wages and benefits per

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			employee combined with a 0.2% increase in the number of employees. Average wages and benefits per employee increased due to pilot pay increases (11% effective in June 2001 plus 5% effective in May 2002), scale and step increases for union employees, annual merit raises for management employees, and higher pension and health insurance costs for all employees.
	•		Fuel expense decreased 13.4% due to a 15.5% decrease in the cost per gallon of fuel combined with a 2.5% increase in gallons consumed. The lower fuel prices saved $11.8 million.
	•		Maintenance expense increased 10.7%, largely due to increased airframe overhaul expenses. A total of 10 “C” checks (annual airframe inspections) were performed at outside contractors in 2002 compared to three in 2001.
	•		Aircraft rent decreased 9.1%, due to lower lease rates on several aircraft and reduced spare parts rental costs.
	•		Commission expense decreased 22.0%, much more than the 0.1% decrease in passenger revenue, due to a commission cap we instituted in November 2001 and the continuing shift to direct sales channels. In 2002, 57.8% of the Company’s ticket sales were made through travel agents, versus 61.4% in 2001. In 2002, 20.4% of total ticket sales were made through Alaska’s Internet web site versus 15.9% in 2001. In June 2002, the Company changed its travel agent commissions program to eliminate base commissions and move to a 100% incentive-based program. This change had no material impact on commissions expense in the second quarter of 2002, but is expected to reduce commission expense by approximately $17 million for the remainder of 2002, as compared to 2001.
	•		Depreciation and amortization increased 13.1%, primarily because we owned an average of four more aircraft in 2002.
	•		Landing fees and other rentals increased 21.8%, primarily due to higher rates. The higher rates are attributable to airport construction projects and the effects of increased security and other costs resulting from the events of September 11.
	•		Other expense decreased .5% due to higher insurance costs, offset by lower costs for legal, personnel, professional services and uninsured losses.

Horizon Air

Freight and mail revenues decreased 53.8%. In June 2001, Horizon ceased carrying general freight in order to focus on carrying higher-yield small packages. This change, along with the impact of the September 11 terrorist attacks, led to the decline in revenues. Other-net revenues decreased $1.4 million, primarily due to lower levels of manufacturer support received as compensation for delays in delivery of new aircraft.

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Operating expenses decreased by $7.3 million, or 6.4%, primarily due to a decrease in maintenance and fuel expenses. Horizon’s transition to its new fleet, as well as decreases in fuel prices, contributed to the decrease in these expenses. Our cost per ASM decreased by 11.2%, while our cost per ASM excluding fuel decreased by 7.7%. Explanations of significant year-over-year changes in the components of operating expenses are as follows:

	•		Wages and benefits increased 1.6% due to a 12.6% increase in average wages and benefits per employee, offset by a 9.7% reduction in the number of employees. Employee reductions were in line with a 7.9% reduction in block hours. Average wages and benefits per employee increased due to a pilot pay increase that was effective in September 2001, scale and step increases for union employees, annual merit raises for management employees, and higher health insurance costs for all employees.
	•		Contracted services increased 23.5% due to increased airport security screening costs at all airports and ground handling costs at new airports served.
	•		Fuel expense decreased 29.9% due to a 17.9% decrease in the cost per gallon of fuel and a 15.0% decrease in gallons consumed. The fuel consumption rate decreased 7.3% due to the use of more fuel-efficient Dash 8-400 and CRJ 700 aircraft. The lower fuel prices saved $2.4 million.
	•		Aircraft maintenance expense decreased 57.8% due to a 7.9% decrease in aircraft block hours, the greater use of new aircraft in 2002, and higher expenses in 2001 related to the phasing out of the Fokker F-28 jet aircraft.
	•		Aircraft rent increased 31.9% due to higher rental rates incurred on new Dash 8-400 and CRJ 700 aircraft commencing in mid-2001 through mid-2002.
	•		Depreciation and amortization expense decreased 23.9%, primarily due to the phasing out of the Fokker F-28 jet aircraft in 2001.
	•		Other expense increased 41.4%, primarily due to higher expenditures for insurance and property taxes, partly offset by lower legal, passenger remuneration and utility costs.

Consolidated Nonoperating Income (Expense)

Six Months 2002 Compared with Six Months 2001

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Alaska Airlines

Explanations of significant year-over-year changes in the components of operating expenses are as follows:

	•		Wages and benefits increased 9.0% due to an 11.0% increase in average wages and benefits per employee combined with a 1.8% decrease in the number of employees. Average wages and benefits per employee increased due to pilot pay increases (11% effective in June 2001 plus 5% effective in May 2002), scale and step increases for union employees, annual merit raises for management employees, and higher pension and health insurance costs for all employees.
	•		Fuel expense decreased 19.4% due to a 19.8% decrease in the cost per gallon of fuel combined with a 0.5% increase in gallons consumed. The lower fuel prices saved $29.5 million.
	•		Commission expense decreased 16.7%, much more than the 1.1% decrease in passenger revenue, due to a commission cap we instituted in November 2001 and the continuing shift to direct sales channels. In 2002, 58.2% of Air Group ticket sales were made through travel agents, versus 61.5% in 2001. In 2002, 19.6% of total ticket sales were made through Alaska’s Internet web site versus 15.4% in 2001. In June 2002, the Company changed its travel agent commissions program to eliminate base commissions and move to a 100% incentive-based program. This change had no material impact on commissions expense in the second quarter of 2002, but is expected to reduce commission expense by approximately $17 million for the remainder of 2002, as compared to 2001.
	•		Depreciation and amortization increased 16.2%, primarily because we owned an average of five more aircraft in 2002.
	•		Landing fees and other rentals increased 16.3%, primarily due to higher rates. The higher rates are attributable to airport construction projects and the effects of increased security and other costs resulting from the events of September 11.

Horizon Air

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revenues increased $2.8 million, primarily due to higher levels of manufacturer support received as compensation for delays in delivery of new aircraft during the first quarter of 2002. Explanations of significant year-over-year changes in the components of operating expenses are as follows:

	•		Fuel expense decreased 34.7% due to a 20.3% decrease in the cost per gallon of fuel and an 18.0% decrease in gallons consumed. The fuel consumption rate decreased 7.8% due to the use of more fuel-efficient Dash 8-400 and CRJ 700 aircraft. The lower fuel prices saved $5.2 million.
	•		Aircraft maintenance expense decreased 58.1% due to an 11.0% decrease in aircraft block hours, the greater use of new aircraft in 2002, and higher expenses in 2001 related to the phasing out of the Fokker F-28 jet aircraft.
	•		Aircraft rent increased 33.2% due to higher rental rates incurred on new Dash 8-400 and CRJ 700 aircraft commencing in mid-2001 through mid-2002.
	•		Other expense increased 34.4%, primarily due to higher expenditures for insurance, property taxes and legal fees, partly offset by lower passenger remuneration, supplies and communication costs.

Consolidated Nonoperating Income (Expense)

Consolidated Income Tax Benefit

Critical Accounting Policies

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Liquidity and Capital Resources

		December 31, 2001 Restated				June 30, 2002 Restated				Change
		(In millions, except debt-to-capital and per-share amounts)
Cash and marketable securities		$	660.6			$	705.3			$	44.7
Working capital			167.0				197.5				30.5
Long-term debt and capital lease obligations			852.2				852.1				(0.1	)
Shareholders’ equity			851.3				772.2				(79.1	)
Book value per common share		$	32.09			$	29.09			$	(3.0	)
Debt-to-capital			50%:50	%			52%:48	%		NA
Debt-to-capital assuming aircraft operating leases are capitalized at seven times annualized rent			72%:28	%			74%:26	%		NA

The Company’s cash and marketable securities portfolio increased $44.7 million during the first six months of 2002. Operating activities provided $81.6 million of cash during this period. Additional cash was provided by the issuance of $25.5 million of new debt. Cash was used for $39.2 million of capital expenditures, including flight equipment deposits, the purchase of spare parts, and airframe and engine overhauls, and for $18.8 million of debt repayment.

Shareholders’ equity decreased $79.1 million primarily due to the net loss of $88.0 million.

Financing Activities - During the first six months of 2002, Horizon added three Dash 8-400 and five CRJ 700 aircraft to its operating fleet. The aircraft were financed with a combination of U.S. leveraged leases and single investor leases with terms of approximately 16.5 years. The aggregate future minimum lease payments under these eight new leases will be $195.7 million. Because these aircraft were financed at delivery, they are not included in the capital expenditures amount stated above.

Commitments - At June 30, 2002, the Company had firm orders for 26 aircraft requiring aggregate payments of approximately $721 million, as set forth below. In addition, Alaska has options to acquire 24 more B737s, and Horizon has options to acquire 15 Dash 8-400s and 25 CRJ 700s. Alaska expects to finance the new planes with leases, long-term debt or internally generated cash. Horizon expects to finance its new aircraft with operating leases.

										Delivery Period - Firm Orders
Aircraft		2002				2003				2004				2005				Total
Boeing 737-700			—				3				—				—				3
Boeing 737-900			1				3				3				—				7
Bombardier CRJ 700			2				2				6				6				16
Total			3				8				9				6				26
Payments (Millions)		$	184			$	235			$	195			$	107			$	721

The Company has a purchase commitment that may trigger a liability under certain events of default. The Company previously recognized a portion of this commitment, which was funded by a third party as a liability, and related aircraft purchase deposits, on its balance sheet. Since the executory contract for the purchase commitment is not an obligation of the Company until the aircraft is delivered, this commitment is now disclosed as a purchase commitment and not included in long-term debt or deposits for future flight equipment.

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See Note 2 to the consolidated financial statements.

New Accounting Standards - Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets”. Under this Statement the Company’s goodwill will no longer be amortized, but instead will be tested for impairment on a minimum of an annual basis. The impact of discontinuing amortization of existing goodwill has resulted in an increase of net income of $1.0 million for the six months ended June 30, 2002. During the second quarter of 2002, the Company completed the first step of its impairment test related to its $51.4 million of goodwill. The test was performed using Alaska and Horizon as separate reporting units. In the fourth quarter of 2002, the Company completed the second step of its impairment test and determined that all of the Company’s goodwill was impaired. As a result, the Company recorded a one-time, non-cash charge, effective January 1, 2002, of $51.4 million ($12.5 million Alaska and $38.9 million Horizon) to write-off all of its goodwill. This charge is reflected as a cumulative effect of accounting change in the Consolidated Statement of Operations for the six months ended June 30, 2002.

In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 143, “Accounting for Asset Retirement Obligations” (effective for the Company on January 1, 2003). This Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company expects that adoption of SFAS No. 143 will not have a material impact on the Company’s consolidated financial statements.

In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. This Statement supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of” and APB Opinion No. 30, “Reporting the Results of Operations – Reporting the Effects of Disposal of a Segment of Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions”. Adoption of this Statement, in the fiscal year beginning January 1, 2002, did not have a material impact on the Company’s consolidated financial statements.

In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections”. This Statement requires that only certain debt extinguishment transactions be classified as an extraordinary item. Additionally, under this Statement, capital leases that are modified so that the resulting agreement is an operating lease, shall be accounted for under the sale-leaseback provisions of SFAS No. 98. The Statement also includes minor modifications to existing GAAP literature. Provisions of the Statement are effective for the Company commencing in May 2002 through January 2003.

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)”. The Statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. The Statement is effective for the Company on January 1, 2003.

We do not expect a significant impact on our financial position or results of operations from adoption of SFAS No. 145 or 146.

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ITEM 3. Quantitative and Qualitative Disclosure About Market Risk

PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings

Management believes the ultimate disposition of this matter is not likely to materially affect the Company’s financial position or results of operations. This forward-looking statement is based on management’s current understanding of the relevant law and facts; it is subject to various contingencies, including the potential costs and risks associated with litigation and the actions of judges and juries.

The Company is also a party to other ordinary routine litigation incidental to its business and with respect to which no material liability is expected.

ITEM 4. Submission of Matters to a Vote of Security Holders

A company-sponsored proposal to amend the 1999 Long-Term Incentive Equity Plan was approved with 14,076,815 votes for, 4,498,989 votes against, and 145,969 votes abstaining.

A company-sponsored proposal to establish a new employee stock purchase plan was approved with 14,050,177 votes for, 4,607,801 votes against, and 63,796 votes abstaining.

Four directors were elected with the following results:

					Votes Against					Broker
Director		Votes For				or Withheld				Non-Votes
P. J. Campbell			20,057,341				2,065,052				0
M. R. Hamilton			19,861,283				2,261,110				0
B. I. Mallott			19,843,647				2,278,746				0
R. A. Wein			19,863,064				2,259,329				0

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ITEM 5. Other Information
Employees

Horizon has begun negotiations with the Association of Flight Attendants regarding the flight attendant employee group, whose contract is amendable January 28, 2003. During the third quarter of 2002, negotiations are expected to begin with AMFA (that recently replaced the Transport Workers Union) regarding the mechanics and related classifications employee group, whose contract is amendable December 15, 2002.

ITEM 6. Exhibits and Reports on Form 8-K

Exhibit 3.2 Bylaws of Alaska Air Group, Inc., (incorporated by reference to Exhibit 3(ii) to Form 10-Q filed with the Commission on May 10, 2000.)

Exhibit 99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. section 1350
Exhibit 99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. section 1350

On April 3, 2002, April 12, 2002, May 7, 2002 and June 6, 2002, reports on Form 8-K were filed discussing estimated financial results under regulation FD disclosure. On May 28, 2002, a report on Form 8-K was filed disclosing a change in the registrant’s certifying accountant.

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Signatures

ALASKA AIR GROUP, INC. Registrant

Date: March 10, 2003

/s/ Bradley D. Tilden Bradley D. Tilden Executive Vice President/Finance and Chief Financial Officer

/s/ Terri K. Maupin Terri K. Maupin Staff Vice President/Finance and Controller

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CERTIFICATIONS

I, John F. Kelly, certify that:

1.		I have reviewed this quarterly report on Form 10-Q/A of Alaska Air Group, Inc. for the period ending June 30, 2002;
2.		Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.		Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

March 10, 2003		By		/s/ John F. Kelly
				John F. Kelly Chief Executive Officer

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I, Bradley D. Tilden, certify that:

1.		I have reviewed this quarterly report on Form 10-Q/A of Alaska Air Group, Inc. for the period ending June 30, 2002;
2.		Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.		Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

March 10, 2003		By		/s/ Bradley D. Tilden
				Bradley D. Tilden Chief Financial Officer

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