September 17, 2004
(Date of earliest event reported)


(Exact Name of Registrant as Specified in Its Charter)

(State or Other Jurisdiction of Incorporation)

1-8957   91-1292054

(Commission File Number)   (IRS Employer Identification No.)
19300 Pacific Highway South, Seattle, Washington   98188

(Address of Principal Executive Offices)   (Zip Code)

(206) 392-5040

(Registrant’s Telephone Number, Including Area Code)

(Former Name or Former Address, if Changed Since Last Report)

     Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

     o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

     o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

     o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

     o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))




ITEM 7.01. Regulation FD Disclosure

ITEM 7.01. Regulation FD Disclosure

Pursuant to 17 CFR Part 243 (“Regulation FD”), Alaska Air Group, Inc. is submitting this current report on Form 8-K to present information relating to its financial and operational outlook for 2004. This report includes information regarding forecasts of available seat miles (ASMs), cost per available seat mile (CASM) excluding fuel consumption and the restructuring charges associated with our recently announced restructuring efforts, as well as certain actual results for revenue passenger miles (RPMs), load factor and revenue per available seat mile (RASM), for its subsidiaries Alaska Airlines, Inc. and Horizon Air. Our disclosure of operating cost per available seat mile, excluding fuel and restructuring charges provides us the ability to measure and monitor our performance without these items. In addition, we believe the disclosure of financial performance without restructuring charges and mark-to-market hedging gains is useful to investors in evaluating our ongoing operational performance. The most directly comparable GAAP measure is total operating expense per available seat mile. However, due to the large fluctuations in fuel prices, we are unable to predict total operating expense for any future period with any degree of certainty. Please see the cautionary statement under “Forward-Looking Information” at the end of this report.

In accordance with General Instruction B.2 of Form 8-K, the following information shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), nor shall such information be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such a filing. This Report will not be deemed an admission as to the materiality of any information required to be disclosed solely to satisfy the requirements of Regulation FD.

References in this report on Form 8-K to “Air Group,” “the Company,” “we,” “us,” and “our” refer to Alaska Air Group, Inc. and its subsidiaries, unless otherwise specified. Alaska Airlines, Inc. and Horizon Air Industries, Inc. are referred to as “Alaska” and “Horizon,” respectively, and together as our “airlines.”



Third Quarter 2004

    Forecast   Change
    Q3   Yr/Yr
Alaska Airlines
Capacity (ASMs in millions)
    6,009       5.6 %
Fuel gallons (000,000)
    96.4       4.8 %
Cost per ASM excluding fuel
and restructuring charges (cents)
    7.4       (5.1 %)

Alaska Airlines’ August traffic increased 7.9% to 1.655 billion RPMs from 1.534 billion flown a year earlier. Capacity during August was 2.091 billion ASMs, 5.1% higher than the 1.988 billion in August 2003.

The passenger load factor (the percentage of available seats occupied by fare-paying passengers) for the month was 79.2%, compared to 77.1% in August 2003. The airline carried 1,655,900 passengers compared to 1,584,200 in August 2003.

For August 2004, RASM increased by 2.3% as compared to August 2003 due to an increase in load factor. For July 2004, RASM increased by 8.8% as compared to July 2003.

Forecasted cost per ASM excludes the charges that will be recorded as a result of our recently announced restructuring initiatives. Those initiatives will result in a net reduction of approximately 900 employees. The up-front termination costs and related accounting charges associated with this program, the majority of which will be recorded in the third and fourth quarter of 2004, are expected to be significant but have not yet been finalized.

    Forecast   Change
    Q3   Yr/Yr
Horizon Air
Capacity (ASMs in millions)
    829       18.3 %
Fuel gallons (000,000)
    13.0       (10.3 %)
Cost per ASM excluding fuel
and restructuring charges (cents)
    12.9       (9.2 %)

Horizon Air’s August traffic increased 25.2% to 211.1 million RPMs from 168.6 million flown a year earlier. Capacity for August was 284.2 million ASMs, 16.1% higher than the 244.9 million in August 2003.

The passenger load factor for the month was 74.3%, compared to 68.8% in August 2003. The airline carried 577,500 passengers compared to 490,500 in August 2003.



For the third quarter of 2004, CASM excluding fuel is expected to decrease 9.2% compared to the third quarter of 2003, reflecting changes in Horizon’s flying mix from the traditional native network to a mix of native network flying and contract flying with Frontier Airlines. Under the contract flying agreement with Frontier, Horizon does not incur many of the normal costs of operations such as fuel, marketing costs and station labor and rents, resulting in significantly lower CASM (excluding fuel) and RASM. Horizon is currently operating nine 70-seat Bombardier CRJ-700 aircraft under the Frontier JetExpress brand, representing approximately 20% to 25% of total Horizon capacity and approximately 9% to 10% of total Horizon revenue.

For August 2004, RASM decreased by 13.7% as compared to August 2003 resulting from the contract flying with Frontier. For July 2004, RASM decreased by 12.4% as compared to July 2003.

Capacity Estimates for 2004
Provided below are current capacity (ASMs in millions) estimates for the full year of 2004:

Alaska Airlines capacity
    22,232       6.9 %
Horizon Air capacity
    3,079       19.9 %

Other Financial Information
Cash and Short-Term Investments
Cash and short-term investments was approximately $871 million at August 31, 2004 compared to $837 million at July 31, 2004. The increase of $34 million is principally due to cash provided from operations.

Fuel Hedging
Beginning in the second quarter of 2004, we lost the ability to defer, as a component of Accumulated Other Comprehensive Income, recognition of any unrealized gain or loss on our fuel hedge contracts until the hedged fuel is consumed (also known as the ability to use “hedge accounting”). The implications of this loss going forward are as follows:

    we will have more volatile earnings as we mark our entire hedge portfolio to market each period-end and report the gain or loss in other non-operating income or expense,
    because we mark our portfolio to market each period, the impact of the fuel hedging program will not be included in our results in the same period as the related fuel is purchased and consumed.

To help investors understand our results, we will regularly provide unaudited information about fuel price movements and the impact of our hedging program on our financial results. Management believes it is useful to compare results between periods that exclude the hedging gains/losses recorded on a GAAP basis and include the cash received or due on hedge positions settled during the period (although the related impact may have been



recognized for financial reporting purposes in a prior period). We refer to this as the comparison of “raw fuel cost” to “economic fuel cost”, which is presented below for August 2004.



August 2004   Alaska Airlines   Alaska Airlines   Horizon Air   Horizon Air
  Cost/Gal (cents)
Fuel expense before hedge activities (“raw fuel”)
  $ 47,089     $ 1.41     $ 6,500     $ 1.45  
Gains on settled hedges included in fuel expense
    1,167       .03       159       .03  
GAAP fuel expense
  $ 45,922     $ 1.38     $ 6,341     $ 1.42  
Gains on settled hedges included in non-operating income*
    3,145       .10       429       .10  
Economic fuel expense
  $ 42,777     $ 1.28     $ 5,912     $ 1.32  
% Change from prior year
    40.1%       36.2%       23.1%       38.9%  
gains (losses) included in non-operating income related to hedges that settle in future periods
  $ (4,063 )   NM   $ (554 )   NM

    *Amounts may include mark-to-market hedging gains (losses) recognized in non-operating income (expense) in previous periods.

Excluding all gains on hedges recorded under generally accepted accounting principles and including the cash settlement received or due for hedges settled during the period, Alaska and Horizon’s pre-tax income (loss) would have been higher by approximately $4.1 million and $0.6 million, respectively.



Alaska Air Group’s future hedge positions are as follows:

    Approximate % of Expected   Approximate Crude Oil
    Fuel Requirements
  Price per Barrel
Third Quarter 2004
    40%     $ 29.30  
Fourth Quarter 2004
    50%     $ 30.39  
First Quarter 2005
    50%     $ 29.86  
Second Quarter 2005
    50%     $ 28.97  
Third Quarter 2005
    50%     $ 28.81  
Fourth Quarter 2005
    45%     $ 30.50  
First Quarter 2006
    35%     $ 31.83  
Second Quarter 2006
    25%     $ 32.91  
Third Quarter 2006
    15%     $ 34.38  
Fourth Quarter 2006
    5%     $ 36.15  

Operating Fleet Plan
The following table provides a fleet summary for Alaska and Horizon for actual airplanes on hand at the end of 2003 and changes in 2004 and 2005 based on our contractual obligations and expected retirement plans:

                    Change   Change
            On Hand   During   During
    Seats   YE 2003   2004   2005
Alaska Airlines
    111       9       (2 )     (1 )
    138       40                  
    120       22                  
    160       0               3  
    172       11       1          
    140       27       (1 )        
            109       (2 )     2  
Horizon Air
    37       28                  
    70       16       2          
CRJ 700
    70       18               1  
            62       2       1  

Alaska has no firm commitments for aircraft deliveries beyond 2005. However, we plan to acquire three B737-800s in 2006. These planned acquisitions are not included in the table above since we do not have firm orders at this time. Horizon has two CRJ 700s scheduled for delivery per year from 2006 to 2009 and none thereafter.




This report may contain forward-looking statements that are intended to be subject to the safe harbor protection provided by Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements relate to future events or our future financial performance and involve known and unknown risks and uncertainties that may cause our actual results or performance to be materially different from those indicated by any forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “forecast,” “may,” “will,” “could,” “should,” “expect,” “plan,” “believe,” “potential” or other similar words indicating future events or contingencies. Some of the things that could cause our actual results to differ from our expectations are: economic conditions; the continued impact of terrorist attacks, global instability and potential U.S. military involvement; our significant indebtedness; downgrades of our credit ratings; the competitive environment and other trends in our industry; changes in laws and regulations; changes in our operating costs including fuel; changes in our business plans; interest rates and the availability of financing; liability and other claims asserted against us; labor disputes; our ability to attract and retain qualified personnel; and inflation. For a discussion of these and other risk factors, see Item 1 of the Company’s Amendment No. 1 to its Annual Report for the year ended December 31, 2003 on Form 10-K/A. All of the forward-looking statements are qualified in their entirety by reference to the risk factors discussed therein. These risk factors may not be exhaustive. We operate in a continually changing business environment, and new risk factors emerge from time to time. Management cannot predict such new risk factors, nor can it assess the impact, if any, of such new risk factors on our business or events described in any forward-looking statements. We disclaim any obligation to publicly update or revise any forward-looking statements after the date of this report to conform them to actual results.




Pursuant to the requirements 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.

Date: September 17, 2004
/s/ Brandon S. Pedersen
Brandon S. Pedersen
Staff Vice President/Finance and Controller
/s/ Bradley D. Tilden
Bradley D. Tilden
Executive Vice President/Finance and Chief Financial Officer