Alaska Airlines

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K

(Mark One)

X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934 [FEE REQUIRED]

For the fiscal year ended December 31, 1995

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.

(Exact name of registrant as specified in its charter)

Delaware 91-1292054

(State or other jurisdiction of incorporation or organization) (I.R.S.

Employer Identification No.)

19300 Pacific Highway South, Seattle, Washington 98188

(Address of Principal Executive Offices)

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

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class Name of Each Exchange on Which Registered

Common Stock, $1.00 Par Value New York Stock Exchange

Rights to Purchase Series A Participating

Preferred Stock New York Stock Exchange

6-1/2% Convertible Senior Debentures Due 2005 New York Stock Exchange

7-3/4% Convertible Subordinated Debentures Due 2010 Unlisted

6-7/8% Convertible Subordinated Debentures Due 2014 New York Stock Exchange

10.21% Series B Cumulative Redeemable

Preferred Stock Due 1997 Unlisted

As of December 31, 1995, common shares outstanding totaled 13,565,076.

The aggregate market value of the common shares of Alaska Air Group, Inc.

held by nonaffiliates, 13,378,152 shares, was approximately $217 million

(based on the closing price of these shares, $16.25, on the New York Stock

Exchange on such date).

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 ____

Indicate by check mark if disclosure of delinquent filers pursuant to

Item 405 of Regulation S-K is not contained herein, and will not be

contained, to the best of registrant's knowledge, in definitive proxy or

information statements incorporated by reference in Part III of this Form

10-K or any amendment to this Form 10-K. ( X )

DOCUMENTS TO BE INCORPORATED BY REFERENCE

Title of Document Part Hereof Into Which Document to be

Incorporated

Definitive Proxy Statement Relating to Part III

1996 Annual Meeting of Shareholders

Exhibit Index begins on page 33.

PART I

ITEM 1. BUSINESS

General

Alaska Air Group, Inc. (Air Group or the Company) is a holding company

which was incorporated in Delaware in 1985. Its two principal subsidiaries

are Alaska Airlines, Inc. (Alaska) and Horizon Air Industries, Inc.

(Horizon). Both subsidiaries operate as airlines. However, each

subsidiary's business plan, competition and economic risks differ

substantially. Alaska is a major airline, operates an all jet fleet, and

its average passenger trip length is 846 miles. Horizon is a regional

airline, operates jet and turboprop aircraft, and its average passenger

trip is 221 miles. Business segment information is reported in the Notes to

Consolidated Financial Statements. The Company's executive offices are

located at 19300 Pacific Highway South, Seattle, Washington 98188.

The business of the Company is somewhat seasonal. Quarterly operating

income tends to peak during the third quarter.

Alaska

Alaska Airlines is an Alaska corporation, organized in 1937. Alaska serves

37 cities in six states (Alaska, Washington, Oregon, California, Nevada and

Arizona), three cities in Mexico and four cities in Russia. In each year

since 1973, Alaska has carried more passengers between Alaska and the U.S.

mainland than any other airline. In 1995, Alaska carried 10.1 million

passengers. Passenger traffic within Alaska and between Alaska and the

U.S. mainland accounted for 27% of Alaska's total revenue passenger miles,

while West Coast traffic accounted for 66% and the Mexico markets 7%.

Based on passenger enplanements, Alaska's leading airports are Seattle,

Portland, Anchorage and Los Angeles. Based on revenues, its leading

nonstop routes were Seattle-Anchorage, Seattle-Los Angeles and Seattle-San

Francisco. At December 31, 1995, Alaska's operating fleet consisted of 74

jet aircraft.

During 1995, Alaska entered into a marketing agreement with Northwest

Airlines whereby certain Alaska flights and certain Northwest flights are

dual-designated in airline computer reservation systems as Alaska Airlines

and Northwest Airlines. Alaska Airlines also serves three smaller cities

in California, two in Washington, and many small communities in Alaska

through code share marketing agreements with local carriers.

Horizon

Horizon, a Washington corporation, began service in 1981 and was acquired

by Air Group in 1986. It is the largest regional airline in the Pacific

Northwest, and serves 35 cities in five states (Washington, Oregon,

Montana, Idaho, and California) and four cities in Canada. In 1995,

Horizon carried 3.8 million passengers. Based on passenger enplanements,

Horizon's leading airports are Seattle, Portland, Spokane and Boise. Based

on revenues, its leading nonstop routes were Seattle-Spokane, Seattle-

Portland, Seattle-Boise, and Portland-Boise. At December 31, 1995,

Horizon's operating fleet consisted of 12 jet and 55 turboprop aircraft.

Horizon flights are listed under the Alaska Airlines designator code in

airline computer reservation systems. Certain Horizon flights are dual-

designated in these reservation systems as Northwest Airlines and Alaska

Airlines. Currently, 29% of Horizon's passengers connect to either Alaska

or Northwest.

Airline Regulation

United States Department of Transportation (DOT) - The DOT has the

authority to regulate certain airline economic functions including

financial and statistical reporting, consumer protection, computerized

reservations systems and essential air transportation. The DOT is also

charged with determining which U.S. carriers will receive the authority to

provide service to international destinations. International operating

authority is subject to bilateral agreements between the United States and

the respective countries. The countries establish the number of carriers

to provide service, approve the carriers selected to provide such service

and the size of aircraft to be used. The DOT reviews the carriers

authorized under bilateral agreements every five years. Beginning in

February 1997, under the U.S.-Canada "open skies" agreement, all U.S. and

Canadian carriers will be able to operate between U.S. and Canadian cities

(except for Toronto), subject to availability of landing slots. Alaska's

authorities to serve its various Mexico destinations are to be reviewed

during 1996. The bilateral agreement with Russia will also be reviewed in

1996. The Company expects to be granted authority to continue to operate

its international routes.

Federal Aviation Administration (FAA) - The FAA, an agency within the DOT,

has jurisdiction to regulate aviation safety generally, including: the

licensing of pilots and maintenance personnel; the establishment of minimum

standards for training and maintenance; and technical standards of flight,

communications and ground equipment. All aircraft must have and maintain

certificates of airworthiness issued by the FAA. Alaska and Horizon

aircraft, maintenance facilities and procedures are subject to inspection

by the FAA. The FAA has the authority to suspend temporarily or revoke

permanently the authority of an air carrier or its licensed personnel for

failure to comply with Federal Aviation Regulations and to levy civil

penalties for such failure.

Labor Relations - The air transportation industry is regulated under the

Railway Labor Act, which vests in the National Mediation Board certain

regulatory powers with respect to disputes between airlines and labor

unions arising under collective bargaining agreements.

Environmental - Special noise ordinances or agreements restrict the type of

aircraft, the timing and the number of flights operated by Alaska and other

air carriers at four Los Angeles area airports plus San Diego, Palm

Springs, San Francisco and Seattle.

In 1990, Congress passed the Airport Noise and Capacity Act of 1990 (Act).

The Act addressed the need to establish a national aviation noise policy

and limit the ability of airports and local communities to implement

procedures that would interfere with interstate commerce or the national

air transportation system. The Act also called for the phase out of Stage

II airplanes (generally older aircraft not meeting certain noise emission

standards) in the contiguous 48 states by December 31, 1999. Alaska's only

Stage II aircraft are eight Boeing 737-200Cs, and the Company anticipates

it will modify or replace these aircraft to meet applicable noise

requirements.

Competition

Competition in the air transportation industry is intense. Currently, any

domestic air carrier deemed fit by the DOT is allowed to operate scheduled

passenger service in the United States. Together, Alaska and Horizon carry

2.2% of all U.S. passenger traffic.

Alaska and Horizon compete in the West Coast, Arizona and Nevada markets

with America West, Delta, Reno Air, Shuttle by United, Southwest Airlines,

United and United Express. Alaska also competes with Continental, Delta,

Reno Air and United in the Lower 48-to-Alaska market. Some of these

competitors are substantially larger than Alaska and Horizon, have greater

financial resources and have more extensive route systems. Due to its

shorthaul markets, Horizon is also subject to competition from surface

transportation, particularly the private automobile.

Alaska and Horizon integrate their flight schedules to provide the best

possible service between any two points served by their systems. Both

airlines distinguish themselves from competitors by providing a higher

level of customer service. The airlines' excellent service in the form of

attention to customer needs, high-quality food and beverage service,

legroom, well-maintained aircraft and other amenities has been recognized

by independent studies and surveys of air travelers. Alaska and Horizon

offer competitive fares.

Most large U.S. carriers have developed, independently or in partnership

with others, large computerized reservation systems (CRS). Due to

contractual requirements imposed by CRSs, most travel agencies contract

with a single CRS to sell tickets. Airlines, including Alaska, and

Horizon, are charged industry-set fees to have their flight schedules

included in the various CRS displays. These systems are currently the

predominant means of distributing airline tickets. In order to reduce anti-

competitive practices, the DOT regulates the display of all airline

schedules and fares. Alaska is exploring alternatives to existing

distribution methods. American Airlines, owner of the SABRE CRS, has filed

suit against Alaska to prevent Alaska from reducing its level of display

purchased from SABRE without also doing so in all other CRSs.

Frequent Flyer Program

All major airlines have developed frequent flyer programs as a way of

increasing passenger loyalty. Alaska's Mileage Plan allows members to earn

mileage by flying on Alaska, Horizon and other participating airlines, and

by using the services of non-airline partners which include a credit card,

telephone companies, hotels and car rental agencies. Alaska is paid by non-

airline partners for the miles it credits to member accounts. Alaska has

the ability to change the Mileage Plan terms, conditions, partners, mileage

credits and award levels.

Mileage can be redeemed for free or discounted travel and for other travel

industry awards. Upon accumulating the necessary mileage, members notify

Alaska of their award selection. Once selected, awards can be changed,

subject to a change fee. Over 70% of the flight awards selected are

subject to blackout dates and capacity-controlled seating. Prior to

January 1996, miles earned had to be redeemed within three years, otherwise

they expired. Effective in January 1996, all miles currently accrued and

future mileage earned will accumulate indefinitely.

As of the year end 1995 and 1994, Alaska estimates that 481,000 and 662,000

roundtrip flight awards could have been redeemed by Mileage Plan members

who have mileage credits exceeding the 20,000 mile free round trip domestic

ticket award threshold. At December 31, 1995, fewer than 24% of these

flight awards were issued and outstanding. For the years 1995, 1994 and

1993, approximately 242,000, 226,000 and 188,000 round trip flight awards

were redeemed and flown on Alaska and Horizon. These awards represent

approximately 7% for 1995, and 5% for 1994 and 1993, of the total passenger

miles flown for each period.

Alaska maintains a liability for its Mileage Plan obligation which is based

on its total miles outstanding, less an estimate for miles which will never

be redeemed. The net miles outstanding are allocated between those

credited for travel on Alaska, Horizon or other airline partners and those

credited for using the services of non-airline partners. Miles credited

for travel on Alaska, Horizon or other airline partners are accrued at

Alaska's incremental cost of providing the air travel. The incremental

cost includes the cost of meals, fuel, reservations and insurance. The

incremental cost does not include a contribution to overhead, aircraft cost

or profit. A portion of the proceeds received from non-airline partners is

also deferred. At December 31, 1995 and 1994, the total liability for

miles outstanding was $17.5 million and $17.4 million, respectively.

Selected Quarterly Consolidated Financial Information (Unaudited)

Selected financial data for each quarter of 1995 and 1994 is as follows (in

millions, except per share):

1st Quarter 2nd Quarter 3rd Quarter 4th Quarter

1995 1994 1995 1994 1995 1994 1995 1994

Operating

revenues $294.6 $280.4 $362.2 $330.5 $419.6 $386.8 $341.1 $318.0

Operating

income (loss) (18.3) (2.9) 24.5 24.5 62.6 52.3 7.1 1.2

Net income

(loss) (16.3) (6.3) 7.0 9.7 27.4 24.3 (.8) (5.1)

Earnings (loss) per share:

Primary (1.22) (.47) .52 .72 2.01 1.81 (.06) (.38)

Fully diluted * * .48 .61 1.30 1.36 * *

* Anti-dilutive

The total of the amounts shown as quarterly earnings per share may differ

from the amount shown on the Consolidated Statement of Income because the

annual computation is made separately and is based upon average number of

shares and equivalent shares outstanding for the year.

Employees

Alaska had 7,379 active full-time and part-time employees at December 31,

1995, of which approximately 87% are represented by labor unions.

The following is a summary of Alaska's union contracts as of December 31,

1995:

Number of

Union Employee Group Employees Contract Status

International

Association Mechanic, Rampservice 1,724 Amendable 9/1/97

of Machinists and and related

Aerospace Workers classifications

Clerical, Office and 2,397 Amendable 5/20/99

Passenger Service

Air Line Pilots Pilots 922 Amendable 12/1/97

Association International

Association of Flight Attendants 1,333 Amendable 3/14/99

Flight Attendants

Mexico Workers Mexico Airport 53 Amendable 4/1/96

Association Personnel

of Air Transport

Transport Workers Dispatchers 16 Amendable 2/9/02

Horizon had 3,088 active full-time and part-time employees at December 31,

1995, of which approximately 21% are represented by labor unions. During

1995, the pilots voted to reject union representation by the International

Brotherhood of Teamsters.

The following is a summary of Horizon's union contracts as of December 31,

1995:

Number of

Union Employee Group Employees Contract Status

Transport Workers Mechanics and 315 Amendable 4/24/98

Union of America related classifications

Dispatchers 27 Amendable 5/10/97

Association of Flight Attendants 271 Amendable 6/15/96

Flight Attendants

National Automobile, Station personnel 42 Amendable 12/21/97

Aerospace, in Canada

Transportation

and General Workers

ITEM 2. PROPERTIES

Aircraft

The following table describes the aircraft operated and their average age

at December 31, 1995.

Passenger Average Age

Aircraft Type Capacity Owned Leased Total in Years

Alaska Airlines

Boeing 737-200C 111 4 4 8 15.4

Boeing 737-400 140 4 18 22 2.7

McDonnell Douglas MD-80 140 16 28 44 7.0

24 50 74 6.6

Horizon

Fairchild Metroliner III 18 5 17 22 9.5

Dornier 328 31 -- 10 10 1.4

de Havilland Dash 8 37 -- 23 23 7.5

Fokker F-28 62 -- 12 12 22.0

5 62 67 9.8

Part II, Item 7., "Management's Discussion and Analysis of Results of

Operations and Financial Condition," discusses future orders and options

for additional aircraft.

Sixteen of the 24 aircraft owned by Alaska as of December 31, 1995 are

subject to liens securing long-term debt, and two are subject to liens

securing short-term borrowings. Alaska's leased B737-200C, B737-400 and MD-

80 aircraft have lease expiration dates between 1996 and 1999, 2002 and

2013, and 1997 and 2013, respectively. Horizon's leased Fairchild

Metroliner III, Dornier 328, de Havilland Dash 8 and Fokker F-28 aircraft

have expiration dates between 1996 and 2001, 2008 and 2011, 1999 and 2006,

and 1996 and 1998, respectively. Alaska and Horizon have the option to

extend most of the leases for additional periods, or the right to purchase

the aircraft at the end of the lease term, usually at the then fair market

value of the aircraft. For information regarding obligations under capital

leases and long-term operating leases, see Notes to Consolidated Financial

Statements.

Ground Facilities and Services

Alaska and Horizon lease ticket counters, gates, cargo and baggage, office

space and other support areas at the majority of the airports they serve.

Alaska also owns terminal buildings at various Alaska cities.

Alaska has centralized operations in several buildings located at or near

Seattle-Tacoma International Airport (Sea-Tac) in Seattle, Washington. The

owned buildings, including land unless located on leased airport property,

include: a three-bay hangar facility with maintenance shops; a flight

operations and training center; an air cargo facility; a reservation and

office facility; a four-story office building; its corporate headquarters;

and two storage warehouses. Alaska also leases a two-bay hangar/office

facility at Sea-Tac.

Alaska's other major facilities include: its Anchorage regional

headquarters building and Phoenix reservations center; a leased two-bay

maintenance facility in Oakland; and a leased hangar/office facility in

Anchorage.

Horizon owns its Seattle corporate headquarters building and leases

maintenance facilities at the Portland and Boise airports.

ITEM 3. LEGAL PROCEEDINGS

In October 1991, Alaska gave notice of termination of its code sharing and

frequent flyer relationship with MarkAir, an airline based in the state of

Alaska. Both companies have filed suit against one another in connection

with that termination alleging breach of contract and other causes of

action under state law. In addition, MarkAir claimed that the termination

was in violation of Federal Antitrust Laws. MarkAir filed for protection

under Chapter 11 of the U.S. Bankruptcy Code in June 1992. In December

1993, MarkAir agreed to dismiss all antitrust claims against the Company.

In 1994, the U.S. District Court which had jurisdiction over the case

approved the settlement. Discovery continues in a related Alaska state

court case pertaining to breach of contract and other state law claims.

The Company believes the ultimate resolution of this legal proceeding will

not result in a material adverse impact on the financial position or

results of operations of the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers of Alaska Air Group, Inc., their positions and their

respective ages (as of March 1, 1996) are as follows:

Officer

Name Position Age Since

John F. Kelly Chairman, President and Chief 51 1981

Executive Officer of Alaska

Air Group, Inc. and Alaska

Airlines, Inc.

Marjorie E. Laws Vice President/Corporate Affairs 55 1983

and Corporate Secretary of Alaska

Air Group, Inc. and Alaska

Airlines, Inc.

Steven G. Hamilton Vice President/Legal and General 56 1988

Counsel of Alaska Air Group, Inc.

and Alaska Airlines, Inc.

Harry G. Lehr Senior Vice President/Finance 55 1986

of Alaska Air Group, Inc.

and Alaska Airlines, Inc.

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED

STOCKHOLDER MATTERS

As of December 31, 1995, there were 13,565,076 shares of common stock

issued and outstanding and 5,747 shareholders of record. The Company also

held 3,153,608 treasury shares at a cost of $71.8 million. In December

1992, the Company suspended the quarterly dividend on the common stock due

to the 1992 net loss and the difficult economic environment. Although the

Company has returned to profitability, it has no plans to pay dividends in

the forseeable future. Air Group's common stock is listed on the New York

Stock Exchange (symbol: ALK).

The following table shows the trading range of Alaska Air Group common

stock on the New York Stock Exchange for 1995 and 1994.

1995 1994

High Low High Low

First Quarter 16-3/4 13-1/2 18-7/8 13-5/8

Second Quarter 18-3/8 14-1/2 16-1/8 13-3/4

Third Quarter 21-3/8 14-3/8 17-7/8 14-3/8

Fourth Quarter 18-7/8 13-5/8 18 13-1/8

<TABLE>

ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

1995 1994 1993 1992 1991

Consolidated Financial Data:

Year Ended December 31 (in millions, except per share amounts):

Operating Revenues $1,417.5 $1,315.6 $1,128.3 $1,115.4 $1,104.0

Operating Expenses 1,341.6 1,240.6 1,145.1 1,210.2 1,069.4

Operating Income (Loss) 75.9 75.0 (16.8) (94.8) 34.6

Nonoperating expense, net (a) (41.9) (34.0) (29.0) (30.9) (18.4)

Income (loss) before income tax

and accounting change 34.0 41.0 (45.8) (125.7) 16.2

Net Income (Loss) $17.3 $22.5 $(30.9) $(84.8) $10.3

Average primary shares outstanding 13.5 13.4 13.3 13.3 13.4

Primary earnings (loss) per share (b) $1.28 $1.68 $(2.51) $(6.87) $0.27

Fully diluted earnings (loss) per share 1.26 1.62 (c) (c) (c)

Cash dividends per share -- -- -- $0.15 $0.20

At End of Period (in millions, except ratio):

Total assets $1,313.4 $1,315.8 $1,135.0 $1,208.4 $1,225.5

Long-term debt and capital lease obligations 522.4 589.9 525.4 487.8 500.0

Redeemable preferred stock -- -- -- 61.2 60.9

Shareholders' equity 212.5 191.3 166.8 196.7 284.4

Ratio of earnings to fixed charges 1.28 1.36 (d) (d) 1.10

Alaska Airlines Operating Data:

Revenue passenger miles (000,000) 8,584 7,587 5,514 5,537 4,948

Available seat miles (000,000) 13,885 12,082 9,426 9,617 8,789

Revenue passenger load factor 61.8% 62.8% 58.5% 57.6% 56.3%

Yield per passenger mile 11.59c 12.20c 14.32c 14.50c 16.70c

Operating expenses per available seat mile 7.71c 8.27c 9.88c 10.49c 10.16c

Average number of employees (e) 6,993 6,486 6,191 6,514 6,127

Horizon Air Operating Data:

Revenue passenger miles (000,000) 841 733 560 486 405

Available seat miles (000,000) 1,414 1,165 986 905 786

Revenue passenger load factor 59.5% 62.9% 56.8% 53.7% 51.5%

Yield per passenger mile 31.48c 33.35c 37.93c 40.69c 42.88c

Operating expenses per available seat mile 19.47c 20.95c 21.76c 22.19c 22.30c

Average number of employees (e) 2,864 2,557 2,267 2,152 1,953

c = cents

(a) Includes capitalized interest of $.2 million, $.4 million, $.4 million, $6.1 million

and $8.3 million for 1995, 1994, 1993, 1992, and 1991, respectively.

(b) For 1992, primary earnings per share includes ($.34) for the $4.6 million cululative

effect of the postretirement benefits accounting change as of January 1, 1992.

(d) For 1993 and 1992, earnings are inadequate to cover fixed charges

by $50.0 million and $142.1 million, respectively.

(e) Full-time equivalents.

</TABLE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND

FINANCIAL CONDITION

Industry Conditions

During 1994, the character of competition changed on the West Coast due to

the December 1993 purchase of Morris Air by Southwest Airlines, and the

October start-up of Shuttle by United. Low air fares are now a permanent

part of the fare structure on the West Coast. During April 1995, MarkAir,

a significant competitor in the Alaska marketplace since 1992, withdrew

from all Alaska markets and subsequently ceased operations.

The Company has responded to the changing industry environment by

implementing a new advertising campaign, aggressively matching competitors'

air fares, increasing flight frequency, and improving utilization of

aircraft, facilities, equipment and people. From 1992 to 1994, Alaska

reduced its unit costs by 20%, which is believed to be the sharpest drop in

the airline industry. From 1994 to 1995, Alaska's unit costs dropped 7%.

Results of Operations

1995 COMPARED WITH 1994 Consolidated net income in 1995 was $17.3 million,

or $1.28 per share (primary) and $1.26 per share (fully diluted), compared

with net income of $22.5 million, or $1.68 per share (primary) and $1.62

per share (fully diluted) in 1994. Consolidated operating income was $75.9

million compared to $75.0 million in 1994. Alaska's operating income

improved by $9.5 million, but it was offset by significantly lower

operating results at Horizon. A discussion of operating revenues and

expenses for the two airlines follows.

Alaska Airlines Operating revenues increased 7.6% to $1.142 billion.

Passenger revenues, which accounted for 87% of total operating revenues,

increased 7.4% on a 13.1% rise in passenger traffic. Capacity increased

14.9%, primarily due to increases in the Pacific Northwest to California

markets. The load factor dropped from 62.8% in 1994 to 61.8% in 1995.

Passenger yields declined 5.0% to 11.59 cents in 1995, reflecting increased

competition on the West Coast. The static value of a one cent movement in

yield is approximately $86 million per year. However, in a dynamic, price-

sensitive business, a one cent increase will not necessarily result in a

revenue improvement of this magnitude.

Freight and mail revenues increased 2.9% due to higher freight and mail

volumes, resulting in part from the withdrawal of MarkAir from all Alaska

markets. Other-net revenues rose 17.6% primarily due to increased revenues

from partners in Alaska's frequent flyer program.

The table below shows the major operating expense elements on a cost per

available seat mile (ASM) basis in 1995 and 1994.

Alaska Airlines Operating Expenses Per ASM (In Cents)

1995 1994 Change Change

Wages and benefits 2.46 2.67 (.21) (8)

Aircraft fuel 1.11 1.08 .03 3

Aircraft maintenance .33 .34 (.01) (3)

Aircraft rent .99 1.13 (.14) (12)

Commissions .54 .61 (.07) (11)

Depreciation & amortization .42 .39 .03 8

Other 1.86 2.05 (.19) (9)

Alaska Airlines Total 7.71 8.27 (.56) (7)

Alaska's lower unit costs were due to continuing cost reduction efforts and

better utilization of aircraft. Average daily aircraft utilization

increased 5% from 10.3 block hours to 10.8 block hours. Wages and benefits

per ASM decreased 8% primarily due to improved productivity. The number of

full-time equivalent employees increased 8% while capacity increased 15%

and traffic increased 13%.

Fuel expense per ASM increased 3%, due to a 5% increase in the price of

fuel, offset by a lower consumption rate resulting from a longer average

aircraft hop length. The average cost per gallon rose 3.0 cents to 62.9

cents in 1995. Currently, a 1 cent change in fuel prices affects annual

fuel costs by approximately $2.5 million. In October 1995, Alaska (as well

as Horizon and other airlines) began paying a 4.3 cent Federal excise tax

on domestic fuel consumption. The annual fuel expense impact of this tax

on Alaska is approximately $10 million or .07 cents per ASM. The annual

fuel expense impact on both Alaska and Horizon is $12 million. There is

pending legislation in Congress to extend the exemption from this tax for

17 to 24 months.

Aircraft maintenance per ASM decreased 3% due to increased aircraft

utilization. Aircraft rent per ASM decreased 12% due to an increase in

aircraft utilization, and a restructuring (in the fourth quarter of 1994)

of B737-400 aircraft leases.

Commission expense per ASM decreased 11% because passenger revenues, upon

which commissions are paid, did not keep pace with ASM growth. In

addition, a greater percentage of tickets were sold without commissions

through tour operators and other wholesalers.

Depreciation and amortization expense per ASM increased 8%, in spite of a

15% increase in ASMs, primarily due to: (a) the reduction in estimated

salvage value from 20% to 5% (effective January 1, 1995) for all MD-80

aircraft; and (b) depreciation on three B737-400 aircraft that were treated as

operating leases for most of 1994.

Other expense per ASM decreased 9% due to lower unit costs for building

rentals, food, landing fees and outside services expenses.

Horizon Air Operating revenues increased 8.8% to $279.5 million.

Passenger revenues, which accounted for 95% of total operating revenues,

increased 8.3% on a 14.8% rise in passenger traffic. Capacity increased

21.4% due to the increased use of larger capacity Fokker F-28 jets and

Dornier 328 turboprop aircraft. The load factor dropped from 62.9% in 1994

to 59.5% in 1995. Passenger yields declined 5.6% to 31.5 cents in 1995,

reflecting increased competition and longer passenger trips.

Freight, mail and other revenues increased 18.0% due to increased freight

and mail volumes as well as increased revenues from providing services to

other airlines.

The table below shows the major operating expense elements on cost per ASM

basis for Horizon in 1995 and 1994.

Horizon Air Operating Expenses Per ASM (In Cents)

1995 1994 Change Change

Wages and benefits 6.06 6.75 (.69) (10)

Aircraft fuel 1.95 1.84 .11 6

Aircraft maintenance 2.41 2.33 .08 3

Aircraft rent 2.44 2.73 (.29) (11)

Commissions 1.34 1.56 (.22) (14)

Depreciation & amortization .70 .75 (.05) (7)

Other 4.57 4.99 (.42) (8)

Horizon Air Total 19.47 20.95 (1.48) (7)

Horizon's cost per ASM declined 7% to 19.47 cents due to: (a) greater use

of higher capacity aircraft; (b) no profit sharing accrual in 1995; and (c)

cost reduction efforts.

Consolidated Other Income (Expense) Non-operating expense increased $7.9

million to $41.9 million expense primarily due to: (a) $4.5 million more

interest expense resulting from higher interest rates on variable debt and

higher average debt balances; (b) $2.2 million of amortization of issue

costs for the 7-1/4% zero coupon notes that were repurchased in August

1995; (c) $1.8 million of vendor credits included in 1994; and (d) $1.6

million more gains on debt retirements included in 1994.

1994 COMPARED WITH 1993 Consolidated net income for 1994 was $22.5

million, or $1.68 per share (primary) and $1.62 per share (fully diluted),

compared with a net loss of $30.9 million, or $2.51 per share, in 1993.

The results for 1993 include an after-tax charge of $9.8 million for the

early retirement of the 727 fleet. Operating income for 1994 was $75.0

million, compared to an operating loss of $16.8 million for 1993. The

improved operating results reflect higher operating revenues and the

effects of cost reductions and productivity improvements.

Consolidated operating revenues increased 17% to $1.316 billion. Passenger

revenues increased 17% on a 37% increase in passenger traffic. Traffic

gains were due to a 27% increase in system capacity, lower fares that

stimulated traffic, and increased market share. Yields declined 15% to

14.1 cents in 1994. Freight and mail revenues increased 9% due to a

military charter contract in the state of Alaska, increased freight

volumes, and increased freight rates, offset by lower mail volumes. The

lower mail volumes resulted from Alaska's decision to not bid on certain

U.S. mail contracts so that capacity could be made available for higher

yielding freight. Other-net revenues rose by $11.6 million or 27% due to

increased revenues from Alaska's frequent flyer program, maintenance

contracts and inflight liquor sales.

Consolidated operating expenses increased 8% to $1.241 billion. Alaska's

operating expenses increased 7% to $998.7 million on a 28% increase in

capacity, resulting in a 16% decline in its cost per ASM. The lower unit

costs were due to an extensive cost reduction effort and better utilization

of aircraft, facilities, equipment and people, as well as a 2% increase in

average seats per aircraft. Average daily aircraft utilization increased

26% from 8.2 block hours to 10.3 block hours. Horizon's operating expenses

increased 14% to $244.0 million on an 18% increase in capacity, resulting

in a 4% decline in its cost per ASM. The lower unit costs were due to the

acquisition of higher capacity aircraft and cost reduction efforts.

Consilidated Other Income (Expense) was $34.0 million expense in 1994 compared

to $29.0 million expense in 1993. The increase was primarily due to higher

interest rates on debt and higher average debt balances, offset by gains on

debt retirement and vendor credits.

Liquidity and Capital Resources

The table below presents the major indicators of financial condition and

liquidity.

December 31, 1995 December 31, 1994 Change

(In millions, except ratios and per share amounts)

Cash and marketable securities $135.1 $104.9 $ 30.2

Working capital (deficit) (106.4) (147.1) 40.7

Total assets 1,313.4 1,315.8 (2.4)

Long-term debt

and capital lease obligations 522.4 589.9 (67.5)

Shareholders' equity 212.5 191.3 21.2

Book value per common share $15.67 $14.27 $1.40

Debt/equity ratio 71%:29% 76%:24% NA

1995 FINANCIAL CHANGES The Company's cash and marketable securities

portfolio increased by $30 million during 1995. Operating activities

provided $126 million of cash in 1995. Additional cash was provided by

flight equipment deposits returned ($11 million), net short-term borrowings

($41 million), the sale and leaseback of two B737-400 aircraft ($56

million) and new long-term debt proceeds ($129 million). Cash was used for

the purchase of one previously leased B737-400 aircraft, airframe and

engine overhauls and other capital expenditures ($103 million) and the

repayment of debt and capital lease obligations ($237 million).

Like many airlines, the Company has a working capital deficit. The deficit

decreased during 1995 for a variety of factors including the sale and

leaseback of two B737-400 aircraft and the reclassification of an $18

million receivable from other assets to current assets. The existence of a

working capital deficit has not in the past impaired the Company's ability

to meet its obligations as they become due and it is not expected to do so

in the future.

Financing Arrangements In June 1995, the Company issued $132.3 million of

6-1/2% convertible senior debentures due 2005. In August 1995, the Company

redeemed all of its 7-1/4% zero coupon, convertible subordinated notes for

$127.7 million. In December 1995, Alaska: (a) sold and leased back one

B737-400 aircraft for 18 years; (b) extinguished capital lease obligations

of $27.4 million and subsequently sold and leased back one B737-400

aircraft for 18 years; (c) purchased one B737-400 aircraft that had been

treated as a capital lease; and (d) purchased another B737-400 aircraft that had

been treated as an operating lease. Short-term borrowings of $46 million were

incurred to purchase the two B737-400 aircraft. Alaska intends to repay

the short-term borrowings in 1996 when long-term financing is arranged for

these aircraft.

In August 1995, Standard & Poors lowered its corporate credit rating on Air

Group and Alaska to single B plus from double B minus, citing increased

competition in Alaska's West coast markets.

Commitments During 1995, Alaska took delivery of two new MD-83 aircraft

under 16-year operating leases, and Horizon took delivery of three new

Dornier 328 aircraft (two of which are not in the operating fleet at

December 31, 1995) under 15-year operating leases. In addition, Alaska

extended operating leases on four of its MD-80 aircraft for an average of

two years and agreed to lease two new B737-400 aircraft.

At December 31, 1995, the Company had firm orders for 14 aircraft with a

total cost of approximately $270 million as set forth below.

Delivery Period - Firm Orders

Aircraft 1996 1997 1998 Total

Boeing B737-400 1 1 -- 2

Dornier 328 2 2 4 8

McDonnell Douglas MD-83 2 2 -- 4

Total 5 5 4 14

Cost (Millions) $120 $120 $30 $270

Operating leases have been completed for the B737-400 and Dornier 328

orders. The Company expects to finance the MD-83s with either leases, long-

term debt or internally generated cash.

The Company accrues the costs associated with returning leased aircraft

over the lease period. At December 31, 1995, $33 million was reserved for

leased aircraft returns.

Deferred Taxes At December 31, 1995, net deferred tax liabilities were $30

million, which includes $101 million of net temporary differences, offset

by $42 million of net operating loss (NOL) carryforwards and $29 million of

Alternative Minimum Tax (AMT) credits. The Company believes that all of

its deferred tax assets, including the NOL and AMT credits, will be

realized through the reversal of existing temporary differences or tax

planning strategies such as the sale of aircraft.

New Accounting Standards During 1995, the Financial Accounting Standards

Board issued FAS 121, Accounting for the Impairment of Long-Lived Assets,

and FAS 123, Accounting for Stock-Based Compensation. FAS 121 will be

adopted in 1996 and is not expected to have a material impact on the

Company's financial position or results of operations. The Company plans

to continue to measure compensation cost of employee stock option plans

using the intrinsic value method prescribed by APB Opinion No. 25 and,

starting in 1996, to make pro forma disclosures of net income and earnings

per share as if the fair value method prescribed by FAS 123 had been

applied.

1994 FINANCIAL CHANGES Cash and marketable securities increased by $4

million in 1994. Operations generated $144 million, proceeds from

financing four new MD-83 aircraft were $104 million, and net short-term

borrowings added $5 million. Cash was used for the repayment of debt ($71

million), and capital expenditures ($189 million). During 1994, Alaska

restructured its 20 B737-400 aircraft leases. The fixed term of the leases

was increased from eight years to ten years. As a result of the

restructuring, Alaska expects to save more than $6 million per year over

the term of the leases. As part of the restructuring, Alaska purchased one

of the leased aircraft in 1994, agreed to purchase one each in 1995 and

1996, and received options to purchase up to four more of the 20 between

1997 and 1999. Capital lease obligations increased $57.9 million due to

changes in the lease agreements for two B737-400 aircraft that were

previously classified as operating leases. Also during 1994, Alaska

further restructured its aircraft orders with McDonnell Douglas, replacing

an order for ten MD-90s plus options with an order for four MD-83s. This

restructuring will reduce future capital spending by $360 million.

1993 FINANCIAL CHANGES Cash and marketable securities increased by $18

million in 1993. Operations generated $49 million, proceeds from aircraft

financing were $84 million, and short-term borrowings added $20 million.

Cash was used for the repayment of debt ($79 million), the repurchase of

preferred stock ($33 million), and capital expenditures ($30 million).

During 1993, the Company repurchased all of its outstanding redeemable

preferred stock for $60 million, saving the Company more than $4 million

annually after taxes. The seller provided a $27 million loan to assist

with the stock purchase.

EFFECT OF INFLATION Inflation and specific price changes do not have a

significant effect on the Company's operating revenues, operating expenses

and operating income, because such revenues and expenses generally reflect

current price levels.

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See Item 14.

ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

See "Election of Directors," incorporated herein by reference from the

definitive Proxy Statement for Air Group's Annual Meeting of Shareholders

to be held on May 21, 1996. See "Executive Officers of the Registrant" in

Part I following Item 4 for information relating to executive officers.

ITEM 11. EXECUTIVE COMPENSATION

See "Executive Compensation," incorporated herein by reference from the

definitive Proxy Statement for Air Group's Annual Meeting of Shareholders

to be held on May 21, 1996.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND

MANAGEMENT

See "Security Ownership of Certain Beneficial Owners and Management,"

incorporated herein by reference from the definitive Proxy Statement for

Air Group's Annual Meeting of Shareholders to be held on May 21, 1996.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

See "Transactions with Management and Others," incorporated herein by

reference from the definitive Proxy Statement for Air Group's Annual

Meeting of Shareholders to be held on May 21, 1996.

PART IV

ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS

ON FORM 8-K

(a) Consolidated Financial Statements: Page(s)

Selected Quarterly Consolidated Financial Information (Unaudited) 4

Consolidated Balance Sheet as of December 31, 1995 and 1994 18-19

Consolidated Statement of Income for the years ended

December 31, 1995, 1994 and 1993 20

Consolidated Statement of Shareholders' Equity for the years ended

December 31, 1995, 1994 and 1993 21

Consolidated Statement of Cash Flows for the years ended

December 31, 1995, 1994 and 1993 22

Notes to Consolidated Financial Statements 23-30

Report of Independent Public Accountants 31

Consolidated Financial Statement Schedule II, Valuation and

Qualifying Accounts, for the years ended

December 31, 1995, 1994 and 1993 32

See Exhibit Index on page 33.

(b) Alaska Air Group did not file any reports on Form 8-K during the

fourth quarter of 1995.

SIGNATURES

Pursuant to the requirements of Section 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/ John F. Kelly Date: February 8, 1996

John F. Kelly, Chairman, Chief Executive Officer and President

Pursuant to the requirements of the Securities Exchange Act of 1934, this

report has been signed below by the following persons on February 8, 1996

on behalf of the registrant and in the capacities indicated.

/s/ John F. Kelly Chairman, Chief Executive Officer,

President and Director

John F. Kelly

/s/ Harry G. Lehr Senior Vice President/Finance

Harry G. Lehr (Principal Financial Officer)

/s/ Bradley D. Tilden Controller

Bradley D. Tilden (Principal Accounting Officer)

/s/ William H. Clapp Director

William H. Clapp

/s/ Ronald F. Cosgrave Director

Ronald F. Cosgrave

/s/ Mary Jane Fate Director

Mary Jane Fate

/s/ Bruce R. Kennedy Director

Bruce R. Kennedy

/s/ R. Marc Langland Director

R. Marc Langland

Not available Director

Byron I. Mallott

/s/ Robert L. Parker, Jr. Director

Robert L. Parker, Jr.

/s/ Richard A. Wien Director

Richard A. Wien

<TABLE>

CONSOLIDATED BALANCE SHEET

Alaska Air Group, Inc.

ASSETS

As of December 31 (In Millions) 1995 1994

Current Assets

Cash and cash equivalents $25.8 $11.6

Marketable securities 109.3 93.3

Receivables - less allowance for doubtful

accounts (1995 - $1.6; 1994 - $2.3) 88.5 70.1

Inventories and supplies 44.8 40.3

Prepaid expenses and other assets 70.0 57.3

Total Current Assets 338.4 272.6

Property and Equipment

Flight equipment 845.9 776.6

Other property and equipment 219.1 208.5

Deposits for future flight equipment 40.7 52.8

1,105.7 1,037.9

Less accumulated depreciation and amortization 312.8 260.0

792.9 777.9

Capital leases

Flight and other equipment 44.4 103.1

Less accumulated amortization 23.3 21.7

21.1 81.4

Total Property and Equipment - Net 814.0 859.3

Intangible Assets - Subsidiaries 63.6 65.7

Other Assets 97.4 118.2

Total Assets $1,313.4 $1,315.8

See accompanying notes to consolidated financial statements.

CONSOLIDATED BALANCE SHEET

Alaska Air Group, Inc.

LIABILITIES AND SHAREHOLDERS' EQUITY

As of December 31 (In Millions) 1995 1994

Current Liabilities

Accounts payable $69.2 $48.6

Accrued aircraft rent 44.1 43.8

Accrued wages, vacation and payroll taxes 45.8 47.4

Other accrued liabilities 55.7 59.6

Short-term borrowings

(Interest rate: 1995 - 6.2%; 1994 - 6.0%) 65.9 25.0

Air traffic liability 124.4 123.3

Current portion of long-term debt and

capital lease obligations 39.7 72.0

Total Current Liabilities 444.8 419.7

Long-Term Debt and Capital Lease Obligations 522.4 589.9

Other Liabilities and Credits

Deferred income taxes 41.0 28.6

Deferred income 20.0 23.0

Other liabilities 72.7 63.3

133.7 114.9

Commitments

Shareholders' Equity

Preferred stock, $1 par value

Authorized: 5,000,000 shares - -

Common stock, $1 par value

Authorized: 30,000,000 shares

Issued: 1995 - 16,718,684 shares

1994 - 16,553,679 shares 16.7 16.6

Capital in excess of par value 155.4 152.8

Treasury stock, at cost: 1995 - 3,153,608 shares

1994 - 3,153,589 shares (71.8) (71.8)

Deferred compensation (3.6) (4.8)

Retained earnings 115.8 98.5

212.5 191.3

Total Liabilities and Shareholders' Equity $1,313.4 $1,315.8

See accompanying notes to consolidated financial statements.

</TABLE>

<TABLE>

CONSOLIDATED STATEMENT OF INCOME

Alaska Air Group, Inc.

Year Ended December 31

(In Millions except Per share Amounts) 1995 1994 1993

Operating Revenues

Passenger $1,258.2 $1,170.2 $1,002.0

Freight and mail 95.2 91.5 84.0

Other - net 64.1 53.9 42.3

Total Operating Revenues 1,417.5 1,315.6 1,128.3

Operating Expenses

Wages and benefits 427.8 401.7 368.2

Aircraft fuel 181.2 152.3 142.6

Aircraft maintenance 79.2 68.3 67.4

Aircraft rent 172.1 168.5 154.9

Commissions 93.1 91.9 80.1

Depreciation and amortization 68.3 56.6 58.4

Special charges - - 15.0

Other 319.9 301.3 258.5

Total Operating Expenses 1,341.6 1,240.6 1,145.1

Operating Income (Loss) 75.9 75.0 (16.8)

Other Income (Expense)

Interest income 10.4 7.8 7.1

Interest expense (51.5) (47.0) (37.6)

Interest capitalized 0.2 0.4 0.4

Loss on sale of assets (0.2) (1.0) (0.6)

Other - net (0.8) 5.8 1.7

(41.9) (34.0) (29.0)

Income (loss) before income tax 34.0 41.0 (45.8)

Income tax expense (credit) 16.7 18.5 (14.9)

Net Income (Loss) $17.3 $22.5 $(30.9)

Primary Earnings (Loss) Per Share $1.28 $1.68 $(2.51)

Fully Diluted Earnings Per Share $1.26 $1.62 AD

Shares used for computation:

Primary 13.5 13.4 13.3

Fully diluted 20.8 19.6 AD

AD = Anti-dilutive

See accompanying notes to consolidated financial statements.

</TABLE>

<TABLE>

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

Alaska Air Group, Inc.

Common Stock

Capital in Treasury Deferred

$1 Par Excess of Stock Compen- Retained

(In Millions) Value Par Value at Cost sation Earnings Total

Balances at December 31, 1992 $16.5 $151.8 $(71.8) $(10.2) $110.4 $196.7

1993 net loss (30.9) (30.9)

Preferred stock dividends and

early redemption premium (3.6) (3.6)

Stock issued under stock plans 0.2 0.2

Employee Stock Ownership Plans

shares allocated 4.4 4.4

Balances at December 31, 1993 16.5 152.0 (71.8) (5.8) 75.9 166.8

1994 net income 22.6 22.6

Stock issued under stock plans 0.1 0.8 0.9

Employee Stock Ownership Plans

shares allocated 1.0 1.0

Balances at December 31, 1994 16.6 152.8 (71.8) (4.8) 98.5 191.3

1995 net income 17.3 17.3

Stock issued under stock plans 0.1 2.6 2.7

Employee Stock Ownership Plan

shares allocated 1.2 1.2

Balances at December 31, 1995 $16.7 $155.4 $(71.8) $(3.6) $115.8 $212.5

See accompanying notes to consolidated financial statements.

</TABLE>

<TABLE>

CONSOLIDATED STATEMENT OF CASH FLOWS

Alaska Air Group, Inc.

Year Ended December 31 (In Millions) 1995 1994 1993

Cash and cash equivalents at beginning of year $11.6 $27.2 $6.9

Cash flows from operating activities:

Net income (loss) 17.3 22.5 (30.9)

Adjustments to reconcile net income to cash:

Depreciation and amortization 68.3 56.6 58.4

Amortization of airframe and engine overhauls 24.3 21.0 29.4

Special charges - - 15.0

Loss (gain) on disposal of assets and debt retired 1.9 (1.1) (0.3)

Increase (decrease) in deferred income taxes 12.4 7.6 (8.1)

Decrease (increase) in accounts receivable (18.5) 5.2 9.1

Decrease (increase) in other current assets (17.2) 0.1 (15.1)

Increase in air traffic liability 1.0 15.1 11.6

Increase in other current liabilities 15.5 27.7 1.1

Interest on zero coupon notes 5.4 9.9 9.9

Leased aircraft return payments and other-net 15.1 (20.5) (31.6)

Net cash provided by operating activities 125.5 144.1 48.5

Cash flows from investing activities:

Proceeds from disposition of assets 3.8 6.5 7.2

Purchases of marketable securities (169.4) (76.1) (150.6)

Sales and maturities of marketable securities 153.5 56.8 153.2

Flight equipment deposits returned 10.8 5.5 2.7

Additions to flight equipment deposits (0.5) (1.1) (0.8)

Additions to property and equipment (102.8) (187.5) (29.6)

Restricted deposits and other 3.9 (4.8) 0.1

Net cash used in investing activities (100.7) (200.7) (17.8)

Cash flows from financing activities:

Proceeds from short-term borrowings 69.9 25.0 20.0

Repayment of short-term borrowings (29.0) (20.0) -

Proceeds from sale and leaseback transactions 56.0 - 36.5

Proceeds from issuance of long-term debt 128.8 104.0 47.2

Long-term debt and capital lease payments (237.4) (70.9) (79.4)

Proceeds from issuance of common stock 2.8 0.8 0.2

Repurchase of preferred stock - - (33.4)

Cash dividends - - (2.4)

Gain (loss) on debt retirement (1.7) 2.1 0.9

Net cash provided by (used in) financing activities (10.6) 41.0 (10.4)

Net increase (decrease) in cash and cash equivalents 14.2 (15.6) 20.3

Cash and cash equivalents at end of year $25.8 $11.6 $27.2

Supplemental disclosure of cash paid (received) during the year for:

Interest (net of amount capitalized) $52.6 $44.8 $33.6

Income taxes (refunds) 5.0 2.2 (18.6)

Noncash investing and financing activities:

1995 - None

1994 - Capital lease obligations of $57.9 million

were incurred due to changes in lease agreements.

1993 - The preferred stock was repurchased in exchange for a $27 million note

payable and a $33.4 million cash payment.

See accompanying notes to consolidated financial statements.

</TABLE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Alaska Air Group, Inc.

December 31, 1995

Note 1. Summary of Significant Accounting Policies

Basis of Presentation

The consolidated financial statements include the accounts of Alaska Air

Group, Inc. (Company or Air Group) and its subsidiaries, the principal

subsidiaries being Alaska Airlines, Inc. (Alaska) and Horizon Air

Industries, Inc. (Horizon). All significant intercompany transactions are

eliminated. Preparation of financial statements requires the use of

management's estimates. Actual results could differ from those estimates.

Certain reclassifications have been made in prior years' financial

statements to conform to the 1995 presentation.

Both subsidiaries operate as airlines. However, each subsidiary's business

plan, competition and economic risks differ substantially due to the

passenger capacity and range of aircraft operated. Alaska is a major

airline serving Alaska, the West Coast, Mexico and Eastern Russia. It

operates an all jet fleet and its average passenger trip is 846 miles.

Horizon is a regional airline serving the Pacific Northwest, Northern

California and Western Canada. It operates both jet and turboprop

aircraft, and its average passenger trip is 221 miles. See Note 10 for

business segment information.

Cash and Cash Equivalents

Cash equivalents consist of highly liquid investments with original

maturities of three months or less. They are carried at cost, which

approximates market.

Inventories and Supplies

Expendable and repairable aircraft parts, as well as materials and

supplies, are stated at average cost. An allowance for obsolescence is

accrued on a straight-line basis over the estimated useful lives of the

aircraft. Inventories related to the retired B727 fleet and other surplus

items are carried at their net realizable value. The allowance at December

31, 1995 and 1994 for all inventories was $13.5 million and $12.1 million,

respectively.

Property, Equipment and Depreciation

Property and equipment are recorded at cost and depreciated using the

straight-line method over their estimated useful lives, which are as

follows:

Aircraft and other

flight equipment 8-20 years

Buildings 10-30 years

Capitalized leases and

leasehold improvements Term of lease

Other equipment 3-15 years

Effective January 1, 1995, the estimated salvage value of MD-80 flight

equipment was changed to 5% from 20%. The new estimate was adopted to

recognize the lower expected salvage values for this aircraft type. The

effect of the change on the year ended December 31, 1995 was to increase

depreciation expense by $4.9 million and decrease net income by $3.0

million ($.22 per share).

Assets and related obligations for items financed under capital leases are

initially recorded at an amount equal to the present value of the future

minimum lease payments. The cost of major airframe overhauls, engine

overhauls, and other modifications which extend the life or improve the

usefulness of aircraft are capitalized and amortized over their estimated

period of use. Other repair and maintenance costs are expensed when

incurred.

Capitalized Interest

Interest is capitalized on flight equipment purchase deposits and ground

facilities progress payments as a cost of the related asset and is

depreciated over the estimated useful life of the asset. Interest

capitalization is suspended when there is a substantial delay in aircraft

deliveries.

Intangible Assets-Subsidiaries

The excess of purchase price over the fair value of net assets acquired is

recorded as an intangible asset and is amortized over 40 years.

Accumulated amortization at December 31, 1995 and 1994 was $19.1 million

and $17.0 million, respectively.

Deferred Income

Deferred income results from the sale and leaseback of aircraft, the

receipt of manufacturer or vendor credits, and from the sale of foreign tax

benefits. This income is recognized over the term of the applicable

agreements.

Passenger Revenues

Passenger revenues are considered earned at the time transportation service

is provided. Tickets sold but not yet used are reported as air traffic

liability.

Frequent Flyer Awards

Alaska operates a frequent flyer award program that provides travel awards

to members based on accumulated mileage. The estimated incremental cost of

providing free travel is recognized as an expense and accrued as a

liability as miles are accumulated. Alaska also defers recognition of

income on a portion of the payments it receives from travel partners

associated with its frequent flyer program. The frequent flyer liability

is relieved as travel awards are used.

Advertising

The costs of advertising are expensed the first time the advertising takes

place. Advertising expense was $15.2 million, $13.0 million, and $16.8

million, respectively, in 1995, 1994 and 1993

Income Taxes

Income taxes are accounted for in accordance with Statement of Financial

Accounting Standards No. 109, which requires the recognition of deferred

tax assets and liabilities for the expected future tax consequences of

events that have been recognized in the Company's financial statements or

tax returns.

Earnings Per Share

Primary earnings per share is calculated by dividing net income after

reduction for any preferred stock dividends by the average number of common

shares and dilutive common stock equivalents outstanding. Common stock

equivalents result from the assumed exercise of stock options. Fully

diluted earnings per share gives effect to the conversion of convertible

debt (after elimination of related interest expense, net of income tax

effect).

Derivative Financial Instruments

The Company enters into interest rate swap agreements to hedge interest

rate risk. The differential to be paid or received from these agreements

is accrued as interest rates change and is recognized currently in the

income statement. The Company enters into hedge agreements to reduce its

exposure to fluctuations in the price of jet fuel. A gain or loss is

recorded quarterly if the fuel index average exceeds the ceiling price or

falls below the floor price.

Note 2. Marketable Securities

Marketable securities are investments that are readily convertible to cash

and have original maturity dates that exceed three months. They are

classified as available for sale and consisted of the following at December

31 (in millions):

1995 1994

Cost:

U.S. govt. sec. $102.8 $78.0

Other 6.5 15.3

$109.3 $93.3

Fair value:

U.S. govt. sec. $103.1 $76.6

Other 6.6 15.0

$109.7 $91.6

Gross unrealized holding gains:

U.S. govt. sec. $ .4 $ --

Other -- --

$ .4 $ --

Gross unrealized holding losses:

U.S. govt. sec. $ -- $1.5

Other -- .2

$ -- $1.7

Of the marketable securities on hand at December 31, 1995, all will mature

during 1997. Based on specific identification of securities sold, the

following occurred in 1995 and 1994 (in millions):

1995 1994

Proceeds from sales $153.5 $56.8

Gross realized gains .3 --

Gross realized losses .5 .5

The above realized gains and losses are included in 1995 interest income of

$10.4 million.

Note 3. Other Assets

Other assets consisted of the following at December 31 (in millions):

1995 1994

Restricted deposits $64.2 $66.9

Leasehold rights 11.2 14.1

Deferred costs 18.2 16.0

Receivables 3.8 21.2

$97.4 $118.2

Leasehold rights and deferred costs are amortized over the term of the

related lease or contract. At December 31, 1995, deferred costs include

$4.2 million of capitalized training costs associated with the B737-400

aircraft. These costs are being amortized over a five-year period which

began in April 1992.

Note 4. Long-Term Debt and Capital Lease Obligations

At December 31, 1995 and 1994, long-term debt and capital lease

obligations were as follows (in millions):

1995 1994

8.2%* notes payable due

through 2009 $335.1 $375.9

6-1/2% convertible senior

debentures due 2005 132.3 --

7-3/4% convertible subordinated

debentures due 2006-2010 10.8 14.4

6-7/8% convertible subordinated

debentures due 2004-2014 54.0 54.0

7-1/4% zero coupon,

convertible subordinated

notes due 2006 -- 129.4

Long-term debt 532.2 573.7

Capital lease obligations 29.9 88.2

Less current portion (39.7) (72.0)

$522.4 $589.9

* weighted average for 1995

During 1995, the Company issued $132.3 million of 6-1/2% convertible

senior debentures due 2005. Each debenture is convertible into common

stock at $21.50 per share. In addition, the Company redeemed all of its 7-

1/4% zero coupon, convertible subordinated notes for $127.7 million.

At December 31, 1995, borrowings of $330.7 million are secured by flight

equipment and real property. The 7-3/4% and 6-7/8% debentures are

convertible into common stock at $28.25 and $33.60 per share, respectively,

subject to adjustments in certain events.

At December 31, 1995, Alaska had a $75 million credit facility with

commercial banks. Advances under this facility may either be for up to a

364-day term, or up to a maximum maturity of three years. Borrowings may

be used for aircraft acquisitions or other corporate purposes, and they

bear interest at a rate which varies based on LIBOR. Certain Alaska loan

agreements contain provisions that require maintenance of specific levels

of net worth, leverage and fixed charge coverage, and limit investments,

lease obligations, sales of assets and additional indebtedness. At

December 31, 1995, the Company was in compliance with all loan provisions,

and under the most restrictive loan provisions, Alaska had $30.8 million of

net worth above the minimum.

At December 31, 1995, long-term debt principal payments for the next five

years were (in millions):

1996 $37.6

1997 $34.7

1998 $35.7

1999 $53.5

2000 $59.8

Note 5. Commitments

Lease Commitments

Lease contracts for 114 aircraft have remaining lease terms of one to 17

years. The majority of airport and terminal facilities are also leased.

Total rent expense was $201.9 million, $196.9 million and $180.4 million,

in 1995, 1994 and 1993, respectively. Future minimum lease payments under

capital leases and long-term operating leases as of December 31, 1995 are

shown below (in millions):

Capital

Leases Operating Leases Total

Aircraft Facilities

1996 $ 4.1 $173.8 $15.2 $193.1

1997 4.1 165.1 14.0 183.2

1998 4.1 153.7 13.7 171.5

1999 4.1 142.0 13.6 159.7

2000 4.1 132.8 11.9 148.8

Thereafter 15.1 717.5 30.2 762.8

Total lease

payments 35.6 $1,484.9 $98.6 $1,619.1

Less amount

representing

interest 5.7

Present value

of capital lease

payments $29.9

Aircraft Commitments

The Company has firm orders for 8 Dornier 328s to be delivered between 1996

and 1998, and four MD-83s and two B737-400s to be delivered in 1996 and

1997. The total amount of these commitments is approximately $270 million.

As of December 31, 1995, deposits related to the future equipment

deliveries were $33.0 million. In addition to the ordered aircraft, the

Company holds purchase options on 40 Dornier 328s.

Note 6. Stock Plans

Air Group has two stock option plans, which provide for the purchase of Air

Group common stock at its market price on the date of grant by certain

officers and key employees of Air Group and its subsidiaries. Under the

plans, the incentive and non qualified stock options granted have terms of

up to approximately ten years. Up to half of the options provide for stock

appreciation rights. Changes in the number of shares subject to option are

summarized as follows:

1995 1994 1993

Outstanding, beginning

of year 1,044,143 861,362 770,420

Granted(a) 425,500 330,200 172,200

Exercised (165,005) (58,469) (12,600)

Canceled (143,050) (88,950) (68,658)

Outstanding, end

of year 1,161,588 1,044,143 861,362

Exercisable, end

of year(b) 596,338 644,843 542,012

Available for granting

in future periods 102,250 409,000 701,867

Average price of options:

Exercised

during the year $16.11 $13.65 $14.65

Outstanding

at year-end $16.56 $17.15 $17.06

(a) The average price of the options granted in 1995 was $15.37

(b) Options exercisable at year-end 1995 expire between June 1996 and June

2004.

In addition, 2,273,700 shares of common stock are subject to

nontransferable investment options held by management employees, for which

the Company received $3.1 million, which is included with other liabilities

on the Balance Sheet. These options are subject to mandatory redemption at

$3.1 million in February 1997, and they allow the holder to purchase common

stock at $27 per share until that date.

Note 7. Employee Benefit Plans

Pension Plans

Four defined benefit and five defined contribution retirement plans cover

various employee groups of Alaska and Horizon. The defined benefit plans

provide benefits based on an employee's term of service and average

compensation for a specified period of time before retirement. Pension

plans are funded as required by the Employee Retirement Income Security Act

of 1974 (ERISA).

The defined benefit plan assets are primarily invested in common stocks and

fixed income securities. Plan assets exceeded the accumulated benefit

obligation at December 31, 1995 and 1994. The following table sets forth

the funded status of the plans at December 31, 1995 and 1994 (in millions):

1995 1994

Benefit obligation -

Vested $155.8 $114.9

Nonvested 22.0 15.8

Accumulated benefit

obligation $177.8 $130.7

Plan assets

at fair value $184.4 $144.1

Projected benefit

obligation 199.9 147.2

Plan assets less

projected benefit

obligation (15.5) (3.1)

Unrecognized

transition asset (1.1) (1.4)

Unrecognized prior

service cost 2.8 3.5

Unrecognized loss 32.6 15.9

Prepaid pension cost $18.8 $14.9

The weighted average discount rate used to determine the projected benefit

obligation was 7.5% and 9.0% as of December 31, 1995 and 1994,

respectively. The calculation assumed a weighted average rate of increase

for future compensation levels of 5.1% and 5.2% for 1995 and 1994,

respectively. The expected long-term rate of return on plan assets used in

1995 and 1994 was 10%.

Net pension expense for the defined benefit plans included the following

components for 1995, 1994 and 1993 (in millions):

1995 1994 1993

Service cost (benefits

earned during the

period) $11.4 $12.4 $10.0

Interest cost on projected

benefit obligation 12.9 11.9 10.4

Actual return on assets (37.0) (2.1) (14.1)

Net amortization

and deferral 23.3 (10.9) 2.3

Net pension expense $10.6 $11.3 $8.6

The defined contribution plans are deferred compensation plans under

section 401(k) of the Internal Revenue Code. Some of these plans require

Company matching contributions based on a percentage of participants'

contributions. One plan has an Employee Stock Ownership Plan (ESOP)

feature. The ESOP owns Air Group common shares which are held in trust for

eligible employees. The Company has recorded deferred compensation to

reflect the value of the shares not yet allocated to eligible employees'

accounts. As these shares are allocated to employees, compensation expense

is recorded and deferred compensation is reduced.

Alaska and Horizon also maintain an unfunded, noncontributory benefit plan

for certain elected officers. The present value of unfunded benefits for

this plan was accrued as of December 31, 1995 and 1994.

Total expense for all pension plans was $22.2 million, $22.5 million and

$19.8 million, respectively, in 1995, 1994 and 1993.

Profit Sharing Plans

Alaska and Horizon have employee profit sharing plans. Profit sharing

expense for 1995, 1994 and 1993 was $-0- million, $3.6 million and $2.3

million, respectively.

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