UNITED STATES SECURITIES AND EXCHANGE COMMISSION

(Mark One)

For the quarterly period ended September 30, 2002.

ORMarch 31, 2003.

For the transition period from        . . . . . . to . . . . . .

Commission file number 1-8957

ALASKA AIR GROUP, INC.

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. YesX[X]No   [ ]

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). 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 26,549,16126,605,733 common shares, par value $1.00, outstanding at OctoberMarch 31, 2002.2003.

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PART I. FINANCIAL INFORMATION

ASSETS

See accompanying notes to consolidated financial statements.

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

LIABILITIES AND SHAREHOLDERS’ EQUITY

See accompanying notes to consolidated financial statements.

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

See accompanying notes to consolidated financial statements.

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CONSOLIDATED STATEMENTSSTATEMENT OF INCOMESHAREHOLDERS’ EQUITY (unaudited)
Alaska Air Group, Inc.

See accompanying notes to consolidated financial statements.

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

See accompanying notes to consolidated financial statements.

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

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

The accompanying unaudited consolidated financial statements of Alaska Air Group, Inc. (the Company)Company or Air Group) include the accounts of itsour principal subsidiaries, Alaska Airlines, Inc. (Alaska) and Horizon Air Industries, Inc. (Horizon). These interim consolidated financial statements are unaudited and should be read in conjunction with the consolidated financial statements in the Company’s annual report on Form 10-K for the year ended December 31, 2001, subject to the restatement described in Note 2 below2002. In the opinion of management, all adjustments (consisting only of normal recurring accruals) have been made which are necessary to present fairly the financial position of the Company as of September 30, 2002,March 31, 2003, as well as the results of its operations for the three and nine months ended September 30,March 31, 2002 and 2001. Except for the restatement of the prior year’s financial statements as described below, the2003. The adjustments made were of a normal recurring nature. Certain reclassifications

These consolidated financial statements have been made in the prior year’s restated financial statements to conform to the 2002 presentation.

         The preparation of consolidated financial statementsprepared in conformity with accounting principles generally accepted in the United States of America (GAAP) requiresand 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 discussedChange in Note 2, in June 2002, the Company restated its consolidated financial statements for the year ended December 31, 2001 and its unaudited consolidated financial statements for the quarterly period ended March 31, 2002 and for all quarterly periods during the year ended December 31, 2001. The Company expects to file an amendment to its Annual Report on Form 10-K for the year ended December 31, 2001, which will include its restated financial statements.

Accounting Principle

Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets”. UnderAssets.” In connection with the adoption of this Statementstatement, the Company’sCompany determined that all of its goodwill will no longer be amortized, but instead will be tested for impairment onwas impaired. As a minimum of an annual basis. The impact of discontinuing amortization of existing goodwill has resulted in an increase of net income of $1.5 million for the nine months ended September 30, 2002. During the second quarter ofresult, effective January 1, 2002, the Company completed the first steprecorded a one-time, non-cash charge of $51.4 million ($12.5 million Alaska and $38.9 million Horizon) to write-off all of its impairment test related to its $51.4 milliongoodwill. This charge is reflected as a cumulative effect of goodwill. The test was performed using Alaska and Horizon as separate reporting units. Results of the test indicate that there may be an impairment in each reporting unit as it was determined that the net book value of each reporting unit exceeded its fair value. As a result, the Company isaccounting change in the processConsolidated Statement of completingOperations for the second step of the impairment test to determine the amount of impairment, if any. The Company is unable to estimate the amount of the possible impairment, but is expected to complete the second step of the impairment test during the fourth quarter ofthree months ended March 31, 2002.

New Accounting Standards

In August 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting StandardsSFAS No. 143, “Accounting for Asset Retirement Obligations”, which requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The statement also requires that the associated asset retirement costs arebe capitalized as part of the carrying amount of the long-lived asset. This statement is effective for financial statements issued for fiscal years beginning after June 15, 2002.January 1, 2003. The adoption of this

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statement is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

         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 financial position, results of operations or cash flows.

In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”. This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees. Additionally, this Interpretation clarifies the requirements for recognizing a liability at the inception of the guarantee equal to the fair value of the obligation undertaken in issuing the guarantee and

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incorporates the guidance in FASB Interpretation No. 34, “Disclosure of Indirect Guarantees of Indebtedness of Others.” Disclosures under Interpretation No. 45 are effective for financial statements issued after December 15, 2002. While the Company has various guarantees included in contracts in the normal course of business, primarily in the form of indemnities, the adoption of the liability recognition provision of Interpretation No. 45 had no significant impact on the financial condition and results of operations of the Company.

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” which requires the consolidation of variable interest entities, as defined. This Interpretation is applicable to variable interest entities created after January 31, 2003. Variable interest entities created prior to February 1, 2003, must be consolidated effective July 1, 2003. Disclosures are required currently if the Company expects to consolidate any variable interest entities. The Company does not currently believe that any entities will be consolidated as a result of Interpretation No. 46.

In April 2002,2003, the FASB issued Statement of Financial Accounting Standards No. 145, “Rescission149, “Amendment of FASB StatementsStatement 133 on Derivative Instruments and Hedging Activities” (SFAS No. 4, 44149). SFAS No. 149 amends and 64, Amendmentclarifies certain derivative instruments embedded in other contracts, and for hedging activities under Statement 133. SFAS No. 149 is effective for certain contracts entered into or modified by the Company after June 30, 2003. The Company is currently evaluating SFAS No. 149 to determine its impact on the financial condition and results of FASBoperations of the Company.

Note 2. Prepaid Expenses and Other Assets

At December 31, 2002 and March 31, 2003, prepaid expenses and other assets included prepaid aircraft rent of $30.4 million and $51.2 million, respectively.

Note 3. Stock Option Plans

The Company has three stock option plans that provide for the grant of options to purchase Air Group common stock at stipulated prices on the date of the grant by certain officers and key employees of Air Group and its subsidiaries. The Company applies the intrinsic value method in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees”, and related Interpretations in accounting for stock options. Accordingly, no compensation cost has been recognized for these plans as the exercise price of options equals the fair market value on the date of grant.

Had compensation cost for the Company’s stock options been determined in accordance with Statement of Financial Accounting Standards No. 13,123, loss before accounting change and Technical Corrections” (“applicable loss per share (EPS) would have been increased to the pro forma amounts indicated below (in millions except per share amounts):

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In December 2002, the Financial Accounting Standards Board (FASB) issued Statement 145”)of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure” (SFAS No. 148). 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 thatSFAS No. 148 amends the resulting agreement is an operating lease shall be accounted for under the sale-leasebacktransition and disclosure provisions of SFAS No. 98. Statement 145 also includes minor modifications123. During the fourth quarter of 2002, the Company adopted the disclosure provisions of SFAS No. 148 and is currently evaluating SFAS No. 148 to existing GAAP literature. Statement 145 is generally effectivedetermine if it will adopt SFAS No. 123 to account for financial statements issued for fiscal years beginning after May 15, 2002. The adoptionemployee stock options using the fair value method and, if so, when to transition to that method. If the Company had adopted the prospective transition method as prescribed by SFAS No. 148 in the first quarter of this statement is not expected to2003, compensation expense of $0.1 million would have a materialbeen recorded on an after-tax basis, and would have had an insignificant impact on the Company’s financial position, results of operations or cash flows.

         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 for transactions on or after January 1, 2003 and is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.loss per share.

Note 2. Restatement of Financial Statements

         In June 2002, the Company changed its accounting policies relating to the accrual for certain lease return costs and the capitalization of software development costs, and restated its previously issued consolidated financial statements for the year ended December 31, 2001, including the interim periods within that year. The effect of these changes is as shown below and results in an increase in shareholders’ equity of $28.9 million as of December 31, 2001. In addition, the Company changed its accounting for aircraft purchase commitments assumed by a third party, and made a reclassification of deferred income taxes, neither of which impact previously reported equity or earnings. These changes are more fully described below. Because the former methods are not considered to be in compliance with generally accepted accounting principles in the United States of America, the financial statements have been restated to give retroactive effect to these changes.

Leased Aircraft Return Costs

         The Company leases many of its aircraft under relatively long-term operating lease agreements. These aircraft are subject to periodic airframe and engine overhauls based on the Company’s maintenance program. The Company’s previous policy was to capitalize these overhauls and amortize the costs over the estimated lives of the overhauls. Separately, many of the Company’s lease agreements contain provisions which require that at the end of the lease, either certain minimum times remain until the next overhaul or the Company make a cash payment to the lessor. At the inception of the lease, the Company does not know the balance between actual time remaining to the next overhaul and cash

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payments that will be used to satisfy its return commitments. Under the previous method, the Company accrued the costs of returning leased aircraft, including any cash payments due to lessors and any unamortized overhauls, on a straight-line basis over the lives of the leases. Airframe and engine overhauls are now capitalized and amortized over the remaining lease term, if shorter than the life of the overhaul. Additionally, under our 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, versus over the entire lease term.

Internally Developed Software

         The Company also revised its accounting practices for certain costs of internally developed software. These costs were previously charged to expense as they were incurred, and they are now capitalized and amortized over the estimated lives of the software.

Aircraft Purchase Commitments

         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 disclosed as a purchase commitment and not included in long-term debt or deposits for future flight equipment.

The effect of the restatement for the three and nine months ended September 30, 2001 is as follows:

The effect of the restatement on selected balance sheet items is as follows as of December 31, 2001:

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Note 3.4. Frequent Flyer Program

Alaska’s Mileage Plan liabilities are included under the following balance sheet captions:captions (in millions):