SEC Info - Alaska Air Group, Inc. - ‘424B2’ on 11/18/97

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Alaska Air Group, Inc. – ‘424B2’ on 11/18/97

As of: Tuesday, 11/18/97 · Accession #: 1032210-97-250 · File #: 333-04835

  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

11/18/97  Alaska Air Group, Inc.            424B2                  1:200K                                   Donnelley R R & S… Co/FA

Prospectus — Rule 424(b)(2)
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 424B2       Prospectus                                            69    331K

Document Table of Contents

Page	(sequential)	\|	(alphabetic)	Top
			Alternative Formats (Word, et al.) Air Group and Alaska Alaska Airlines Capitalization Capitalized interest Cash and cash equivalents Cash and marketable securities Certain U.S. Federal Income Tax Considerations for Non-U.S. Holders Common Stock Company, The December 31, 1995 December 31, 1996 Deferred income Description of Common Stock Experts Forward-Looking Statements Horizon Income taxes Income tax expense Incorporation of Certain Documents by Reference Index to Consolidated Financial Statements Inventories and supplies Legal Opinions Management Management's Discussion and Analysis of Financial Condition and Results of Operations Merrill Lynch International Operating revenues Other Plan of Distribution Price Range of Common Stock and Dividend Policy Prospectus Supplement Prospectus Supplement Summary Risk Factors Selected Financial and Operating Data Table of Contents The Company Underwriting Use of Proceeds
1	1st Page - Filing Submission
"	Prospectus Supplement
3	Forward-Looking Statements
"	Incorporation of Certain Documents by Reference
5	Prospectus Supplement Summary
"	The Company
8	Risk Factors
12	Alaska Airlines
13	Horizon
18	Use of Proceeds
"	Capitalization
19	Price Range of Common Stock and Dividend Policy
20	Selected Financial and Operating Data
21	Management's Discussion and Analysis of Financial Condition and Results of Operations
23	Income tax expense
26	Cash and marketable securities
28	Management
29	Certain U.S. Federal Income Tax Considerations for Non-U.S. Holders
32	Underwriting
34	Legal Opinions
"	Experts
35	Common Stock
37	Air Group and Alaska
38	Description of Common Stock
"	Other
39	Plan of Distribution
40	Index to Consolidated Financial Statements
44	Operating revenues
47	Cash and cash equivalents
"	Inventories and supplies
48	Capitalized interest
"	Deferred income
"	Income taxes
57	December 31, 1995
"	December 31, 1996
64	Table of Contents
69	Merrill Lynch International

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FILED PURSUANT TO RULE 424B2
FILE NUMBER 333-4835

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. THIS +
+PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS SHALL NOT CONSTITUTE AN +
+OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY +
+SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR +
+SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE +
+SECURITIES LAWS OF ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS SUPPLEMENT DATED NOVEMBER 17, 1997

PROSPECTUS SUPPLEMENT
---------------------
(TO PROSPECTUS DATED AUGUST 22, 1996)

3,000,000 SHARES

[LOGO OF ALASKA AIR GROUP, INC.]
COMMON STOCK

-----------

All the shares of Common Stock offered hereby are being sold by Alaska Air
Group, Inc. ("Alaska Air Group" or the "Company"). Of the 3,000,000 shares of
Common Stock offered, 2,550,000 shares are being offered in the United States
and Canada (the "U.S. Offering") and 450,000 shares are being offered outside
the United States and Canada (the "International Offering" and, together with
the U.S. Offering, the "Offerings"). The public offering price per share and
the underwriting discount per share will be identical for both Offerings. See
"Underwriting."

The Common Stock is listed on the New York Stock Exchange (the "NYSE") under
the symbol "ALK." On November 14, 1997, the last reported sales price of the
Common Stock on the NYSE was $35 1/2 per share. See "Price Range of Common
Stock and Dividend Policy."

SEE "RISK FACTORS" BEGINNING ON PAGE S-8 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.

-----------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

[Enlarge/Download Table]

==========================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
------------------------------------------------------------------------------------------

Per Share....................... $ $ $
------------------------------------------------------------------------------------------
Total(3)........................ $ $ $
==========================================================================================

(1) The Company has agreed to indemnify the several Underwriters against
certain liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted the U.S. Underwriters and the International
Managers options, exercisable within 30 days of the date hereof, to
purchase up to an additional 382,500 shares and 67,500 shares of Common
Stock, respectively, solely to cover over-allotments, if any. If such
options are exercised in full, the total Price to Public, Underwriting
Discount and Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."

-----------

The shares of Common Stock are offered by the several Underwriters subject to
prior sale, when, as and if issued to and accepted by them, subject to approval
of certain legal matters by counsel for the Underwriters and certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part. It is expected that
delivery of the Common Stock will be made in New York, New York on or about
, 1997.

-----------
MERRILL LYNCH & CO. MORGAN STANLEY DEAN WITTER

-----------

The date of this Prospectus Supplement is , 1997.

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[ARTWORK--MAP OF THE ALASKA AIRLINES AND HORIZON AIRLINES ROUTE SYSTEMS]

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FORWARD-LOOKING STATEMENTS

This Prospectus Supplement includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and is subject to the safe-harbor created by
such sections. All statements other than statements of historical facts
included in this Prospectus Supplement, including, without limitation, the
statements under "Prospectus Supplement Summary," "The Company" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and located elsewhere or incorporated by reference herein
regarding industry prospects and the Company's results of operations or
financial position are forward-looking statements. Such forward-looking
statements represent management's current expectations and are inherently
uncertain. Investors are warned that the Company's actual results may differ
significantly from management's expectations and, therefore, from the results
discussed in such forward-looking statements. Certain factors that might cause
such differences include, but are not limited to, the "Risk Factors" described
herein. Investors are cautioned not to place undue reliance on such forward-
looking statements, which speak only as of the date hereof.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents have been filed with the Securities and Exchange
Commission (the "Commission") pursuant to the Exchange Act and are
incorporated into this Prospectus by reference and made a part hereof: Alaska
Air Group's Annual Report on Form 10-K for the fiscal year ended December 31,
1996 and Alaska Air Group's Quarterly Reports on Form 10-Q for the fiscal
quarters ended March 31, 1997, June 30, 1997 and September 30, 1997, the
description of Alaska Air Group's Common Stock contained in Alaska Air Group's
Registration Statement on Form 8-A filed with the Commission on September 19,
1985, including any amendments or reports filed for the purposes of updating
such description, and the description of the rights to purchase Series A
Participating Preferred Stock in Alaska Air Group's Registration Statement on
Form 8-A filed with the Commission on December 11, 1986, including any
amendments or reports filed for purposes of updating such description.

All documents filed by Alaska Air Group pursuant to Section 13(a), 13(c), 14
or 15(d) of the 1934 Act subsequent to the date of this Prospectus Supplement
and prior to the termination of this offering shall be deemed to be
incorporated by reference in this Prospectus Supplement, and to be a part
hereof from the date of filing of such documents. Any statement incorporated
by reference herein shall be deemed to be modified or superseded for purposes
of this Prospectus Supplement to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
statement modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Prospectus Supplement. Alaska Air
Group will provide without charge to each person to whom a copy of this
Prospectus Supplement is delivered, upon the written or oral request of such
person, a copy of any document incorporated by reference in this Prospectus
Supplement (other than exhibits to such documents unless such exhibits are
specifically incorporated by reference to such documents). Requests for such
copies should be directed to the office of the Corporate Secretary, Alaska Air
Group, Inc., P.O. Box 68947, Seattle, Washington 98168 (telephone (206) 433-
3131).

CERTAIN PERSONS PARTICIPATING IN THE OFFERINGS MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERINGS,
MAY BID FOR AND PURCHASE COMMON STOCK IN THE OPEN MARKET AND MAY IMPOSE
PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES SEE "UNDERWRITING."

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PROSPECTUS SUPPLEMENT SUMMARY

The following summary is qualified in its entirety by the detailed
information and consolidated financial statements included elsewhere herein or
incorporated by reference into this Prospectus Supplement and the accompanying
Prospectus. This Prospectus Supplement should be read in conjunction with the
accompanying Prospectus dated August 22, 1996. Unless indicated otherwise, the
information contained herein assumes that the Underwriters' over-allotment
options are not exercised.

THE COMPANY

Alaska Air Group provides air transportation services to the West Coast as
well as to Canada, Mexico and Russia through its two principal subsidiaries,
Alaska Airlines, Inc. ("Alaska Airlines") and Horizon Air Industries, Inc.
("Horizon"). Alaska Airlines, founded in 1932, is the tenth largest commercial
air carrier in the United States. Its major centers of operations are Seattle,
Washington; Portland, Oregon; and Anchorage, Alaska. From these principal
cities, the airline serves destinations in Alaska; to Alaska from the West
Coast; along the west coasts of the United States, Canada (Vancouver) and
Mexico; and to Russia. As of September 30, 1997, Alaska Airlines operated 78
jet aircraft with an average age of approximately 7.3 years. Horizon is the
largest regional airline in the Pacific Northwest and operates from hubs at
Seattle and Portland. Through a code-sharing agreement with Alaska Airlines,
Horizon provides interconnecting passenger traffic to Alaska Airlines. As of
September 30, 1997, Horizon operated 57 jet and turbo-prop aircraft with an
average age of approximately 9.7 years. The Company also has code-sharing
agreements between Northwest Airlines and both Alaska Airlines and Horizon.

The Company has experienced consistent revenue growth since 1992 primarily
due to capacity growth and improving load factors. By concentrating in one
geographic area, the West Coast, the Company has been able to capture the
largest departure share in the major markets where it operates. Through a cost
reduction program begun in 1992, Alaska Airlines reduced operating expenses per
ASM by over 20% and believes it is one of the lowest cost carriers among major
airlines. Additionally, the Company has had consistent financial results,
realizing a profit in 22 of the last 24 years.

In 1996, Alaska Air Group's consolidated operating revenues and operating
income were approximately $1.6 billion and $89.0 million, respectively. During
this period, 90% of operating revenues were from passenger services, 6% from
freight and mail, and 4% from mileage plan partners and other nonpassenger
sources. Alaska Airlines carried approximately 11.8 million passengers during
this period and accounted for approximately 81% of Alaska Air Group's
consolidated operating revenues. In 1996, Horizon carried approximately 3.8
million passengers and accounted for the remaining 19% of Alaska Air Group's
consolidated operating revenues.

STRATEGY

The Company's strategy is to identify target markets and then to achieve
strong market positions by offering high-frequency, high-quality service at
competitive prices. The Company's growth strategy has been and continues to be
to increase frequencies in existing markets, as this strategy represents the
lowest cost and lowest risk alternative. The combined route system of Alaska
Airlines and Horizon, when viewed as a whole, blends aspects of both the hub-
and-spoke and linear route system concepts, resulting in an integrated system
that provides passengers with more frequent flights than the Company's
competitors in a substantial majority of the 142 nonstop city pairs that the
Company serves. Both Alaska Airlines and Horizon seek to differentiate
themselves from their competitors by offering superior levels of value and
service. The Company targets higher yielding travelers while offering low fares
to discretionary travelers and, through its yield management system, is able to
optimize this mix, resulting in higher overall yields and load factors. This
capability will be further enhanced by a new yield management system that
should be operational by mid-1998. Alaska Airlines' service has been recognized
with a number of awards, including Airline of the Year or highest-ranked major
airline recognition from Conde Nast Traveler magazine in each of the last five
years, "Best U.S. Airline" designation from Travel and Leisure Magazine and
high rankings in consumer magazines and customer surveys by J.D. Power &
Associates and the Zagat's United States Travel Survey.

The Company believes that its strategy of differentiating the products and
services offered by Alaska Airlines and Horizon, together with maintaining low
costs, will increase market share, result in higher load factors and
consequently increase the spread between revenue per available seat mile
("ASM") ASM and cost per ASM.

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THE OFFERINGS

The offering of 2,550,000 shares of common stock, par value $1.00 per share,
including the associated preferred stock purchase rights (the "Common Stock")
initially being offered in the United States and Canada (the "U.S. Offering")
and the offering of 450,000 shares of Common Stock initially being offered
outside the United States and Canada (the "International Offering") are
collectively referred to as the "Offerings." See "Underwriting."

Shares of Common Stock
Offered:
U.S. Offering............ 2,550,000 shares
International Offering... 450,000 shares
---------
Total................ 3,000,000 shares
=========

Shares of Common Stock
Outstanding After the
Offerings.................. 17,746,611 shares(1)

Use of Proceeds............. The net proceeds to the Company from the
Offerings will be added to working capital
and will be available for general corporate
purposes, among which may be the financing
of capital expenditures by Alaska Airlines
and Horizon, including the acquisition of
aircraft and related equipment. See "Use of
Proceeds" in this Prospectus Supplement.

NYSE Symbol................. "ALK"

Dividend Policy............. The Company has not paid cash dividends on
its Common Stock since 1992 and does not
currently anticipate paying cash dividends
in the foreseeable future. See "Price Range
of Common Stock and Dividend Policy."
--------
(1) Based on the number of shares outstanding as of September 30, 1997
(excludes shares issuable upon exercise of stock options and conversion of
convertible debt).

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SUMMARY FINANCIAL AND OPERATING DATA

The following table summarizes selected financial and operating information
for Alaska Air Group. The consolidated financial data for each of the five
years ended December 31, 1996, set forth below, have been taken from the
financial data included in Alaska Air Group's Form 10-K for the year ended
December 31, 1996 incorporated by reference herein. The financial statements
for the five years ended December 31, 1996 have been examined by Arthur
Andersen LLP, independent public accountants. This summary should be read in
conjunction with the financial statements, including the notes thereto, and
other information appearing elsewhere or incorporated by reference herein. The
selected financial information for the nine-month periods ended September 30,
1997 and 1996 is unaudited but includes all adjustments (consisting only of
normal recurring adjustments) that are necessary, in the opinion of management,
for a fair presentation of results of operations for such periods. The airline
business is seasonal in nature and the operating results for the nine months
ended September 30, 1997 are not necessarily indicative of results to be
expected for the full year.

[Enlarge/Download Table]

NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------ ------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS
AND OPERATING DATA)

CONSOLIDATED FINANCIAL
DATA:
Statement of Income
Data:
Operating revenues..... $1,316.6 $1,233.0 $1,592.2 $1,417.5 $1,315.6 $1,128.3 $1,115.4
Operating expenses..... 1,204.8 1,135.6 1,503.2 1,341.8 1,241.6 1,145.1 1,210.2
Operating income
(loss)................ 111.8 97.4 89.0 75.7 74.0 (16.8) (94.8)
Net income (loss)...... 57.3 43.6 38.0 17.3 22.5 (30.9) (84.8)
Average primary shares
outstanding........... 14.7 14.3 14.3 13.5 13.4 13.3 13.3
Primary earnings (loss)
per share............. 3.90 3.06 2.65 1.28 1.68 (2.51) (6.87)
Fully diluted earnings
per share............. 2.78 2.22 2.05 1.26 1.62 (a) (a)
Balance Sheet Data (at
end of period):
Cash and marketable
securities............ $ 192.0 $ 131.3 $ 101.8 $ 135.1 $ 104.9 $ 101.1 $ 83.4
Total assets........... 1,450.7 1,331.9 1,311.4 1,313.4 1,315.8 1,135.0 1,208.4
Long-term debt and
capital lease
obligations........... 411.6 452.9 404.1 522.4 589.9 525.4 487.8
Shareholders' equity... 336.1 277.7 272.5 212.5 191.3 166.8 196.7
ALASKA AIRLINES
OPERATING DATA(B):
Revenue passenger miles
(000,000).............. 7,896 7,524 9,831 8,584 7,587 5,514 5,537
Available seat miles
(000,000).............. 11,589 11,409 14,904 13,885 12,082 9,426 9,617
Revenue passenger load
factor................. 68.1% 65.9% 66.0% 61.8% 62.8% 58.5% 57.6%
Yield per passenger
mile................... 12.46c 11.86c 11.67c 11.59c 12.20c 14.32c 14.50c
Operating revenue per
available seat mile.... 9.47c 8.81c 8.70c 8.23c 8.79c 9.62c 9.44c
Operating expenses per
available seat mile.... 8.53c 8.01c 8.10c 7.71c 8.27c 9.88c 10.49c
HORIZON AIR OPERATING
DATA(B):
Revenue passenger miles
(000,000).............. 658 656 867 841 733 560 486
Available seat miles
(000,000).............. 1,070 1,097 1,462 1,414 1,165 986 905
Revenue passenger load
factor................. 61.5% 59.8% 59.3% 59.5% 62.9% 56.8% 53.7%
Yield per passenger
mile................... 32.94c 33.92c 33.14c 31.48c 33.35c 37.93c 40.69c
Operating revenue per
available seat mile.... 21.24c 21.25c 20.61c 19.77c 22.06c 22.65c 23.00c
Operating expenses per
available seat mile.... 21.00c 20.59c 20.60c 19.47c 20.95c 21.76c 22.19c

--------
(a) Antidilutive.

(b) See "Selected Financial and Operating Data" in this Prospectus Supplement
for definition of terms.

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RISK FACTORS

The Company identifies the following important factors, which could cause
actual results to differ materially from any results that might be projected,
forecast, estimated or budgeted by the Company, as forward-looking
information. All such factors are difficult to predict and the majority are
beyond the control of the Company. In evaluating an investment in the Common
Stock, prospective investors should carefully review the information contained
elsewhere in this Prospectus Supplement and should particularly consider the
following factors. See "Forward-Looking Statements" in this Prospectus
Supplement.

COMPETITION

Competition in the air transportation industry is intense. Any domestic air
carrier deemed fit by the United States Department of Transportation (the
"DOT") is allowed to operate scheduled passenger service in the United States.
In 1996, Alaska Airlines and Horizon together carried 2.3% of all U.S.
domestic passenger traffic. Some of the Company's competitors are
substantially larger than Alaska Airlines 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.

The airline industry is highly susceptible to price discounting, aided by
the fact that airlines incur very low marginal costs for providing service to
passengers occupying otherwise unsold seats. There can be no assurance that
certain of the Company's competitors or a new entrant will not undercut the
Company's fares in the future or increase capacity on routes in an effort to
increase market share. Such activity by other airlines could reduce the level
of fares or passenger traffic on the Company's routes to the point where
profitable levels of operations could not be achieved.

FUEL

Fuel costs represented 15.6% of the Company's total operating expenses in
1996 and 14.5% in the nine months ended September 30, 1997. Fuel prices, which
can be volatile and are outside of the Company's control, can have a material
adverse effect on the Company's business, financial condition and results of
operations. A one cent change in the fuel price per gallon affects annual fuel
costs by approximately $3.1 million (based on 1996 consumption). The Company
has in the past hedged against its exposure to fuel costs, but does not
currently hedge against such exposure. The Company evaluates hedging
strategies on an ongoing basis.

EMPLOYEE RELATIONS

Labor costs represented 33.1% of the Company's total operating expenses for
the nine months ended September 30, 1997. Wage rates can have a material
adverse effect on the Company's business, financial condition and results of
operations. At September 30, 1997, labor unions represented approximately 88%
of Alaska Airlines' and 40% of Horizon's employees. 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. In October 1997, Alaska Airlines and the Airline
Pilots Association reached agreement on a 5 1/2 year contract, which becomes
amendable in May 2003 and may be extended for an additional two years. In
September 1997, Alaska Airlines began formally negotiating a new contract with
the union representing its mechanics and rampservice employees. Furthermore,
Alaska Airlines has agreements with the Association of Flight Attendants and
the union representing its clerical office and passenger service employees. In
September 1997, the pilots of Horizon voted to be represented by the
International Brotherhood of Teamsters. Contract negotiations have not yet
commenced. Horizon and the Association of Flight Attendants are continuing
mediated negotiations for a new contract. The Company cannot predict the terms
of any future collective bargaining agreement and therefore the effect, if
any, on the Company's business, financial condition and results of operations.
The inability of the Company and each of the foregoing unions or any other
union representing employees of the Company to reach an agreement could have a
material adverse effect on the Company's business, financial condition and
results of operations.

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HIGH OPERATING LEVERAGE

The airline industry is generally characterized by a high degree of
operating leverage, a phenomenon that also affects the Company. Due to high
fixed costs, including payments made in connection with the Company's aircraft
leases, the expenses relating to the operation of any given flight do not vary
proportionately with the number of passengers or amount of cargo carried,
while revenues generated from a particular flight are directly related to the
number of passengers or amount of cargo carried and the fare structure of the
flight. Accordingly, a decrease in revenues could result in a
disproportionately higher decrease in profits.

FUTURE CAPITAL REQUIREMENTS

The Company has announced agreements to purchase a total of 27 Boeing 737
aircraft, with an option to purchase 22 more over the next seven years. Three
of the aircraft were delivered in June and July 1997. In addition, the Company
announced it will acquire up to 13 new Dash 8-200 aircraft in 1998. The
Company estimates the aggregate net cost for all aircraft currently on order
to be approximately $925 million. The Company will require significant amounts
of financing to meet its aircraft capital commitments and may require
additional financing to fund its other business needs as well. The Company has
relied in the past, and expects to continue to rely, on substantial inflows of
capital from several external sources. Among other things, the Company also
relied, and expects to continue to rely, on certain leveraged leasing
arrangements. There can be no assurance that such leasing or other financing
arrangements will continue to be available. The ability of the Company to
obtain financing may be affected by its financial position and leverage, as
well as prevailing economic conditions and the cost of financing generally. If
the Company is unable to obtain such financing, its ability to acquire new
aircraft or to expand its operations could be substantially impaired.

SEASONAL NATURE OF AIRLINE BUSINESS; WEATHER

Due to the greater demand for air travel during the summer months, revenue
in the airline industry in the second and third quarters of the year is
generally significantly greater than revenue in the first and fourth quarters
of the year. The Company's results of operations generally reflect this
seasonality, but have also been impacted by numerous other factors that are
not necessarily seasonal, including the extent and nature of competition from
other airlines, fare wars, excise and similar taxes, changing levels of
operations, fuel prices, foreign currency exchange rates and general economic
conditions.

Unusually adverse weather, as occurred during December 1996 in the Pacific
Northwest, can significantly reduce flight operations, resulting in lost
revenues and lower profits.

GOVERNMENTAL REGULATION

The Company, like other airlines, is subject to regulation by the Federal
Aviation Administration ("FAA") and the DOT. The FAA, under its mandate to
ensure aviation safety, has the authority to ground aircraft and to suspend
temporarily or revoke permanently the authority of an air carrier or its
licensed personnel for failure to comply with FAA regulations and to levy
civil penalties for such failure. The DOT has the authority to regulate
certain airline economic functions, including financial and statistical
reporting, consumer protection, computerized reservations systems, essential
air transportation and international route authority.

International air services are generally governed by a network of bilateral
civil air transport agreements in which rights are exchanged between
governments, which then select and designate air carriers authorized to
exercise such rights. The provisions of bilateral agreements pertaining to
scheduled air services vary considerably from country to country. The Company
is subject to various international bilateral air transport agreements

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between the United States and the countries to which the Company provides
service. There can be no assurance that existing bilateral agreements between
the United States and foreign governments will continue or that the Company's
designation to operate such routes will continue.

Recent federal legislation imposed new taxes on sales of frequent flier
miles. Such taxes may have a material adverse effect on future sales of
frequent flier miles or the prices paid for them.

RISK OF LOSS AND LIABILITY

The Company is exposed to potential catastrophic losses that may be incurred
in the event of an aircraft accident or terrorist incident. Any such accident
or incident could involve not only replacement of a damaged aircraft and its
loss from service, but also significant potential claims of injured passengers
and others. The Company currently maintains liability insurance consistent
with industry standards. Although the Company currently believes its insurance
coverage is adequate, there can be no assurance that its coverage will not
need to be increased, that insurance premiums will not increase significantly
or that the Company will not be forced to bear substantial losses from
accidents or incidents. Substantial claims resulting from an accident or
incident in excess of related insurance coverage could have a material adverse
effect on the Company's business, financial condition and results of
operations. Moreover, any aircraft accident, even if fully insured, could
cause a public perception that the Company's aircraft are less safe or
reliable than those operated by other airlines, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.

In addition, the Company from time to time is a party to certain litigation
incidental to its business. For further discussion, see the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1997
incorporated by reference herein.

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THE COMPANY

GENERAL

Alaska Air Group provides air transportation services to the West Coast as
well as to Canada, Mexico and Russia through its two principal subsidiaries,
Alaska Airlines and Horizon. Alaska Airlines, founded in 1932, is the tenth
largest commercial air carrier in the United States. Its major centers of
operations are Seattle, Washington; Portland, Oregon; and Anchorage, Alaska.
From these principal cities, the airline serves destinations in Alaska; to
Alaska from the West Coast; along the west coasts of the United States, Canada
(Vancouver) and Mexico; and to Russia. As of September 30, 1997, Alaska
Airlines operated 78 jet aircraft with an average age of approximately 7.3
years. Horizon is the largest regional airline in the Pacific Northwest and
operates from hubs at Seattle and Portland. Through a code-sharing agreement
with Alaska Airlines, Horizon provides interconnecting passenger traffic to
Alaska Airlines. As of September 30, 1997, Horizon operated 57 jet and turbo-
prop aircraft with an average age of approximately 9.7 years. The Company also
has code-sharing agreements between Northwest Airlines and both Alaska
Airlines and Horizon.

The Company has experienced consistent revenue growth since 1992 primarily
due to capacity growth and improving load factors. By concentrating in one
geographic area, the West Coast, the Company has been able to capture the
largest departure share in the major markets where it operates. Through a cost
reduction program begun in 1992, Alaska Airlines reduced operating expenses
per ASM by over 20% and believes it is one of the lowest cost carriers among
major airlines. Additionally, the Company has had consistent financial
results, realizing a profit in 22 of the last 24 years.

STRATEGY

The Company's strategy is to identify target markets and then to achieve
strong market positions by offering high-frequency, high-quality service at
competitive prices. The Company's growth strategy has been and continues to be
to increase frequencies in existing markets, as this strategy represents the
lowest cost and lowest risk alternative. The combined route system of Alaska
Airlines and Horizon, when viewed as a whole, blends aspects of both the hub-
and-spoke and linear route system concepts, resulting in an integrated system
that provides passengers with more frequent flights than the Company's
competitors in a substantial majority of the 142 nonstop city pairs that the
Company serves. Both Alaska Airlines and Horizon seek to differentiate
themselves from their competitors by offering superior levels of value and
service. The Company targets higher yielding travelers while offering low
fares to discretionary travelers and, through its yield management system, is
able to optimize this mix, resulting in higher overall yields and load
factors. This capability will be further enhanced by a new yield management
system that should be operational by mid-1998. Alaska Airlines' service has
been recognized with a number of awards, including Airline of the Year or
highest-ranked major airline recognition from Conde Nast Traveler magazine in
each of the last five years, "Best U.S. Airline" designation from Travel and
Leisure Magazine and high rankings in consumer magazines and customer surveys
by J.D. Power & Associates and the Zagat's United States Travel Survey.

The Company is committed to new technology and believes utilization of such
technology enhances efficiency and, therefore, profitability. For example,
Alaska Airlines was the first airline to offer booking and ticket sales over
the Internet and has invested in new avionics technologies such as Global
Positioning System ("GPS") in its aircraft to improve navigation reliability
and safety.

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ALASKA AIRLINES

Geographic Focus

Alaska Airlines concentrates its service on the West Coast and last year
enplaned almost 12 million passengers. Its average passenger trip length in
1996 was 833 miles. Principal routes in Alaska Airlines' system are to and
within Alaska, between the Pacific Northwest and Northern and Southern
California and between California and Mexico. In each of the last 24 years,
the Company has carried more people between Alaska and the U.S. mainland than
any other airline.

By concentrating on one geographic area, the West Coast, Alaska Airlines has
been able to capture the largest departure share among the primary competitors
in the market segments it serves. From the West Coast to Alaska and the
Pacific Northwest to Southern California, Alaska Airlines holds over 70% of
the total departure share. In the Pacific Northwest to Northern California
market, where Alaska Airlines competes directly with Southwest Airlines,
Shuttle by United and United's San Francisco hub, Alaska Airlines leads the
market with over 40% departure share.

DEPARTURE SHARE*

[Download Table]

WEST COAST PACIFIC NORTHWEST TO PACIFIC NORTHWEST TO
TO ALASKA NORTHERN CALIFORNIA SOUTHERN CALIFORNIA
---------- -------------------- --------------------

Alaska Airlines............ 76.3% 40.1% 70.8%
Shuttle by United.......... 4.0% 32.1% 18.9%
Southwest Airlines......... 0.0% 25.9% 0.0%
All Others................. 19.7% 1.9% 10.3%

--------
Source: U.S. Department of Transportation T100 Domestic Market Data for
January-June 1997.
*Departure share is measured by non-stop departures of jets with capacities in
excess of 70 seats.

In February 1997, the United States and Canada signed an "open skies"
agreement under which all U.S. and Canadian carriers will be able to operate
between U.S. and Canadian cities (except for Toronto). Alaska Airlines
commenced service to Vancouver, British Columbia in 1996 and currently flies
between Vancouver and five West Coast destinations.

Emphasis on Service

Part of Alaska Airlines' success is attributable to its tradition of
excellent service. Unlike many "no-frills" airlines, Alaska Airlines features
meals at mealtime, assigned seating, airport lounges, first-class seating,
interlining and a global frequent flier plan. This level of service is
especially notable in light of service reductions at other carriers and has
brought Alaska Airlines special recognition within the industry. In 1996, for
example, readers of Conde Nast Traveler voted Alaska No. 1 in service among
the nation's major airlines and Travel and Leisure Magazine readers chose
Alaska Airlines as the "Best U.S. Airline."

Cost Reductions

Alaska Airlines couples its focus on service with an equally strong focus on
cost. Over the past several years, Alaska Airlines has concentrated on
increasing productivity and improving operating efficiencies to achieve
permanent cost reductions. This strategy has allowed it to be price-
competitive while retaining customer loyalty. The approach is communicated by
the Company's advertising slogan: For the same price, you just get more.

Alaska Airlines' cost-reduction program involves modernizing its fleet,
increasing aircraft utilization and employee productivity and using technology
to improve efficiency. Between 1992 and 1996, Alaska Airlines reduced
operating expenses per available seat mile by 22.8%. During the same period,
aircraft utilization increased by 33% from an average of 8.5 hours per day in
1992 to 11.3 hours per day in 1996. Also during that period, Alaska Airlines
reduced its fleet to two types of aircraft, the Boeing 737 and the MD-80
series, thereby realizing savings in maintenance, training and parts
inventories. The Company expects to achieve its long-term goal of a single
aircraft type fleet for Alaska Airlines by gradually retiring its MD-80
aircraft as leases expire.

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HORIZON

Horizon is the largest regional airline in the Pacific Northwest, and serves
33 cities in Washington, Oregon, Montana, Idaho and California, as well as
four cities in western Canada through its hubs in Seattle and Portland. At
September 30, 1997, Horizon operated a fleet of 57 aircraft, consisting of 43
turboprop aircraft and 14 jet aircraft. In 1996, Horizon carried approximately
3.8 million passengers.

Horizon has code-sharing arrangements with Alaska Airlines and Northwest,
which accounted for approximately 850,000 and 250,000 passengers,
respectively, in 1996. In contrast to most regional airlines, Horizon relies
much less on connecting traffic, with approximately 65% of its passengers
having origins and destinations within the Horizon system.

Recently, Horizon has focused on improving efficiency and utilization by
changing its route system from four hubs to two, with a greater number of
nonstop flights between the cities on its system. Beginning in 1996, Horizon
embarked on a fleet simplification program, scheduled to be completed in 1998,
of reducing the five aircraft types operated to one turboprop type and one jet
type. The fleet simplification program is designed to increase flight crew
utilization, reduce maintenance, training and parts inventories and improve
fuel efficiency. In addition, since 1995 Horizon discontinued service on
marginally profitable routes and upgraded to larger aircraft in other markets
in an effort to better match aircraft size with demand.

FLEET

As of September 30, 1997, Alaska Airlines operated an all-jet fleet
consisting of 36 Boeing 737 and 42 McDonnell Douglas MD-80 aircraft with an
average age of 7.3 years, making it the youngest fleet of any major carrier in
the United States. In 1996, Alaska Airlines announced an order to acquire
twelve Boeing 737-400 aircraft along with an option to acquire twelve more.
Three of the aircraft were delivered in June and July 1997, with the remaining
nine scheduled to be delivered over the next two years. The 1996 purchase
agreement gives the Company flexibility to substitute B737-600, -700 and -800
models to better tailor its capacity to specific route volumes. These aircraft
will replace twelve older McDonnell Douglas MD-80s which are expected to be
retired during the same period.

On November 10, 1997, Alaska Airlines announced an order to acquire fifteen
additional Boeing 737 aircraft together with an option to acquire ten more.
This order includes two B737-400 and three B737-700 aircraft previously under
option and a launch order for ten B737-900 aircraft. The 174-seat capacity of
the B737-900 will more efficiently serve Alaska Airlines' high volume, long-
haul markets and provide lower costs resulting from increased scheduling,
maintenance and pilot flexibility.

The Company has the flexibility to modify its fleet size through lease
returns or extensions of MD-80 aircraft.

ALASKA AIRLINES' FLEET AS OF SEPTEMBER 30, 1997

[Download Table]

NO. OF PASSENGER
AIRCRAFT AIRCRAFT CAPACITY
-------- -------- ---------

Boeing 737-200C........................................... 8 111
Boeing 737-400............................................ 28 140
McDonnell Douglas MD-80................................... 42 140
---
Total................................................... 78

As of September 30, 1997, Horizon operated a fleet of 57 aircraft consisting
of two Dornier 328s, 11 Metroliners and 30 de Havilland Dash 8 turboprop
aircraft and 14 Fokker F28 jets with an average age of 9.7 years. As part of
its fleet rationalization program, Horizon currently plans to eliminate its
Dornier 328s and Metroliners and expand its fleet of Dash 8s with the addition
of up to 13 new Dash 8-200s in 1998 and to replace its older F28-1000 jets
with newer, more efficient F28-4000s.

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HORIZON'S FLEET AS OF SEPTEMBER 30, 1997

[Download Table]

NO. OF PASSENGER
AIRCRAFT AIRCRAFT CAPACITY
-------- -------- ---------

Dornier................................................... 2 31
Metroliner................................................ 11 18
Dash 8.................................................... 30 37
Fokker F28................................................ 14 62-69
---
Total................................................... 57

TRAFFIC AND REVENUE GROWTH

The Company has experienced average annual revenue increases of 10.7% since
1992, principally due to growth in Alaska Airlines' passenger capacity and
increasing load factors. Capacity increases were generated both by fleet
additions and significant improvements in utilization. Alaska Airlines has one
of the highest aircraft utilization rates of any major U.S. airline, reaching
11.3 hours per day in 1996. The capacity increases were primarily used to
expand current service by increasing frequency to established destinations.
The Company believes that its strategy of increasing frequency in existing
markets represents the lowest cost and lowest risk for achieving system
growth. The increasing passenger traffic was partially offset by declining
yields as a consequence of intense competition in West Coast markets in the
past three years from Shuttle by United and Southwest Airlines. In spite of
this competition, Alaska Airlines has maintained its market share and
generally enjoys a yield premium over its major competitors.

Freight and mail revenue and other revenue have also grown over the period
and represent 5.9% and 4.4%, respectively, of 1996 gross revenues. Alaska
Airlines offers substantial cargo service, with eight specialized Boeing 737-
200 "combi" aircraft based in Alaska that are capable of carrying a
combination of up to 111 passengers or up to six standard pallets of freight.
As a consequence, profitable air service is possible to many small Alaska
markets by optimizing the balance of freight and passenger service. Many
smaller cities are served in this manner throughout Alaska, which has limited
ground transportation alternatives.

Other revenues are derived principally from the sales of mileage credits in
the Alaska Airlines Mileage Plan. The Company sells these credits primarily to
credit card issuers, hotels, car rental companies and other businesses
throughout its route system.

COST AND PRODUCTIVITY IMPROVEMENTS

In response to changing conditions and intense competition, Alaska Airlines
commenced a cost reduction and productivity program in 1992 that continues
today. As a result of this program, Alaska Airlines was able to reduce its
cost per ASM from 10.5 cents in 1992 to 8.1 cents in 1996. Cost per ASM
increased to 8.5 cents during the first nine months of 1997. The increase was
due primarily to cyclical maintenance expenses and the Company's decision to
increase staffing to a level sufficient to provide the high quality service
that management believes distinguishes Alaska Airlines from other low-cost
carriers.

The original cost reduction program achieved significant permanent
reductions in operating costs by reducing expenses, increasing productivity of
equipment and employees, reducing some unprofitable flights and restructuring
the Company's finances to repay high-cost debt and reduce operating lease
expenses. This program has continued with the following new targets:

.Continued cost control

.Increased fleet productivity

.Improved route structure profitability

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Continued Cost Control. Between 1992 and 1994, management reviewed and
evaluated Company programs to eliminate nonessential activities. Vendor
contracts were re-negotiated, operating procedures revised, and staffing
levels reduced. Alaska Airlines and Horizon reduced their inflight meal costs
by altering menus, emphasizing lighter fare, and discontinuing meals on
shorter flights operating outside of regular mealtimes. As a result, operating
expenses per ASM declined, and are now among the lowest in the industry, while
management believes the Company's levels of value and service are even more
differentiated from its competitors. During 1994 and 1995, Alaska Airlines and
Horizon further boosted productivity through use of the proprietary IMAGE
computer software, which reduces the time agents need to service clients. In
December 1995, the Company was the first domestic airline to enable customers
to both book flights and purchase tickets over the Internet. In addition,
Alaska Airlines and Horizon continue expanding the use of "Instant Travel," an
electronic ticketing program, and are developing other methods for ticket
distribution, which offer improved customer convenience and reduce
distribution costs. Currently, over 50% of direct ticket sales (other than
through travel agents) are made using Instant Travel. For customers purchasing
electronic tickets, the Company has installed free-standing, self-service
computer terminals for check-in and seat assignment at major cities throughout
the Alaska Airlines and Horizon route system.

Increased Fleet Productivity. Alaska Airlines increased aircraft
utilization, measured in block hours per day per aircraft, over 30% from 8.5
hours in 1992 to 11.3 hours in 1996, by reducing turn times and increasing the
workday. Through increased aircraft utilization, Alaska Airlines is able to
increase revenues and strengthen market presence by adding flights and expand
to additional markets without incurring the costs of acquiring additional
aircraft.

Alaska Airlines was the first major airline to equip its aircraft with the
new GPS, a navigation system that uses satellites interfacing with the flight
management computers onboard the aircraft. GPS, in combination with the
Company's "Enhanced Ground Proximity Warning System," is designed to give
pilots more precise navigation information regarding the surrounding terrain.
These systems improve operational efficiency in poor weather or reduced
visibility conditions and increase safety, schedule reliability and
efficiency.

Improved Route Structure Profitability. The Company believes that its
strategy of increasing frequency in existing markets represents the lowest
cost and lowest risk means for achieving system growth. The Company continues
to expand its service to Vancouver, British Columbia, where the Company
believes its relatively low cost structure gives it a competitive advantage
over higher-cost Canadian carriers.

In the nine months ended September 30, 1997, the Company's passenger load
factors on West Coast routes remained strong, after increasing 6.3 percentage
points in 1996.

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MARKET SHARE

Alaska Airlines

During the first six months of 1997, Alaska Airlines had the highest
departure share of nonstop flights along its routes in each of its following
major markets:

[Enlarge/Download Table]
PACIFIC NORTHWEST TO PACIFIC NORTHWEST TO
WEST COAST TO ALASKA NORTHERN CALIFORNIA SOUTHERN CALIFORNIA
-------------------- -------------------- --------------------

Alaska Airlines...... 76.3% Alaska Airlines...... 40.1% Alaska Airlines...... 70.8%
America West......... 6.8% Shuttle by United.... 32.1% Shuttle by United.... 18.9%
Reno Air............. 5.1% Southwest Airlines... 25.9% Delta................ 7.4%
All Others........... 11.8% All Others........... 1.9% All Others........... 2.9%

--------
Source: U.S. Department of Transportation T100 Domestic Market Data for
January-June 1997.

Approximately 66% of Alaska Airlines' passengers travel from the Pacific
Northwest to other West Coast destinations, 26% travel between the Pacific
Northwest and Alaska or within Alaska, and 8% travel internationally. The most
significant element of Alaska Airlines' route system is its high frequency
service in all the major West Coast markets that it serves.

Over half of the U.S. cities served by Alaska Airlines are located in the
state of Alaska. In each year since 1973, Alaska Airlines has carried more
passengers between Alaska and the U.S. mainland than any other airline. Alaska
Airlines also serves many smaller communities in Alaska and California through
code-sharing agreements with local carriers.

Alaska Airlines serves four resort cities in Mexico: Puerta Vallarta,
Mazatlan, Los Cabos and Ixtapa/Zihuatanejo. Traffic in these markets is
strongest during the winter months, which partially offsets the reduced
seasonal demand in Alaska, thereby allowing the Company to better utilize its
aircraft fleet. Alaska Airlines serves the Russian Far East with flights to
Magadan, Khabarovsk, Vladivostok, Yuzhno-Sakhalinsk and Petropavlosk.

Horizon

Horizon flights are listed under the Alaska Airlines and Northwest Airlines
designator codes in airline computer reservation systems. In 1996, 23% of
Horizon's passengers connected to Alaska Airlines flights and another 7%
connected to Northwest Airlines flights. The number of passengers connecting
between Alaska Airlines and Horizon rose 4% in the nine months ended September
30, 1997. In contrast to most regional airlines, Horizon relies much less on
connecting traffic, with approximately 65% of its passengers having origins
and destinations within the Horizon route system.

During September 1997, Horizon had the highest departure share (number of
flights departed) on its key Northwest routes (Seattle-to-Spokane, 71%;
Seattle-to-Boise, 70%; Seattle-to-Portland, 68%; Portland-to-Spokane, 62%; and
Portland-to-Boise, 67%).

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SERVICE

The Company generally offers the same low fares as its competitors, but with
more frequent service. The Company, however, believes that both Alaska
Airlines and Horizon offer superior value to their customers by providing a
higher level of customer service and amenities as compared to their major
competitors. Unlike some of its major competitors, Alaska Airlines continues
to offer an array of amenities including meal service, advance seat selection
and a first-class cabin. The Company targets higher yielding travelers while
offering low fares to discretionary travelers and, through its yield
management system, is able to optimize this mix resulting in higher overall
yields and load factors. This capability is expected to be further enhanced by
a new yield management system that should be operational by mid-1998.
Additionally, Alaska Airlines' fleet, with an average age of approximately
seven years, is the youngest of any major U.S. carrier and is configured to
create more legroom for its passengers. The Company also provides interline
services that allow passengers to be ticketed and to check their baggage to
their final destinations on virtually every major airline in the world.

The Company's mileage program allows customers to earn mileage credits while
flying on Alaska Airlines, as well as Horizon, Northwest Airlines, TWA, Qantas
and British Airways. Mileage credit can be redeemed for travel on Alaska
Airlines, Horizon or any of the program partners for reward travel worldwide.
Mileage can also be earned from marketing partners such as credit card
issuers, long-distance telecommunications carriers, hotels and car rental
firms.

EMPLOYEES

As of September 30, 1997, Alaska Airlines had 8,649 full-time and part-time
employees and Horizon had 3,069 full-time and part-time employees. At
September 30, 1997, labor unions represented approximately 88% of Alaska
Airlines' and 40% of Horizon's employees. In October 1997, Alaska Airlines and
the Airline Pilots Association reached agreement on a 5 1/2 year contract,
which becomes amendable in May 2003 and may be extended for an additional two
years. In September 1997, Alaska Airlines began formally negotiating a new
contract with the union representing its mechanics and rampservice employees.
Furthermore, Alaska Airlines has agreements with the Association of Flight
Attendants and the union representing its clerical office and passenger
service employees. In September 1997, the pilots of Horizon voted to be
represented by the International Brotherhood of Teamsters. Contract
negotiations have not yet commenced. Horizon and the Association of Flight
Attendants are continuing mediated negotiations for a new contract.

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USE OF PROCEEDS

The net proceeds to the Company from the Offerings, after deducting the
estimated underwriting discount and estimated expenses of the Offerings, are
estimated to be approximately $100.7 million (approximately $116.0 million if
the Underwriters' over-allotment options are exercised in full), assuming an
offering price of $35 1/2 per share, the closing price of the Common Stock on
November 14, 1997. Such net proceeds will be added to working capital of
Alaska Air Group and will be available for general corporate purposes, among
which may be the financing of capital expenditures by Alaska Airlines and
Horizon, including the acquisition of aircraft and related equipment.

CAPITALIZATION

The following table sets forth (i) the unaudited actual consolidated
capitalization of the Company as of September 30, 1997 and (ii) the unaudited
adjusted consolidated capitalization of the Company as of September 30, 1997
after giving effect to (y) the Offerings and (z) the application of the $100.7
million of estimated net proceeds therefrom to be held in cash, assuming no
exercise of the Underwriters' over-allotment options and after deducting the
estimated underwriting discounts and estimated expenses of the Offerings. This
table should be read in conjunction with the consolidated financial statements
of the Company and notes thereto included elsewhere in this Prospectus
Supplement and the accompanying Prospectus.

[Download Table]

SEPTEMBER 30, 1997
----------------------
ACTUAL AS ADJUSTED(2)
------ --------------
(IN MILLIONS)

Cash and marketable securities(1)....................... $192.0 $292.7
====== ======
Indebtedness:
Short-term debt (including bank loans and current
portion of long-term debt).............. $ 28.8 $ 28.8
Long-term debt (excluding current portion)............ 411.6 411.6
------ ------
Total indebtedness.................................. $440.4 $440.4
------ ------
Shareholders' Equity:
Common stock......................................... $127.1 $227.8
Deferred compensation................................. (2.1) (2.1)
Retained earnings..................................... 211.1 211.1
------ ------
Total shareholders' equity.......................... $336.1 $436.8
------ ------
Total capitalization.............................. $776.5 $877.2
====== ======

--------
(1) The net proceeds from the Offerings will be added to working capital of
Alaska Air Group and will be available for general corporate purposes.
(2) Assumes an offering price of $35 1/2 per share, the last reported sales
price of the Common Stock on the NYSE on November 14, 1997.

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PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY

The Company's Common Stock is listed on the NYSE. The following table
indicates the high and low sales prices of the Common Stock as reported by the
NYSE for the periods indicated.

[Download Table]

HIGH LOW
---- ----

1995
First Quarter............................................ $16 3/4 $13 1/2
Second Quarter........................................... 18 3/8 14 1/2
Third Quarter............................................ 21 3/8 14
Fourth Quarter........................................... 18 7/8 13 5/8
1996
First Quarter............................................ $27 3/4 $15 7/8
Second Quarter........................................... 30 3/4 24 1/4
Third Quarter............................................ 28 1/8 19 1/8
Fourth Quarter........................................... 25 1/8 20 5/8
1997
First Quarter............................................ $27 5/8 $20 3/4
Second Quarter........................................... 26 1/4 23
Third Quarter............................................ 33 5/16 25 5/16

The last reported sales price of the Common Stock on the NYSE as of a recent
date is set forth on the cover page of this Prospectus Supplement.

The Company has not paid cash dividends on the Common Stock since 1992. The
Company currently intends to retain all future net earnings to fund its
operations and therefore does not currently anticipate paying cash dividends
in the foreseeable future.

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SELECTED FINANCIAL AND OPERATING DATA

The following table summarizes selected financial and operating information
for Alaska Air Group. The consolidated financial data for each of the five
years ended December 31, 1996, set forth below, have been taken from the
financial data included in Alaska Air Group's Form 10-K for the year ended
December 31, 1996 incorporated by reference herein. The financial statements
for the five years ended December 31, 1996 have been examined by Arthur
Andersen LLP, independent public accountants. This summary should be read in
conjunction with the financial statements, including the notes thereto, and
other information appearing elsewhere or incorporated by reference herein. The
selected financial information for the nine-month periods ended September 30,
1997 and 1996 is unaudited but includes all adjustments (consisting only of
normal recurring adjustments) that are necessary, in the opinion of
management, for a fair presentation of results of operations for such periods.
The airline business is seasonal in nature and the operating results for the
nine months ended September 30, 1997 are not necessarily indicative of results
to be expected for the full year.

[Enlarge/Download Table]

CONSOLIDATED FINANCIAL
DATA:
Statement of Income
Data:
Operating revenues..... $1,316.6 $1,233.0 $1,592.2 $1,417.5 $1,315.6 $1,128.3 $1,115.4
Operating expenses..... 1,204.8 1,135.6 1,503.2 1,341.8 1,241.6 1,145.1 1,210.2
Operating income
(loss)................ 111.8 97.4 89.0 75.7 74.0 (16.8) (94.8)
Other nonoperating
expense, net.......... 12.9 21.4 24.7 41.7 33.0 29.0 30.9
Income (loss) before
income tax expense
and accounting change. 98.9 76.0 64.3 34.0 41.0 (45.8) (125.7)
Net income (loss)...... 57.3 43.6 38.0 17.3 22.5 (30.9) (84.8)
Average primary shares
outstanding........... 14.7 14.3 14.3 13.5 13.4 13.3 13.3
Primary earnings (loss)
per share............. 3.90 3.06 2.65 1.28 1.68 (2.51) (6.87)
Fully diluted earnings
per share............. 2.78 2.22 2.05 1.26 1.62 (a) (a)
Cash dividends per
share................. -- -- -- -- -- -- 0.15
Balance Sheet Data (at
end of period):
Cash and marketable
securities............ $ 192.0 $ 131.3 $ 101.8 $ 135.1 $ 104.9 $ 101.1 $ 83.4
Total assets........... 1,450.7 1,331.9 1,311.4 1,313.4 1,315.8 1,135.0 1,208.4
Long-term debt and
capital lease
obligations........... 411.6 452.9 404.1 522.4 589.9 525.4 487.8
Shareholders' equity... 336.1 277.7 272.5 212.5 191.3 166.8 196.7
ALASKA AIRLINES
OPERATING DATA:
Revenue passenger miles
(000,000).............. 7,896 7,524 9,831 8,584 7,587 5,514 5,537
Available seat miles
(000,000).............. 11,589 11,409 14,904 13,885 12,082 9,426 9,617
Revenue passenger load
factor................. 68.1% 65.9% 66.0% 61.8% 62.8% 58.5% 57.6%
Yield per passenger
mile................... 12.46c 11.86c 11.67c 11.59c 12.20c 14.32c 14.50c
Operating revenue per
available seat mile.... 9.47c 8.81c 8.70c 8.23c 8.79c 9.62c 9.44c
Operating expenses per
available seat mile.... 8.53c 8.01c 8.10c 7.71c 8.27c 9.88c 10.49c
HORIZON AIR OPERATING
DATA:
Revenue passenger miles
(000,000).............. 658 656 867 841 733 560 486
Available seat miles
(000,000).............. 1,070 1,097 1,462 1,414 1,165 986 905
Revenue passenger load
factor................. 61.5% 59.8% 59.3% 59.5% 62.9% 56.8% 53.7%
Yield per passenger
mile................... 32.94c 33.92c 33.14c 31.48c 33.35c 37.93c 40.69c
Operating revenue per
available seat mile.... 21.24c 21.25c 20.61c 19.77c 22.06c 22.65c 23.00c
Operating expenses per
available seat mile.... 21.00c 20.59c 20.60c 19.47c 20.95c 21.76c 22.19c

-------
(a) Antidilutive.
Revenue passenger miles represents the number of paying passengers on a flight
multiplied by the route miles of that flight, summed for all passenger
flights.
Available seat miles represents aircraft miles flown multiplied by the number
of available seats on the aircraft; represents the total passenger carrying
capacity offered.
Revenue passenger load factors represents revenue passenger miles divided by
available seat miles; represents the percentage of available seat capacity
occupied by revenue passengers.
Yield per passenger mile represents the average passenger revenue received for
each mile a passenger is carried.
Operating expenses per available seat mile represents the result of operating
expenses divided by available seat miles.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

INDUSTRY CONDITIONS

During the last several years the character of competition has changed on
the West Coast due to the purchase of Morris Air by Southwest Airlines and the
start-up of Shuttle by United. Low air fares are now a permanent part of the
fare structure on the West Coast. During 1995, MarkAir (a significant
competitor in the Alaska marketplace since 1992) ceased operations and Reno
Air began flying to Alaska. During 1996, America West began flying to Alaska
and United ceased flying from Seattle to Alaska.

The U.S. 10% passenger ticket tax, the 6.25% cargo waybill tax and the $6
per passenger international departure tax expired on December 31, 1996, and
were all reinstated for the period March 7, 1997 through September 30, 1997.
As part of the Taxpayer Relief Act, the cargo waybill tax was extended in its
current form and the other taxes in revised forms through September 30, 2007.
The passenger ticket tax was replaced with a new system that combines a
percentage tax with a per passenger segment fee. For sales and travel
beginning October 1, 1997, the ticket tax is 9% plus $1 per segment. The
percentage tax is scheduled to decrease over time and the segment fee is
scheduled to increase. The $6 international departure tax has increased to $12
and a new $12 international arrival tax has been added. However, the Taxpayer
Relief Act retains the $6 rate for travel between Alaska and the U.S.
mainland. This tax and the international taxes will be indexed to the Consumer
Price Index beginning January 1, 1999. The Taxpayer Relief Act also included
these items that will affect the Company and the airline industry: (a) a new
tax of 7.5% on payments to air carriers for the sale of miles in frequent
flyer programs; (b) a phased-in increase from 50% to 80% for the deductible
percentage of per diems paid to flight crews; and (c) faster cost recovery for
alternative minimum tax purposes of aircraft purchased in 1999 and later
years.

During 1996, fuel prices increased significantly for the Company and most of
its competitors (approximately 20% or 12 cents per gallon for Alaska
Airlines).

RESULTS OF OPERATIONS

NINE MONTHS 1997 COMPARED WITH NINE MONTHS 1996

The consolidated net income for the nine months ended September 30, 1997 was
$57.3 million, or $3.90 per share (primary) and $2.78 per share (fully
diluted), compared with net income of $43.6 million, or $3.06 per share
(primary) and $2.22 per share (fully diluted in 1996). Consolidated operating
income for the first nine months of 1997 was $111.8 million compared to $97.4
million for 1996. Alaska Airlines' operating income increased to
$109.9 million from $91.0 million for 1996, while Horizon's operating income
decreased to $2.6 million from $7.2 million for 1996. A discussion of
operating results for the two airlines follows.

Alaska Airlines

Operating income increased 20.8% to $109.9 million, resulting in a 10.0%
operating margin as compared to a 9.1% margin in 1996. Operating revenue per
ASM increased 7.6% to 9.47 cents while operating expenses per ASM increased
6.4% to 8.53 cents.

The increase in revenue per ASM was due to a 2.2 point improvement in system
passenger load factor combined with a 5.1% increase in system passenger yield.

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The table below shows the major operating expense elements on a cost per ASM
basis for Alaska Airlines for the nine months ended September 30, 1996 and
1997.

[Download Table]

OPERATING EXPENSES PER ASM
(IN CENTS)
----------------------------
ALASKA AIRLINES 1996 1997 CHANGE % CHANGE
--------------- ----- ---- ------ --------

Wages and benefits................................. 2.51 2.75 .24 9.6
Employee profit sharing............................ 0.07 0.08 0.01 NM
Contracted services................................ 0.23 0.27 0.04 17.4
Aircraft fuel...................................... 1.31 1.30 (0.01) (0.8)
Aircraft maintenance............................... 0.36 0.42 0.06 16.7
Aircraft rent...................................... 0.95 0.95 -- --
Food and beverage service.......................... 0.29 0.30 0.01 3.4
Commissions........................................ 0.60 0.67 0.07 11.7
Other selling expenses............................. 0.44 0.45 0.01 2.3
Depreciation and amortization...................... 0.37 0.36 (0.01) (2.7)
Loss (gain) on sale of assets...................... (0.03) -- 0.03 --
Landing fees and other rentals..................... 0.33 0.35 0.02 6.1
Other.............................................. 0.58 0.63 0.05 8.6
----- ---- ----- ----
Alaska Airlines Total.............................. 8.01 8.53 0.52 6.4
===== ==== ===== ====

--------
NM=Not Meaningful

Unit costs increased 6.4% due to a 9.0% increase in the average number of
employees, increased pilot wage rates, $2.1 million more profit sharing
expense, higher ground handling and security costs, increased aircraft
maintenance expense and costs associated with higher load factors.

Horizon

Operating revenues decreased 2.4% primarily due to a 2.9% decrease in
passenger yield. The yield decline is believed to be largely due to the
presence of the 10% passenger ticket tax during March to August 1997 compared
with only one month of tax in the 1996 period.

The table below shows the major operating expense elements on a cost per ASM
basis for Horizon for the nine months ended September 30, of 1996 and 1997.

[Download Table]

OPERATING EXPENSES PER ASM
(IN CENTS)
-----------------------------
HORIZON 1996 1997 CHANGE % CHANGE
------- ----- ----- ------ --------

Wages and benefits............................. 6.31 6.59 0.28 4.4
Employee profit sharing........................ 0.06 0.06 -- --
Contracted services............................ 0.38 0.43 0.05 13.2
Aircraft fuel.................................. 2.22 2.28 0.06 2.7
Aircraft maintenance........................... 2.82 3.11 0.29 10.3
Aircraft rent.................................. 2.40 2.43 0.03 1.3
Food and beverage service...................... 0.17 0.13 (0.04) (23.5)
Commissions.................................... 1.35 1.28 (0.07) (5.2)
Other selling expenses......................... 1.20 1.21 0.01 0.8
Depreciation and amortization.................. 0.77 0.79 0.02 2.6
Loss (gain) on sale of assets.................. 0.07 (0.05) (0.12) NM
Landing fees and other rentals................. 0.88 0.93 0.05 5.7
Other.......................................... 1.96 1.81 (0.15) (7.7)
----- ----- ----- -----
Horizon Total.................................. 20.59 21.00 0.41 2.0
===== ===== ===== =====

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Operating expenses decreased 0.5% on a capacity decrease of 2.4%. Unit costs
increased primarily due to higher wage rates and increased aircraft
maintenance expense (including costs associated with transitioning to a
simplified fleet).

Consolidated Other Income (Expense)

Non-operating expense decreased $8.5 million to $12.9 million primarily due
to lower interest rates on variable debt and smaller average debt balances.

Income Tax Expense

Accounting standards require the Company to provide for income taxes each
quarter based on its estimate of the effective tax rate for the full year. The
volatility of air fares and the seasonality of the Company's business make it
very difficult to estimate full-year pretax results. In addition, a relatively
small change in pretax results can cause a significant change in the effective
tax rate due to the magnitude of nondeductible expenses, such as goodwill
amortization and employee per diem costs. In estimating the 42.1% tax rate for
the first nine months of 1997, the Company considered a variety of factors,
including the U.S. federal rate of 35%, estimates of nondeductible expenses
and state income taxes, and the 40.9% tax rate used for full year 1996. This
rate is evaluated each quarter and adjustments are made if necessary.

New Accounting Standards

During March 1997, the Financial Accounting Standards Board issued FAS 128,
Earnings Per Share ("EPS"). The new standard replaces "primary" and "fully
diluted" EPS amounts with "basic" and "diluted" EPS amounts, respectively. The
purpose of the change is to simplify the EPS calculations and provide
consistency with international accounting standards. Had FAS 128 been in
effect during 1996, the Company's basic EPS would have been $2.67 (versus
$2.65 primary EPS) and diluted EPS would have been $2.05 (the same as fully
diluted EPS). FAS 128 is effective for fiscal years ending after December 15,
1997 and requires restatement of prior years' earnings per share. Early
adoption is not permitted.

1996 COMPARED WITH 1995

Consolidated net income in 1996 was $38.0 million, or $2.65 per share
(primary) and $2.05 per share (fully diluted), compared with net income of
$17.3 million, or $1.28 per share (primary) and $1.26 per share (fully
diluted) in 1995. Consolidated operating income was $89.0 million in 1996
compared to $75.7 million in 1995. Alaska Airlines' operating income improved
by $17.7 million, but it was offset by lower operating results at Horizon. A
discussion of operating results for the two airlines follows.

Alaska Airlines

Operating income increased 24.5% to $90.0 million, resulting in a 6.9%
operating margin as compared to a 6.3% margin in 1995. Operating income
increased in each of the first three quarters, but decreased in the fourth
quarter as a result of higher fuel prices, canceled flights due to extreme
weather during the last week of December, and matching of competitor's lower
fares. 1996 operating revenue per available seat mile (RASM) increased 5.8% to
8.70 cents while operating expenses per available seat mile increased 5.1% to
8.10 cents.

The increase in RASM was primarily due to a 4.2 point improvement in system
passenger load factor. The Pacific Northwest to the Bay Area and to Southern
California markets (which compose half of the system) experienced a 6.8 point
increase in load factor. Changes in passenger yield varied from a 3.4%
increase in the first quarter to a 1.4% decrease in the fourth quarter,
resulting in a slight increase of 0.7% for the full year. Increased yield in
the first half of 1996 is believed to be due in part to the absence of the 10%
passenger transportation tax. Decreased yield in the second half of 1996 was
due to lower fares in the Seattle-Anchorage and Mexico markets.

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Freight and mail revenues decreased 1.7% reflecting increased competition in
the Alaska markets. Other-net revenues rose 6.8% primarily due to increased
revenues from partners in Alaska Airlines' frequent flyer program.

The table below shows the major operating expense elements on a cost per
available seat mile (ASM) basis in 1995 and 1996.

[Download Table]

OPERATING EXPENSES PER
ASM
(IN CENTS)
--------------------------
ALASKA AIRLINES 1995 1996 CHANGE % CHANGE
--------------- ---- ---- ------ --------

Wages and benefits................................ 2.46 2.57 .11 4
Employee profit sharing........................... -- .01 .01 NM
Aircraft fuel..................................... 1.11 1.35 .24 22
Aircraft maintenance.............................. .33 .38 .05 15
Aircraft rent..................................... .99 .98 (.01) (1)
Commissions....................................... .54 .59 .05 9
Depreciation & amortization....................... .42 .38 (.04) (10)
Loss (gain) on sale of assets..................... -- (.06) (.06) NM
Landing fees and other rentals.................... .33 .33 -- --
Other............................................. 1.53 1.57 .04 3
---- ---- ---- ---
Alaska Airlines Total............................. 7.71 8.10 .39 5
==== ==== ==== ===

--------
NM = Not Meaningful

Alaska Airlines' higher unit costs were largely due to higher fuel prices
and heavier passenger loads. Significant unit cost changes are discussed
below.

Revenue passengers increased 16.4%. Employees increased 9% primarily due to
increases in reservation and customer service employees. Wages and benefits
per employee (excluding profit sharing) increased 2.5% due to annual wage
increases and a higher cost of fringe benefits, offset by lower wages for new
hires. The net effect was that wages and benefits increased more than ASMs,
resulting in a 4% increase in cost per ASM.

Fuel expense per ASM increased 22%, due to a 20% increase in the price of
fuel. Approximately one fourth of the 12.3 cent fuel price increase was due to
a 4.3 cent Federal excise tax on domestic fuel consumption that began October
1, 1995. A 1 cent change in fuel prices affects annual fuel costs by
approximately $2.7 million (based on 1996 consumption).

Maintenance expense per ASM increased 15% primarily due to higher
amortization of major airframe and engine overhaul costs. Commission expense
per ASM increased 9% because passenger revenues, upon which commissions are
paid, increased more than ASM growth. Commission expense as a percentage of
passenger revenue was 7.7% in 1996 versus 7.6% in 1995.

Depreciation and amortization expense per ASM decreased 10% primarily due to
the sale (and leaseback) of two aircraft in early 1996 and a 4% increase in
aircraft utilization.

The gain on sale of assets in 1996 is primarily due to the sale of three jet
aircraft. A new accounting standard requires that gains or losses on long-
lived assets be included in operating income.

Horizon

Operating income decreased 98% to $0.1 million, resulting in a 0.0%
operating margin as compared to a 1.5% margin in 1995. The decrease was
primarily attributable to the fourth quarter, which was negatively impacted by
adverse weather, increased competition, higher than normal maintenance expense
and costs associated with transitioning to a simplified fleet. For 1996,
operating revenue per available seat mile (RASM) increased 4.2% to 20.61 cents
while operating expenses per available seat mile increased 5.8% to 20.60
cents.

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The increase in RASM was primarily due to a 5.3% increase in passenger
yield. Changes in passenger yield varied from an 8.9% increase in the second
quarter to a 0.5% decrease in the fourth quarter, resulting in a 5.3% increase
for the full year. Increased yields in the first three quarters of 1996 are
believed to be due in part to the absence of the 10% passenger transportation
tax. Yields were also favorably impacted by reduced flying in the lower-yield
Seattle-Spokane and Portland-Spokane markets. The system passenger load factor
decreased 0.2 points due to a shift in flying from high load factor markets
like Seattle-Spokane to low load factor new markets like Seattle-Edmonton.

Freight and mail revenues increased 0.9% due to increased capacity, while
other-net revenues decreased 26.3% due to reductions in revenues from
providing services to other airlines.

The table below shows the major operating expense elements on a cost per ASM
basis for Horizon in 1995 and 1996.

[Download Table]

OPERATING EXPENSES PER ASM
(IN CENTS)
---------------------------
HORIZON 1995 1996 CHANGE % CHANGE
------- ----- ----- ------ --------

Wages and benefits............................... 6.06 6.33 .27 4
Aircraft fuel.................................... 1.95 2.30 .35 18
Aircraft maintenance............................. 2.41 2.85 .44 18
Aircraft rent.................................... 2.44 2.41 (.03) (1)
Commissions...................................... 1.34 1.31 (.03) (2)
Depreciation & amortization...................... .70 .78 .08 11
Loss on sale of assets........................... -- .01 .01 NM
Landing fees and other rentals................... .89 .88 (.01) (1)
Other............................................ 3.68 3.73 .05 1
----- ----- ---- ---
Horizon Total.................................... 19.47 20.60 1.13 6
===== ===== ==== ===

--------
NM = Not Meaningful

Horizon's unit costs increased 6% primarily due to: (a) higher wage rates
and fringe benefits costs; (b) 18% higher fuel prices; (c) increased
maintenance expense on Dash 8 aircraft; and (d) higher overhaul expense on
leased aircraft that will be returned to lessors earlier than originally
planned.

Consolidated Other Income (Expense)

Non-operating expense decreased from $41.7 million to $24.7 million
primarily due to lower interest rates on variable debt and smaller average
debt balances. In addition, 1995 included a $2.2 million write-off of
capitalized debt issuance costs for the 7-1/4% zero coupon notes that were
redeemed in August 1995.

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 $75.7 million compared to
$74.0 million in 1994. Alaska Airlines' operating income improved by $10.4
million, but it was offset by significantly lower operating results at
Horizon.

Alaska Airlines

Operating income increased 16.8% to $72.3 million, resulting in a 6.3%
operating margin as compared to a 5.8% margin in 1994. Operating revenue per
available seat mile (RASM) decreased 6.4% to 8.23 cents while operating
expenses per available seat mile decreased 6.8% to 7.71 cents. The decrease in
RASM was primarily due to a 5.0% decrease in passenger yield, reflecting
increased competition on the West Coast. Lower unit costs were due to improved
employee productivity and a 5% increase in average daily aircraft utilization.

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Horizon

Operating income decreased 67.1% to $4.2 million, resulting in a 1.5%
operating margin as compared to a 5.0% margin in 1994. Operating revenue per
available seat mile (RASM) decreased 10.4% to 19.77 cents while operating
expenses per available seat mile decreased 7.1% to 19.47 cents. The decrease
in RASM was due to a 5.6% decrease in passenger yield (reflecting increased
competition and longer passenger trips), and a 3.4 point drop in passenger
load factor. Lower unit costs were due to greater use of higher capacity
aircraft, no employee profit sharing in 1995 and cost reduction efforts.

Consolidated Other Income (Expense)

Non-operating expense increased from $33.0 million to $41.7 million
primarily due to higher interest rates on variable debt and larger average
debt balances. In addition, 1995 included more debt issuance expense, fewer
vendor credits and lower gains on debt retirements than in 1994.

LIQUIDITY AND CAPITAL RESOURCES

The table below presents the major indicators of financial condition and
liquidity.

[Download Table]

12/31/96 9/30/97 CHANGE
-------- -------- ------
(IN MILLIONS)

Cash and marketable securities..................... $ 101.8 $ 192.0 $90.2
Working capital (deficit).......................... (185.6) (118.9) 66.7
Long-term debt and capital lease obligations....... 404.1 411.6 7.5
Shareholders' equity............................... 272.5 336.1 63.6

The Company's cash and marketable securities portfolio increased by $90
million during the first nine months of 1997. Operating activities provided
$227 million of cash during this period. Additional cash was provided by the
sale and leaseback of four B737-400 aircraft and eight Dash 8-200 aircraft
($199 million) and issuance of long-term debt ($28 million). Cash was used for
$317 million of capital expenditures including the purchase of two new MD-83
aircraft, three new B737-400 aircraft, a previously leased B737-200C aircraft,
eight new Dash 8-200 aircraft, flight equipment deposits and airframe and
engine overhauls, net repayment of short-term borrowings ($47 million) and the
repayment of debt ($16 million).

The table below presents the major indicators of financial condition and
liquidity.

[Download Table]

DECEMBER 31, 1995 DECEMBER 31, 1996 CHANGE
----------------- ----------------- -------
(IN MILLIONS)

Cash and marketable securities. $ 135.1 $101.8 $ (33.3)
Working capital (deficit)...... (106.4) (185.6) (79.2)
Long-term debt and capital
lease obligations............. 522.4 404.1 (118.3)
Shareholders' equity........... 212.5 272.5 60.0

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1996 Financial Changes

The Company's cash and marketable securities portfolio decreased by $33
million during 1996. Operating activities provided $223 million of cash in
1996. Additional cash was provided by the sale and leaseback of three B737-400
aircraft ($86 million), the sale of three MD-80 aircraft ($52 million) and
proceeds received from the issuance of Common Stock ($21 million). Cash was
used for the purchase of two new MD-83 aircraft, two used B737-400 aircraft,
two previously leased B737-200Cs, airframe and engine overhauls and other
capital expenditures ($209 million), and aircraft purchase deposits ($61
million). Cash was also used to repay net short-term borrowings ($19 million),
and $134 million of long-term debt (including $100 million repaid early).

Like most airlines, the Company has a working capital deficit. 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.

Shareholders' equity increased by $60 million primarily due to net income of
$38 million and the issuance of $21 million of Common Stock under stock plans.
These factors, combined with the early repayment of debt, increased equity to
40% of capital, an improvement of 11 percentage points.

Deferred Taxes

At December 31, 1996, net deferred tax liabilities were $39 million, which
includes $101 million of net temporary differences, offset by $18 million of
net operating loss (NOL) carryforwards and $44 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.

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). Included in the above numbers are the June 1995 issuance of $132.3
million of 6-1/2% convertible senior debentures due 2005, and the August 1995
redemption of the 7-1/4% zero coupon, convertible subordinated notes for
$127.7 million

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 Airlines 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 Airlines expects to save more
than $6 million per year over the term of the leases. As part of the
restructuring, Alaska Airlines 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 Airlines 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.

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.

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MANAGEMENT

The directors of Alaska Air Group, their positions and their respective ages
are as follows:

[Download Table]

NAME POSITION AGE DIRECTOR SINCE
---- -------- --- --------------

John F. Kelly........... Chairman, President and Chief 53 1989
Executive Officer of Alaska Air
Group, Chairman and Chief
Executive Officer of Alaska
Airlines, and Chairman of
Horizon
Ronald F. Cosgrave...... Executive Director of ANP LLC, 65 1971
Chairman Emeritus of
Alaska Airlines
Mary Jane Fate.......... General Manager of Family 64 1979
Business
Bruce R. Kennedy........ Chairman Emeritus of Alaska Air 59 1972
Group
R. Marc Langland........ President of Northrim Bank 56 1991
Byron I. Mallott........ Executive Director of Alaska 54 1982
Permanent Fund
Robert L. Parker, Jr.... President and Chief Executive 49 1975
Officer of Parker Drilling
Company
John V. Rindlaub........ Chairman of SeaFirst Bank and 53 1996
Group Executive Vice
President of Bank of America NT
and SA
Richard A. Wien......... Chairman and Chief Executive 62 1982
Officer of Florcraft, Inc.

The executive officers of Alaska Air Group, Alaska Airlines and Horizon,
their positions and their respective ages are as follows:

[Download Table]

NAME POSITION AGE OFFICER SINCE
---- -------- --- -------------

William S. Ayer......... President of Alaska Airlines 43 1985
George D. Bagley........ President and Chief Executive 52 1984
Officer of Horizon
Harry G. Lehr........... Senior Vice President/Finance of 57 1986
Alaska Air Group and Alaska
Airlines
Steven G. Hamilton...... Vice President/Legal and General 58 1988
Counsel of Alaska Air Group and
Alaska Airlines
Keith Loveless.......... Corporate Secretary and Associate 41 1996
General Counsel of Alaska
Air Group and Alaska Airlines

The above officers have been officers of Alaska Air Group, Alaska Airlines
or Horizon for more than five years, except for Keith Loveless, who was
elected as Corporate Secretary in 1996. Mr. Loveless joined the Alaska
Airlines legal department in 1986 and has been associate general counsel of
Alaska Airlines since 1993. Mr. Kelly has been an officer since 1981.

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CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
FOR NON-U.S. HOLDERS

The following is a general discussion of certain United States federal
income and estate tax consequences of the ownership and disposition of Common
Stock by a Non-U.S. Holder. For this purpose, a "Non-U.S. Holder" is any
person who is, for United States federal income tax purposes, an individual or
entity other than (i) a citizen or resident of the United States, (ii) a
corporation, partnership or other entity created or organized in the United
States or under the laws of the United States or of any state thereof, (iii)
an estate the income of which is includable in gross income for United States
federal income tax purposes regardless of its source, or (iv) a trust if a
court within the United States is able to exercise primary supervision over
the administration of the trust, and one or more United States fiduciaries
have the authority it control all substantial decisions of the trust. This
discussion does not address all aspects of United States federal income and
estate taxes that may be relevant to such Non-U.S. Holders in light of their
circumstances or any foreign, state or local tax consequences. Furthermore,
this discussion is based on provisions of the Internal Revenue Code of 1986,
as amended (the "Code"), existing and proposed regulations promulgated
thereunder and administrative and judicial interpretations thereof, as of the
date hereof, all of which are subject to change, possibly with retroactive
effect. EACH PROSPECTIVE PURCHASER OF COMMON STOCK IS ADVISED TO CONSULT A TAX
ADVISOR WITH RESPECT TO CURRENT AND POSSIBLE FUTURE TAX CONSEQUENCES OF
ACQUIRING, HOLDING AND DISPOSING OF COMMON STOCK, AS WELL AS ANY TAX
CONSEQUENCES THAT MAY ARISE UNDER THE LAWS OF ANY FOREIGN, STATE, LOCAL OR
OTHER TAXING JURISDICTION.

DIVIDENDS

Dividends paid to a Non-U.S. Holder of Common Stock generally will be
subject to withholding of United States federal income tax at a 30% rate or
such lower rates as may be specified by an applicable income tax treaty.
However, dividends that are effectively connected with the conduct of a trade
or business by the Non-U.S. Holder within the United States are not subject to
the withholding tax, but instead are subject to United States federal income
tax on a net income basis at applicable graduated individual or corporate
rates. Any such effectively connected dividends received by a foreign
corporation may, under certain circumstances, be subject to an additional
"branch profits tax" at a 30% rate or such lower rates as may be specified by
an applicable income tax treaty.

Under current law, dividends paid on or before December 31, 1998 to an
address outside the United States are presumed to be paid to a resident of
such country (unless the payer has knowledge to the contrary) for purposes of
the withholding tax discussed above and, under the current United States
Treasury regulations, for purposes of determining the applicability of a tax
treaty rate. Recently finalized U.S. Treasury Regulations applicable to
dividends paid after December 31, 1998 (the "Final Regulations") provide for
certain presumptions (which differ from those described above) upon which the
Company may generally rely to determine whether, in the absence of certain
documentation, a holder should be treated as a non-U.S. Holder for purposes of
the 30% withholding tax described above (rather than a United States person
subject to the backup withholding rules discussed below). The presumptions
will not apply for purposes of granting a reduced rate of withholding under a
treaty. Under the Final Regulations, to obtain a reduced rate of withholding
under a treaty, a Non-U.S. Holder will be required either to (i) provide an
IRS Form W-8 certifying such Non-U.S. Holder is entitled to benefits under a
treaty together with, in certain circumstances, additional information or (ii)
satisfy certain other applicable certification requirements. The Final
Regulations also provide special rules to determine whether, for purposes of
determining the applicability of a tax treaty and for purposes of the 30%
withholding tax described above, dividends paid to a Non-U.S. Holder that is
an entity should be treated as paid to the entity or those holding an interest
in that entity.

A Non-U.S. Holder of Common Stock eligible for a reduced rate of United
States withholding tax pursuant to an income tax treaty may obtain a refund of
any excess amounts withheld by filing an appropriate claim for refund with the
IRS.

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GAIN ON DISPOSITION OF COMMON STOCK

A Non-U.S. Holder generally will not be subject to United States federal
income tax with respect to gain recognized on a sale or other disposition of
Common Stock unless (i) (a) the gain is effectively connected with a trade or
business of the Non-U.S. Holder in the United States and (b) if a tax treaty
applies, the gain is attributable to a United States permanent establishment
maintained by the Non-U.S. Holder, (ii) in the case of a Non-U.S. Holder who
is an individual and holds the Common Stock as a capital asset, such holder is
present in the United States for 183 or more days in the taxable year of the
sale or other disposition and certain other conditions are met, or (iii) the
Company is or has been a "U.S. real property holding corporation" for United
States federal income tax purposes at any time within the shorter of the five-
year period preceding such disposition or such Non-U.S. Holder's holding
period. A corporation is a "U.S. real property holding corporation" if the
fair market value of United States real property interests held by the
corporation is 50% or more of the aggregate value of certain assets of the
corporation. The Company does not believe it ever has been, and does not
anticipate that it will become, a U.S. real property holding corporation. If
the Company is or becomes a U.S. real property holding corporation, so long as
the Common Stock continues to be "regularly traded on an established
securities market," only a Non-U.S. Holder who holds or held (at any time
during the shorter of the five-year period preceding the date of disposition
or the holder's holding period) more than 5% of the Common Stock will be
subject to United States federal income tax on the disposition of the Common
Stock.

An individual Non-U.S. Holder described in clause (i) above will be taxed on
the net gain derived from the sale under regular graduated United States
federal income tax rates. An individual Non-U.S. Holder described in clause
(ii) above will be subject to a flat 30% tax on the gain derived from the
sale, which may be offset by certain United States capital losses
(notwithstanding the fact that the individual is not considered a United
States resident). If a Non-U.S. Holder that is a foreign corporation falls
under clause (i) above, it will be taxed on its gain under regular graduated
United States federal income tax rates and, in addition, may be subject to the
branch profits tax equal to 30% of its effectively connected earnings and
profits within the meaning of the Code for the taxable year, as adjusted for
certain items, unless it qualifies for a lower rate under an applicable income
tax treaty.

FEDERAL ESTATE TAX

Common Stock held by an individual who is not a citizen or resident (based
on domicile, as specially defined for United States federal estate tax
purposes) at the time of his or her death will be included in such holder's
gross estate for United States federal estate tax purposes, unless an
applicable estate tax treaty provides otherwise.

INFORMATION REPORTING AND BACKUP WITHHOLDING TAX

The Company must report annually to the IRS and to each Non-U.S. Holder the
amount of dividends paid to such holder and the tax withheld with respect to
such dividends, regardless of whether withholding was required. Copies of the
information returns reporting such dividends and withholding may also be made
available to the tax authorities in the country in which the Non-U.S. Holder
resides under the provisions of an applicable income tax treaty.

Under current law, backup withholding (which generally is a withholding tax
imposed at the rate of 31% on certain payments to persons who fail to furnish
certain information under the United States information reporting
requirements) generally will not apply to dividends paid on or before December
31, 1998 to a Non-U.S. Holder at an address outside the United States (unless
the payer has knowledge that the payee is a United States person). For
dividends paid after December 31, 1998, the Final Regulations provide certain
presumptions and other rules under which Non-U.S. Holders may be subject to
backup withholding and related information reporting in the absence of
required certifications.

Payment of the proceeds of a sale of Common Stock by or through a United
States office of a broker is subject to both backup withholding and
information reporting unless the beneficial owner certifies under penalties

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of perjury that it is a Non-U.S. Holder, or otherwise establishes an
exemption. In general, backup withholding and information reporting will not
apply to a payment of the proceeds of a sale of Common Stock by or through a
foreign office of a broker. If, however, such broker is, for United States
federal income tax purposes, (i) a United States person, (ii) a controlled
foreign corporation, or (iii) a foreign person that derives 50% or more of its
gross income for certain periods from the conduct of a trade or business in
the United States, such payments will be subject to information reporting, but
not backup withholding, unless (i) such broker has documentary evidence in its
records that the beneficial owner is a Non-U.S. Holder and certain other
conditions are met or (ii) the beneficiary owner otherwise establishes an
exemption. After December 31, 1998, a broader class of foreign brokers having
certain connections with the United States, including, but not limited to, a
broker that is a foreign partnership with U.S. partners or that is engaged in
a U.S. trade or business, will be subject to the same withholding and
information reporting discussed in the preceding sentence. Non-U.S. Holders
should consult their tax advisors regarding the Final Regulations and their
effect on ownership of the Common Stock.

Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules may be allowed as a refund or a credit against such
holder's United States federal income tax liability provided the required
information is furnished to the IRS.

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UNDERWRITING

Subject to the terms and conditions set forth in a U.S. purchase agreement
(the "U.S. Purchase Agreement") among the Company and each of the underwriters
named below (the "U.S. Underwriters") and concurrently with the sale of
450,000 shares of Common Stock to the International Managers (as defined
below), the Company has agreed to sell to each of the U.S. Underwriters, and
each of the U.S. Underwriters for whom Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") and Morgan Stanley & Co. Incorporated are
acting as representatives (the "U.S. Representatives"), has severally agreed
to purchase from the Company, the number of shares of Common Stock set forth
opposite its name below:

[Download Table]

NUMBER OF
U.S. UNDERWRITERS SHARES
----------------- ---------

Merrill Lynch, Pierce, Fenner & Smith
Incorporated.............................................
Morgan Stanley & Co. Incorporated.................................
---------
Total........................................................ 2,550,000
=========

The Company has also entered into an international purchase agreement (the
"International Purchase Agreement" and, together with the U.S. Purchase
Agreement, the "Purchase Agreements") with certain underwriters outside the
United States and Canada (the "International Managers" and, together with the
U.S. Underwriters, the "Underwriters") for whom Merrill Lynch International
and Morgan Stanley & Co. International Limited are acting as representatives
(the "International Representatives"). Subject to the terms and conditions set
forth in the International Purchase Agreement and concurrently with the sale
of 2,550,000 shares of Common Stock to the U.S. Underwriters pursuant to the
U.S. Purchase Agreement, the Company has agreed to sell to the International
Managers, and the International Managers severally have agreed to purchase, an
aggregate of 450,000 shares of Common Stock. The public offering price per
share and the underwriting discount per share of Common Stock are identical
under the U.S. Purchase Agreement and the International Purchase Agreement.

In each Purchase Agreement, the several U.S. Underwriters and the several
International Managers, respectively, have agreed, subject to the terms and
conditions set forth therein, to purchase all the shares of Common Stock being
sold pursuant to each such Purchase Agreement if any of the shares of Common
Stock being sold pursuant to such Purchase Agreement are purchased. In the
event of default by an Underwriter, the Purchase Agreements provide that, in
certain circumstances, purchase commitments of the nondefaulting Underwriters
may be increased or the Purchase Agreements may be terminated. The sale of
Common Stock to the U.S. Underwriters is conditioned upon the sale of shares
of Common Stock to the International Managers, and vice versa.

The U.S. Underwriters and the International Managers have entered into an
intersyndicate agreement (the "Intersyndicate Agreement") that provides for
the coordination of their activities. Pursuant to the Intersyndicate
Agreement, the U.S. Underwriters and the International Managers are permitted
to sell shares of Common Stock to each other for purposes of resale at the
public offering price set forth on the cover page of this Prospectus
Supplement, less an amount not greater than the selling concession. Under the
terms of the Intersyndicate Agreement, the U.S. Underwriters and any dealer to
whom they sell shares of Common Stock will not offer to sell or sell shares of
Common Stock to persons who are non-U.S. or non-Canadian persons, or to
persons they believe intend to resell to persons who are non-U.S. or non-
Canadian persons, and the International Managers and any dealer to whom they
sell shares of Common Stock will not offer to sell or sell shares of Common
Stock

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to U.S. persons or Canadian persons or to persons they believe intend to
resell to U.S. persons or Canadian persons, except, in each case, for
transactions pursuant to the Intersyndicate Agreement.

The U.S. Representatives have advised the Company that the U.S. Underwriters
propose initially to offer the shares of Common Stock to the public at the
public offering price set forth on the cover page of this Prospectus
Supplement, and to certain dealers at such price less a concession not in
excess of $ per share of Common Stock. The U.S. Underwriters may allow, and
such dealers may reallow, a discount not in excess of $ per share of Common
Stock on sales to certain other dealers. After the initial public offering,
the public offering price, concession and discount may be changed.

The Company and the directors and executive officers of the Company have
agreed that for a period of 90 days from the date of this Prospectus
Supplement they will not, without the prior written consent of Merrill Lynch,
offer, sell or otherwise dispose of any shares of Common Stock or securities
convertible into or exchangeable or exercisable for Common Stock (other than,
with respect to the Company, (a) shares issuable pursuant to the Offerings,
(b) shares issuable upon the exercise or conversion of currently outstanding
securities of the Company and (c) the grant of certain rights pursuant to
employee benefit plans).

The Company has granted an option to the U.S. Underwriters, exercisable for
30 days after the date of this Prospectus Supplement, to purchase up to an
aggregate of 382,500 additional shares of Common Stock at the public offering
price set forth on the cover page of this Prospectus Supplement, less the
underwriting discount. The U.S. Underwriters may exercise this option only to
cover over-allotments, if any, made on the sale of Common Stock offered
hereby. To the extent that the U.S. Underwriters exercise this option, each
U.S. Underwriter will be obligated, subject to certain conditions, to purchase
a number of additional shares of Common Stock proportionate to such U.S.
Underwriter's initial amount reflected in the foregoing table. The Company has
also granted an option to the International Managers, exercisable for 30 days
after the date of this Prospectus Supplement, to purchase up to an additional
67,500 shares of Common Stock to cover over-allotments, if any, on terms
similar to those granted to U.S. Underwriters.

The Company has agreed to indemnify the several U.S. Underwriters and the
several International Managers against certain liabilities, including
liabilities under the Securities Act, or to contribute to payments the
Underwriters may be required to make in respect thereof.

Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the U.S.
Underwriters and certain selling group members to bid for and purchase the
Common Stock. As an exception to these rules, the U.S. Representatives are
permitted to engage in certain transactions that stabilize the price of the
Common Stock. Such transactions consist of bids or purchases for the purpose
of pegging, fixing or maintaining the price of the Common Stock.

If the Underwriters create a short position in the Common Stock in
connection with the Offerings, (i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus Supplement), the U.S.
Representatives may reduce that short position by purchasing Common Stock in
the open market. The U.S. Representatives may also elect to reduce any short
position by exercising all or part of the over-allotment option described
above.

The U.S. Representatives may also impose a penalty bid on certain
Underwriters and selling group members. This means that if the U.S.
Representatives purchase shares of Common Stock in the open market to reduce
the Underwriters' short position or to stabilize the price of the Common
Stock, they may reclaim the amount of the selling concession from the
Underwriters and selling group members who sold those shares as part of the
Offerings.

In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of a security to the extent that it
were to discourage resales of the security before the distribution is
completed.

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Neither the Company nor any of the Underwriters makes any representation or
prediction, however, as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Common Stock. In
addition, neither the Company nor any of the Underwriters makes any
representation that the U.S. Representatives will engage in such transaction
or that such transactions, once commenced, will not be discontinued without
notice.

The Underwriters, from time to time, perform investment banking and other
financial services for the Company and its subsidiaries, including Alaska
Airlines and Horizon.

LEGAL OPINIONS

The validity of the shares of Common Stock offered hereby will be passed
upon for Alaska Air Group by Perkins Coie, Seattle, Washington, and for the
Underwriters by Shearman & Sterling, New York, New York.

EXPERTS

The consolidated financial statements and schedule of Alaska Air Group at
December 31, 1996 and for each of the three years in the period ended December
31, 1996, incorporated by reference in this Prospectus Supplement and the
related Registration Statement, have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are incorporated herein and therein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
reports.

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PROSPECTUS
----------

[LOGO OF ALASKA AIR GROUP, INC.]

COMMON STOCK

----------------

Alaska Air Group, Inc. ("Air Group") may from time to time offer shares of
its Common Stock, par value $1.00 per share ("Common Stock"). The Common Stock
offered pursuant to this Prospectus will be limited to $182,250,000 aggregate
public offering price. Certain specific terms of the offering of the Common
Stock in respect of which this Prospectus is being delivered are set forth in
the accompanying Prospectus Supplement (the "Prospectus Supplement"),
including any initial offering price.

----------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
----------------

Air Group may sell the Common Stock to or through underwriters, through
dealers or agents or directly to purchasers. See "Plan of Distribution." The
accompanying Prospectus Supplement sets forth the names of any underwriters,
dealers or agents involved in the sale of the Common Stock in respect of which
this Prospectus is being delivered, and any applicable fee, commission or
discount arrangements with them.

This Prospectus may not be used to consummate sales of Common Stock unless
accompanied by a Prospectus Supplement applicable to the Common Stock being
sold.

----------------

The date of this Prospectus is August 22, 1996.

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No dealer, salesperson or other individual has been authorized to give any
information or to make any representations not contained in this Prospectus in
connection with the offering covered by this Prospectus. If given or made,
such information or representations must not be relied upon as having been
authorized by Air Group or the Underwriter. This Prospectus does not
constitute an offer to sell, or a solicitation of an offer to buy, the Common
Stock in any jurisdiction where, or to any person to whom, it is unlawful to
make such offer or solicitation. Neither the delivery of this Prospectus nor
any sale made hereunder shall, under any circumstances, create an implication
that there has not been any change in the facts set forth in this Prospectus
or in the affairs of Air Group since the date hereof.

AVAILABLE INFORMATION

Air Group is subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "1934 Act"), and, in accordance
therewith, files reports and other information with the Securities and
Exchange Commission (the "Commission"). Such reports and other information may
be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549; Seven
World Trade Center, Suite 1300, New York, New York 10048; and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material may also be obtained at prescribed rates from the Public Reference
Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, or
at the Commission's world wide web site at http//www/sec/gov. In addition,
such material filed by Air Group may be inspected and copied at the offices of
the New York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005.

This Prospectus constitutes a part of a registration statement on Form S-3
(together with all amendments and exhibits, the "Registration Statement")
filed by Air Group and Alaska Airlines, Inc. ("Alaska") with the Commission
under the Securities Act of 1933, as amended (the "Securities Act"). This
Prospectus does not contain all of the information included in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission. Statements contained herein
concerning the provisions of any document do not purport to be complete and,
in each instance, reference is made to the copy of such document filed as an
exhibit to the Registration Statement or otherwise filed with the Commission.
Each such statement is subject to and qualified in its entirety by such
reference. Reference is made to such Registration Statement and to the
exhibits relating thereto for further information with respect to Air Group
and the Common Stock offered hereby.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents have been filed with the Commission pursuant to the
1934 Act and are incorporated into this Prospectus by reference and made a
part hereof: Air Group's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995 and Air Group's Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 1996, Air Group's Quarterly Report on Form 10-Q for
the fiscal quarter ended June 30, 1996, the description of Air Group's Common
Stock contained in Air Group's Registration Statement on Form 8-A filed with
the Commission on September 19, 1985, including any amendments or reports
filed for the purposes of updating such description, and the description of
the rights to purchase Series A Participating Preferred Stock in Air Group's
Registration Statement on Form 8-A filed with the Commission on December 11,
1986, including any amendments or reports filed for purposes of updating such
description.

All documents filed by Air Group pursuant to Section 13(a), 13(c), 14 or
15(d) of the 1934 Act subsequent to the date of this Prospectus and prior to
the termination of this offering shall be deemed to be incorporated by
reference in this Prospectus, and to be a part hereof from the date of filing
of such documents. Any statement incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any statement modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Prospectus.

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Air Group will provide without charge to each person to whom a copy of this
Prospectus is delivered, upon the written or oral request of such person, a
copy of any document incorporated by reference in this Prospectus (other than
exhibits to such documents unless such exhibits are specifically incorporated
by reference to such documents). Requests for such copies should be directed
to the office of the Corporate Secretary, Alaska Air Group, Inc., P.O. Box
68947, Seattle, Washington 98168 (telephone (206) 433-3131).

AIR GROUP AND ALASKA

Air Group is a holding company incorporated in Delaware in 1985. Its
principal subsidiaries are Alaska Airlines, Inc. ("Alaska") and Horizon Air
Industries, Inc. ("Horizon"). Alaska, founded in 1932, provides scheduled air
transportation to 35 cities in Alaska, Washington, Oregon, Nevada, California
and Arizona, four cities in Mexico, four cities in Russia, one city in Canada
and many smaller communities in Alaska and California through code-sharing
agreements with local carriers. As of December 31, 1996, Alaska operated
23 owned and 51 leased jet aircraft with an average age of approximately seven
years. 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. Horizon, a regional commuter carrier founded in 1981,
provides scheduled air transportation to 36 cities in Washington, Oregon,
Montana, Idaho, California and Wyoming, as well as four cities in Canada.
Horizon provides interconnecting passenger traffic to Alaska Airlines through
its major hub cities, Seattle, Portland and Spokane. As of December 31, 1996,
Horizon operated four owned and 58 leased aircraft with an average age of ten
and one-half years. The principal executive offices of Air Group are located
at 19300 Pacific Highway South, Seattle, Washington 98188 (telephone (206)
433-3200).

For the year ended December 31, 1995, Air Group's consolidated operating
revenues were $1.4 billion, of which 89% came from scheduled passenger
services, 7% came from freight and mail, and 4% came from mileage plan
partners and other nonpassenger sources. Alaska Airlines carried approximately
10.1 million passengers in 1995 and accounted for approximately 80% of Air
Group's consolidated 1995 operating revenues. Horizon carried approximately
3.8 million passengers in 1995 and accounted for the remaining 20% of Air
Group's consolidated 1995 operating revenues.

In each year since 1973, Alaska has carried more passengers between Alaska
and the U.S. mainland than any other airline. Passenger traffic within Alaska
and between Alaska and the U.S. mainland accounted for 27% of Alaska's total
revenue passenger miles in 1995, 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.

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USE OF PROCEEDS

Unless otherwise indicated in the accompanying Prospectus Supplement, the
net proceeds to Air Group from the sale of the Common Stock offered hereby
will be added to the working capital of Air Group and will be available for
general corporate purposes, among which may be the repayment of outstanding
indebtedness and financing of capital expenditures by Alaska and Horizon,
including the acquisition of aircraft and related equipment.

DESCRIPTION OF COMMON STOCK

Air Group is authorized to issue 50,000,000 shares of Common Stock, $1.00
par value and 5,000,000 shares of preferred stock.

Voting Rights. Each holder of Common Stock is entitled to one vote per share
on all matters submitted to a vote of such class. Holders of Common Stock do
not have cumulative rights. The Board of Directors is classified into three
classes, with approximately one-third of the Directors elected each year to
three-year terms. A vote of a majority of the shares present at a meeting is
required to elect each nominee as a Director and to approve most other matters
brought before the stockholders for a vote, excluding certain extraordinary
transactions.

Dividend Rights. Holders of Common Stock share ratably in dividends that may
be declared by the Board of Directors out of funds legally available therefor.

Liquidation Rights. Upon any liquidation of Air Group, the holders of Common
Stock are entitled to share ratably in the net assets of Air Group available
for distribution on the Common Stock.

Other. The Common Stock has no preemptive or conversion rights and there are
no redemption provisions applicable thereto. The Common Stock is listed on the
New York Stock Exchange. The registrar and transfer agent for the Common Stock
is The First National Bank of Boston.

Potential Rights of Preferred Stock. Under Air Group's Certificate of
Incorporation, the Board of Directors has authority to issue up to 5,000,000
shares of preferred stock. Such shares would have such voting, dividend,
liquidation, conversion, redemption and other rights as may be determined by
the Board of Directors, subject to the provisions of the Certificate of
Incorporation. Shares of Common Stock would be subject to the preferences,
rights and powers of any such shares of preferred stock as set forth in Air
Group's Certificate of Incorporation and in the resolutions establishing one
or more series of preferred stock. No preferred stock was outstanding at the
date of this Prospectus.

Certain Other Provisions. Air Group's Certificate of Incorporation contains
certain provisions sometimes referred to as "anti-takeover" provisions. In the
event that Air Group at any time has a stockholder who is a beneficial owner
of more than 15% of the voting power of Air Group, these provisions would
require the affirmative vote of the holders of not less than 80% of the
outstanding shares of voting stock to approve a consolidation or merger of Air
Group with any other corporation, the conveyance to any corporation or other
person or any other disposition of all or substantially all of Air Group's
assets, or the disposition by Air Group of all or substantially all of the
stock or assets of any major subsidiary; provided, however, that this 80%
voting requirement does not apply to a transaction which is approved by 80% of
the disinterested members of the Board of Directors.

Air Group is party to a Rights Agreement designed to deter partial and two-
tier tender offers, stock accumulation programs and other coercive tactics
that might be used to gain control without giving the Board of Directors the
opportunity to negotiate on behalf of the stockholders. In accordance with the
Rights Agreement, one right is attached to each share of outstanding Common
Stock. A holder of a right may, under certain circumstances, purchase at a
discount from market value either shares of a special class of voting
preferred stock of Air Group or shares of capital stock of a corporate entity
attempting to acquire Air Group or surviving a merger or consolidation with
Air Group.

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PLAN OF DISTRIBUTION

Air Group may sell the Common Stock to one or more underwriters for public
offering and sale by them or may sell the Common Stock to investors or other
persons directly or through agents. Any such underwriter or agent involved in
the offer and sale of the Common Stock will be named in an applicable
Prospectus Supplement.

Underwriters may offer and sell the Common Stock at a fixed price or prices,
which may be changed, or at prices related to prevailing market prices or at
negotiated prices. Air Group also may, from time to time, authorize
underwriters acting as Air Group's agents to offer and sell the Common Stock
upon the terms and conditions as shall be set forth in any Prospectus
Supplement. In connection with the sale of Common Stock, underwriters may be
deemed to have received compensation from Air Group in the form of
underwriting discounts or commission and may also receive commissions from
purchasers of the Common Stock for whom they may act as agent. Underwriters
may sell the Common Stock to or through dealers, and such dealers may receive
compensation in the form of discounts, concessions or commissions from the
underwriters and/or commissions (which may be changed from time to time) from
the purchasers for whom they may act as agent.

Any underwriting compensation paid by Air Group to underwriters or agents in
connection with the offering of the Common Stock, and any discounts,
concessions or commissions allowed by underwriters to participating dealers,
will be set forth in an applicable Prospectus Supplement. Underwriters,
dealers and agents participating in the distribution of the Common Stock may
be deemed to be underwriters, and any discounts and commissions received by
them and any profit realized by them on resale of the Common Stock may be
deemed to be underwriting discounts and commissions under the Securities Act.
Underwriters, dealers and agents may be entitled, under agreements with Air
Group, to indemnification against and contribution toward certain civil
liabilities, including liabilities under the Securities Act, and to
reimbursement by Air Group for certain expenses.

Underwriters, dealers and agents may engage in transactions with, or perform
services for, Air Group and its subsidiaries in the ordinary course of
business.

LEGAL OPINIONS

Unless otherwise indicated in the applicable Prospectus Supplement, the
validity of the Common Stock offered hereby will be passed upon for Air Group
by Perkins Coie, Seattle, Washington.

EXPERTS

The financial statements and schedule of Air Group incorporated by reference
in this Prospectus and in the Registration Statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are incorporated herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
reports.

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ALASKA AIR GROUP, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

[Download Table]

PAGE
----

CONSOLIDATED FINANCIAL STATEMENTS OF ALASKA AIR GROUP, INC. AND
SUBSIDIARIES
Report of Independent Public Accountants................................ F-2
Consolidated Balance Sheet as of December 31, 1995 and 1996............. F-3
Consolidated Statement of Income for the years ended December 31, 1994,
1995 and 1996.......................................................... F-5
Consolidated Statement of Shareholders' Equity for the years ended De-
cember 31, 1994, 1995 and 1996......................................... F-6
Consolidated Statement of Cash Flows for the years ended December 31,
1994, 1995 and 1996.................................................... F-7
Notes to the Consolidated Financial Statements.......................... F-8
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF ALASKA AIR GROUP, INC. AND
SUBSIDIARIES
Unaudited Consolidated Balance Sheet as of September 30, 1997........... F-19
Unaudited Consolidated Statement of Income for the nine month periods
ended September 30, 1996 and 1997...................................... F-21
Unaudited Consolidated Statement of Shareholders' Equity for the nine
month period ended September 30, 1997.................................. F-22
Unaudited Consolidated Statement of Cash Flows for the nine month
periods ended September 30, 1996 and 1997.............................. F-23
Notes to Unaudited Consolidated Financial Statements.................... F-24

F-1

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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Shareholders of Alaska Air Group, Inc.:

We have audited the accompanying consolidated balance sheet of Alaska Air
Group, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1996
and 1995, and the related consolidated statements of income, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Alaska Air Group, Inc. and
its subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in Item 14(a) is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a required part of the basic financial
statements. This schedule has been subjected to the auditing procedures
applied in our audits of the basic financial statements and, in our opinion,
is fairly stated in all material respects in relation to the basic financial
statements taken as a whole.

Arthur Andersen llp

Seattle, Washington
January 24, 1997

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ALASKA AIR GROUP, INC.

CONSOLIDATED BALANCE SHEET

[Download Table]

AS OF DECEMBER 31,
-------------------
1995 1996
--------- ---------
(IN MILLIONS)

ASSETS
Current Assets
Cash and cash equivalents................................ $ 25.8 $ 49.4
Marketable securities.................................... 109.3 52.4
Receivables--less allowance for doubtful accounts (1995--
$1.6; 1996--$1.3)....................................... 88.5 69.7
Inventories and supplies................................. 44.8 47.8
Prepaid expenses and other assets........................ 70.0 80.9
--------- ---------
Total Current Assets................................... 338.4 300.2
--------- ---------
Property and Equipment
Flight equipment......................................... 845.9 815.9
Other property and equipment............................. 219.1 270.4
Deposits for future flight equipment..................... 40.7 84.5
--------- ---------
1,105.7 1,170.8
Less accumulated depreciation and amortization............. 312.8 326.3
--------- ---------
792.9 844.5
Capital leases
Flight and other equipment............................... 44.4 44.4
Less accumulated amortization............................ 23.3 25.5
--------- ---------
21.1 18.9
--------- ---------
Total Property and Equipment--Net.......................... 814.0 863.4
--------- ---------
Intangible Assets--Subsidiaries............................ 63.6 61.6
--------- ---------
Other Assets............................................... 97.4 86.2
--------- ---------
Total Assets........................................... $1,313.4 $1,311.4
========= =========

See accompanying notes to consolidated financial statements.

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ALASKA AIR GROUP, INC.

CONSOLIDATED BALANCE SHEET

[Download Table]

AS OF DECEMBER 31,
--------------------
1995 1996
--------- ---------
(IN MILLIONS)

LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable....................................... $ 69.2 $ 65.4
Accrued aircraft rent.................................. 44.1 52.8
Accrued wages, vacation and payroll taxes.............. 45.8 51.5
Other accrued liabilities.............................. 55.7 82.0
Short-term borrowings (Interest rate: 1995--6.2%;
1996--5.6%)........................................... 65.9 47.0
Air traffic liability.................................. 124.4 163.0
Current portion of long-term debt and capital lease
obligations........................................... 39.7 24.1
--------- ---------
Total Current Liabilities............................ 444.8 485.8
--------- ---------
Long-Term Debt and Capital Lease Obligations............. 522.4 404.1
--------- ---------
Other Liabilities and Credits
Deferred income taxes.................................. 41.0 49.5
Deferred income........................................ 20.0 18.1
Other liabilities...................................... 72.7 81.4
--------- ---------
133.7 149.0
--------- ---------
Commitments
Shareholders' Equity
Preferred stock, $1 par value
Authorized: 5,000,000 shares......................... -- --
Common stock, $1 par value
Authorized: 50,000,000 shares
Issued: 1995--16,718,684 shares
1996--17,223,281 shares.............................. 16.7 17.2
Capital in excess of par value......................... 155.4 166.8
Treasury stock, at cost:
1995--3,153,608 shares
1996--2,748,550 shares............................... (71.8) (62.6)
Deferred compensation.................................. (3.6) (2.7)
Retained earnings...................................... 115.8 153.8
--------- ---------
212.5 272.5
--------- ---------
Total Liabilities and Shareholders' Equity............. $ 1,313.4 $ 1,311.4
========= =========

See accompanying notes to consolidated financial statements.

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ALASKA AIR GROUP, INC.

CONSOLIDATED STATEMENT OF INCOME

[Download Table]

YEAR ENDED DECEMBER 31
----------------------------
1994 1995 1996
-------- -------- --------
(IN MILLIONS EXCEPT PER
SHARE AMOUNTS)

Operating Revenues
Passenger......................................... $1,170.2 $1,258.2 $1,427.7
Freight and mail.................................. 91.5 95.2 93.9
Other--net........................................ 53.9 64.1 70.6
-------- -------- --------
Total Operating Revenues...................... 1,315.6 1,417.5 1,592.2
-------- -------- --------
Operating Expenses
Wages and benefits................................ 401.7 427.8 477.0
Aircraft fuel..................................... 152.3 181.2 234.2
Aircraft maintenance.............................. 68.3 79.2 98.7
Aircraft rent..................................... 168.5 172.1 181.2
Commissions....................................... 91.9 93.1 101.5
Depreciation and amortization..................... 56.6 68.3 67.5
Loss (gain) on sale of assets..................... 1.0 0.2 (9.1)
Landing fees and other rentals.................... 59.0 57.7 62.4
Other............................................. 242.3 262.2 289.8
-------- -------- --------
Total Operating Expenses...................... 1,241.6 1,341.8 1,503.2
-------- -------- --------
Operating Income.................................. 74.0 75.7 89.0
-------- -------- --------
Other Income (Expense)
Interest income................................... 7.8 10.4 11.1
Interest expense.................................. (47.0) (51.5) (38.4)
Interest capitalized.............................. 0.4 0.2 1.0
Other--net........................................ 5.8 (0.8) 1.6
-------- -------- --------
(33.0) (41.7) (24.7)
-------- -------- --------
Income before income tax.......................... 41.0 34.0 64.3
Income tax expense................................ 18.5 16.7 26.3
-------- -------- --------
Net Income........................................ $ 22.5 $ 17.3 $ 38.0
======== ======== ========
Primary Earnings Per Share........................ $ 1.68 $ 1.28 $ 2.65
======== ======== ========
Fully Diluted Earnings Per Share.................. $ 1.62 $ 1.26 $ 2.05
======== ======== ========
Shares used for computation:
Primary......................................... 13.4 13.5 14.3
Fully diluted................................... 19.6 20.8 22.5

See accompanying notes to consolidated financial statements.

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ALASKA AIR GROUP, INC.

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

[Download Table]

CAPITAL IN TREASURY
COMMON EXCESS OF STOCK AT DEFERRED RETAINED
STOCK PAR VALUE COST COMPENSATION EARNINGS TOTAL
------ ---------- -------- ------------ -------- ------
(IN MILLIONS)

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
Plan 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
----- ------ ------ ----- ------ ------
1996 net income......... 38.0 38.0
Stock issued under stock
plans.................. 0.5 9.7 10.2
Treasury stock purchase
(4,466 shares)......... (0.1) (0.1)
Treasury stock sold
(409,524 shares)....... 1.7 9.3 11.0
Employee Stock Ownership
Plan shares allocated.. 0.9 0.9
----- ------ ------ ----- ------ ------
Balances at December 31,
1996................... $17.2 $166.8 $(62.6) $(2.7) $153.8 $272.5
===== ====== ====== ===== ====== ======

See accompanying notes to consolidated financial statements.

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ALASKA AIR GROUP, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

[Download Table]

YEAR ENDED
DECEMBER 31
----------------------
1994 1995 1996
------ ------ ------
(IN MILLIONS)

Cash flows from operating activities:
Net income............................................. $ 22.5 $ 17.3 $ 38.0
Adjustments to reconcile net income to cash:
Depreciation and amortization........................ 56.6 68.3 67.5
Amortization of airframe and engine overhauls........ 21.0 24.3 34.6
Loss (gain) on disposition of assets and debt
retirement.......................................... (1.1) 1.9 (9.1)
Increase in deferred income taxes.................... 7.6 12.4 8.5
Decrease (increase) in accounts receivable........... 5.2 (18.5) 18.8
Decrease (increase) in other current assets.......... 0.1 (17.2) (13.9)
Increase in air traffic liability.................... 15.1 1.0 38.6
Increase in other current liabilities................ 27.7 15.5 36.9
Other-net............................................ (10.6) 20.5 3.0
------ ------ ------
Net cash provided by operating activities.......... 144.1 125.5 222.9
------ ------ ------
Cash flows from investing activities:
Proceeds from disposition of assets.................. 6.5 3.8 58.1
Purchases of marketable securities................... (76.1) (169.4) (53.5)
Sales and maturities of marketable securities........ 56.8 153.5 110.4
Flight equipment deposits returned................... 5.5 10.8 1.1
Additions to flight equipment deposits............... (1.1) (0.5) (60.5)
Additions to property and equipment.................. (187.5) (102.8) (209.3)
Restricted deposits and other........................ (4.8) 3.9 0.5
------ ------ ------
Net cash used in investing activities.............. (200.7) (100.7) (153.2)
------ ------ ------
Cash flows from financing activities:
Proceeds from short-term borrowings.................. 25.0 69.9 47.0
Repayment of short-term borrowings................... (20.0) (29.0) (65.9)
Proceeds from sale and leaseback transactions........ -- 56.0 85.6
Proceeds from issuance of long-term debt............. 104.0 128.8 --
Long-term debt and capital lease payments............ (70.9) (237.4) (133.9)
Proceeds from issuance of common stock............... 0.8 2.8 10.2
Proceeds from sale of treasury stock................. -- -- 10.9
Gain (loss) on debt retirement....................... 2.1 (1.7) --
------ ------ ------
Net cash provided by (used in) financing activities.... 41.0 (10.6) (46.1)
------ ------ ------
Net increase (decrease) in cash and cash equivalents... (15.6) 14.2 23.6
Cash and cash equivalents at beginning of year......... 27.2 11.6 25.8
------ ------ ------
Cash and cash equivalents at end of year........... $ 11.6 $ 25.8 $ 49.4
====== ====== ======
Supplemental disclosure of cash paid during the year
for:
Interest (net of amount capitalized)................. $ 44.8 $ 52.6 $ 43.5
Income taxes......................................... 2.2 5.0 20.6
Noncash investing and financing activities:
1994--Capital lease obligations of $57.9 million were
incurred due to changes in lease agreements.
1995 and 1996--None

See accompanying notes to consolidated financial statements.

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ALASKA AIR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996

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 1996 presentation.

Alaska and Horizon operate as airlines. However, each airline'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 833 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
231 miles. See Note 9 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. The Company reduces its cash on hand when checks are
disbursed. Due to the time delay in checks clearing the banks, the Company
normally maintains a negative cash balance on its books which is reported as a
current liability. The amount of the negative cash balance was $14.3 million
and $12.5 million at December 31, 1995 and 1996, respectively.

Inventories and Supplies

Expendable and repairable aircraft parts, as well as other 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
1996 for all inventories was $13.5 million and $16.1 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:

[Download Table]

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

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.
The Company periodically reviews long-lived assets for impairment.

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ALASKA AIR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

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 1996 was $19.1 million and $21.1
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 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 issued.

Advertising

The costs of advertising are expensed the first time the advertising takes
place. Advertising expense was $13.0 million, $15.2 million, and $15.6
million, respectively, in 1994, 1995 and 1996.

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 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).

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ALASKA AIR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Stock Options

The Company applies APB Opinion No. 25 and related Interpretations in
accounting for stock options. See Note 6 for more information.

Derivative Financial Instruments

The Company periodically 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 maturities that exceed three months. They are classified as
available for sale and consisted of the following at December 31 (in
millions):

[Download Table]

1995 1996
------ -----

Cost:
U.S. government securities................................. $102.8 $48.4
Other...................................................... 6.5 4.0
------ -----
$109.3 $52.4
====== =====
Fair value:
U.S. government securities................................. $103.1 $48.2
Other...................................................... 6.6 4.0
------ -----
$109.7 $52.2
====== =====

There were no material unrealized holding gains or losses at December 31,
1995 or 1996.

Of the marketable securities on hand at December 31, 1996, 87% will mature
during 1997 and the remainder will mature during 1998. Based on specific
identification of securities sold, the following occurred in 1995 and 1996 (in
millions):

[Download Table]

1995 1996
------ ------

Proceeds from sales.......................................... $153.5 $110.4
Gross realized gains......................................... .3 .3
Gross realized losses........................................ .5 .1
------ ------

Realized gains and losses are reported as a component of interest income.

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ALASKA AIR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 3. OTHER ASSETS

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

[Download Table]

1995 1996
----- -----

Restricted deposits........................................... $64.2 $64.6
Leasehold rights.............................................. 11.2 8.4
Deferred costs and other...................................... 22.0 13.2
----- -----
$97.4 $86.2
===== =====

Leasehold rights and deferred costs are amortized over the term of the
related lease or contract.

NOTE 4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS

At December 31, 1995 and 1996, long-term debt and capital lease obligations
were as follows (in millions):

[Download Table]

1995 1996
------ ------

7.5%* notes payable due through 2009....................... $335.1 $214.1
6-1/2% convertible senior debentures due 2005.............. 132.3 132.3
7-3/4% convertible subordinated debentures due 2006-2010... 10.8 --
6-7/8% convertible subordinated debentures due 2004-2014... 54.0 54.0
------ ------
Long-term debt............................................. 532.2 400.4
Capital lease obligations.................................. 29.9 27.8
Less current portion....................................... (39.7) (24.1)
------ ------
$522.4 $404.1
====== ======

--------
* weighted average for 1996

At December 31, 1996, borrowings of $214.1 million are secured by flight
equipment and real property. The 6-1/2% and 6-7/8% debentures are convertible
into common stock at $21.50 and $33.60 per share, respectively, subject to
adjustments in certain events.

At December 31, 1996, Alaska had a $125 million credit facility with
commercial banks. Advances under this facility may be for up to a maximum
maturity of four 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, 1996, the Company was in compliance with all loan provisions,
and under the most restrictive loan provisions, Alaska had $79.2 million of
net worth above the minimum.

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ALASKA AIR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

At December 31, 1996, long-term debt principal payments for the next five
years were (in millions):

[Download Table]

1997............................................................... $21.9
1998............................................................... $22.9
1999............................................................... $22.8
2000............................................................... $53.9
2001............................................................... $44.2

NOTE 5. COMMITMENTS

Lease Commitments

Lease contracts for 109 aircraft have remaining lease terms of one to 18
years. The majority of airport and terminal facilities are also leased. Total
rent expense was $196.9 million, $201.9 million and $214.7 million, in 1994,
1995 and 1996, respectively. Future minimum lease payments under long-term
operating leases and capital leases as of December 31, 1996 are shown below
(in millions):

[Download Table]

OPERATING LEASES
------------------- CAPITAL
AIRCRAFT FACILITIES LEASES
-------- ---------- -------

1997......................................... $ 169.5 $14.9 $ 4.1
1998......................................... 155.2 14.5 4.1
1999......................................... 144.3 14.4 4.1
2000......................................... 135.1 12.7 4.1
2001......................................... 119.7 8.5 4.1
Thereafter................................... 655.8 32.6 11.0
-------- ----- -----
Total lease payments....................... $1,379.6 $97.6 31.5
======== =====
Less amount representing interest............ (3.7)
-----
Present value of capital lease payments...... $27.8
=====

Aircraft Commitments

The Company has firm orders for 13 B737-400s to be delivered between 1997
and 1999, two MD-83s to be delivered in 1997 and 25 Dash 8-200s to be
delivered in 1997 and 1998. The total amount of these commitments is
approximately $925 million. As of December 31, 1996, deposits related to the
future equipment deliveries were $73.0 million. In addition to the ordered
aircraft, the Company holds purchase options on 12 B737-400s and 45 Dash 8-
200s.

NOTE 6. STOCK PLANS

Air Group has three stock option plans, which provide for the purchase of
Air Group common stock at a stipulated price on the date of grant by certain
officers and key employees of Air Group and its subsidiaries. Under the 1984
Plan, options for 564,300 shares were granted. Under the 1988 Plan, options
for 1,717,900 shares were granted. Under the 1996 Plan, options for 275,100
shares have been granted and, at December 31, 1996, 394,900 shares were
available for grant. Under all plans, the incentive and nonqualified stock
options granted have terms of up to approximately ten years. Grantees are 25%
vested after one year, 50% after two years, 75% after three years and 100%
after four years.

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ALASKA AIR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Air Group follows APB Opinion 25 and related Interpretations in accounting
for stock options. Accordingly, no compensation cost has been recognized for
these plans. Had compensation cost for the Company's stock options been
determined in accordance with Financial Accounting Standard 123, net income
and earnings per share (EPS) would have been reduced to the pro forma amounts
indicated below. The reductions in future years are likely to be larger than
shown below because options vest over four years and new grants are typically
made each year.

[Download Table]

1995 1996
----- -----

Net income (in millions):
As reported............................................... $17.3 $38.0
Pro forma................................................. 17.1 37.4
Primary EPS:
As reported............................................... $1.28 $2.65
Pro forma................................................. 1.26 2.61
Fully diluted EPS:
As reported............................................... $1.26 $2.05
Pro forma................................................. 1.25 2.03

The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions used for
grants in 1995 and 1996, respectively: dividend yield of 0% and 0%; volatility
of 37% and 36%; risk-free interest rates of 6.46% and 6.33%; and expected
lives of 5 and 5 years. Using these assumptions, the weighted average fair
value of options granted was $6.69 and $9.58 in 1995 and 1996, respectively.

Changes in the number of shares subject to option, with their weighted
average exercise prices, are summarized below:

[Download Table]

SHARES PRICE
--------- ------

Outstanding, Dec. 31, 1993............................ 861,362 $17.06
Granted............................................... 330,200 16.53
Exercised............................................. (58,469) 13.65
Canceled.............................................. (88,950) 17.40
--------- ------
Outstanding, Dec. 31, 1994............................ 1,044,143 $17.15
Granted............................................... 425,500 15.37
Exercised............................................. (165,005) 16.11
Canceled.............................................. (143,050) 17.80
--------- ------
Outstanding, Dec. 31, 1995............................ 1,161,588 $16.56
Granted............................................... 379,900 22.51
Exercised............................................. (504,138) 17.05
Canceled.............................................. (45,525) 17.13
--------- ------
Outstanding, Dec. 31, 1996............................ 991,825 $18.57
========= ======

At December 31, 1996, the outstanding options had weighted average exercise
prices ranging from $14.63 to $24.25, and a weighted average remaining
contractual life of 8.1 years.

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ALASKA AIR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The number of shares exercisable at year-end with their weighted average
exercise prices, are summarized below:

[Download Table]

SHARES PRICE
------- ------

December 31, 1994......................................... 644,843 $17.37
December 31, 1995......................................... 596,338 17.24
December 31, 1996......................................... 243,675 16.70

In addition, 1,863,593 shares of common stock are subject to nontransferable
investment options held by management employees. The Company received $2.5
million for these options, which is included with other accrued liabilities on
the Balance Sheet. These options are subject to mandatory redemption at $2.5
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 common stocks and fixed income
securities. Plan assets exceeded the accumulated benefit obligation at
December 31, 1995 and 1996. The following table sets forth the funded status
of the plans at December 31, 1995 and 1996 (in millions):

[Download Table]

1995 1996
------ ------

Benefit obligation
Vested................................................. $155.8 $180.9
Nonvested.............................................. 22.0 22.1
------ ------
Accumulated benefit obligation........................... $177.8 $203.0
====== ======
Plan assets at fair value................................ $184.4 $223.7
Projected benefit obligation............................. 199.9 230.7
------ ------
Plan assets less projected benefit obligation............ (15.5) (7.0)
Unrecognized transition asset............................ (1.1) (.8)
Unrecognized prior service cost.......................... 2.8 2.6
Unrecognized loss........................................ 32.6 32.6
------ ------
Prepaid pension cost..................................... $ 18.8 $ 27.4
====== ======

The weighted average discount rate used to determine the projected benefit
obligation was 7.5% and 7.5% as of December 31, 1995 and 1996, respectively.
The calculation assumed a weighted average rate of increase for future
compensation levels of 5.1% and 5.1% for 1995 and 1996, respectively. The
expected long-term rate of return on plan assets used in 1995 and 1996 was
10%.

F-14

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ALASKA AIR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Net pension expense for the defined benefit plans included the following
components for 1994, 1995 and 1996 (in millions):

[Download Table]

1994 1995 1996
------ ------ ------

Service cost (benefits earned during the
period)....................................... $ 12.4 $ 11.4 $ 15.9
Interest cost on projected benefit obligation.. 11.9 12.9 15.4
Actual return on assets........................ (2.1) (37.0) (23.6)
Net amortization and deferral.................. (10.9) 23.3 6.5
------ ------ ------
Net pension expense............................ $ 11.3 $ 10.6 $ 14.2
====== ====== ======

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 1996.

Total expense for all pension plans was $22.5 million, $22.2 million and
$26.5 million, respectively, in 1994, 1995 and 1996.

Profit Sharing Plans

Alaska and Horizon have employee profit sharing plans. Profit sharing
expense for 1994, 1995 and 1996 was $3.6 million, $-0- and $0.9 million,
respectively.

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Dates Referenced Herein and Documents Incorporated by Reference

		Referenced-On Page
This ‘424B2’ Filing	Date	First	Last	Other Filings

	9/30/07	21		10-Q
	1/1/99	21
	12/31/98	29	31	10-K405, 10-K405/A
	12/15/97	23
	11/19/97
Filed on:	11/18/97
	11/17/97	1	65
	11/14/97	1	65
	11/10/97	13		S-8
	10/1/97	21
	9/30/97	3	63	10-Q
	6/30/97	3		10-Q
	3/31/97	3		10-Q
	3/7/97	21
	1/24/97	41
	1/1/97	63
	12/31/96	3	68	10-K405, DEF 14A
	9/30/96	7	40	10-Q, 10-Q/A
	8/22/96	1	65
	6/30/96	36		10-Q
	3/31/96	36		10-Q
	12/31/95	26	57	10-K405, DEF 14A, PRE 14A
	10/1/95	24
	12/31/94	40	53	10-K, DEF 14A
	12/31/93	45	52	10-K, DEF 14A
				List all Filings

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Filing Submission 0001032210-97-000250 – Alternative Formats (Word / Rich Text, HTML, Plain Text, et al.)

Alaska Air Group, Inc. – ‘424B2’ on 11/18/97

As of: Tuesday, 11/18/97 · Accession #: 1032210-97-250 · File #: 333-04835

Prospectus — Rule 424(b)(2)Filing Table of Contents

Document Table of Contents

Dates Referenced Herein and Documents Incorporated by Reference

Prospectus — Rule 424(b)(2)
Filing Table of Contents