10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2018

OR

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

For the transition period from                      to                      

Commission File Number 1-8957

ALASKA AIR GROUP, INC.

Delaware	91-1292054
(State of Incorporation)	(I.R.S. Employer Identification No.)

19300 International Boulevard, Seattle, Washington 98188

Telephone: (206) 392-5040

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filerx Accelerated filer  ¨ Non-accelerated filer   ¨ (Do not check if a smaller reporting company) Smaller reporting company   ¨ Emerging growth company   ¨

If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ¨ No x

The registrant has 123,299,895 common shares, par value $0.01, outstanding at October 31, 2018.

ALASKA AIR GROUP, INC.

FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2018

TABLE OF CONTENTS

PART I.	FINANCIAL INFORMATION	4
ITEM 1.	CONDENSED CONSOLIDATED FINANCIAL STATEMENTS	4
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	25
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK	44
ITEM 4.	CONTROLS AND PROCEDURES	45
PART II.	OTHER INFORMATION	46
ITEM 1.	LEGAL PROCEEDINGS	46
ITEM 1A.	RISK FACTORS	46
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	46
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	46
ITEM 4.	MINE SAFETY DISCLOSURES	46
ITEM 5.	OTHER INFORMATION	47
ITEM 6.	EXHIBITS	47
	SIGNATURES	47

As used in this Form 10-Q, the terms “Air Group,” the “Company,” “our,” “we” and "us" refer to Alaska Air Group, Inc. and its subsidiaries, unless the context indicates otherwise. Alaska Airlines, Inc., Virgin America Inc. (through July 20, 2018, at which point it was legally merged into Alaska Airlines, Inc), and Horizon Air Industries, Inc. are referred to as “Alaska,” “Virgin America” and “Horizon” and together as our “airlines.”

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Cautionary Note Regarding Forward-Looking Statements

In addition to historical information, this Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. Forward-looking statements are those that predict or describe future events or trends and that do not relate solely to historical matters. You can generally identify forward-looking statements as statements containing the words "believe," "expect," "will," "anticipate," "intend," "estimate," "project," "assume" or other similar expressions, although not all forward-looking statements contain these identifying words. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from historical experience or the Company’s present expectations. Some of the things that could cause actual results to differ from our expectations are:

• the competitive environment in our industry;

• changes in our operating costs, including fuel, which can be volatile;

• our ability to meet our cost reduction goals;

• our ability to achieve anticipated synergies and timing thereof in connection with our acquisition of Virgin America;

• our ability to successfully integrate the Boeing and Airbus operations into those of Alaska;

• labor disputes and our ability to attract and retain qualified personnel;

• operational disruptions;

• general economic conditions, including the impact of those conditions on customer travel behavior;

• the concentration of our revenue from a few key markets;

• an aircraft accident or incident;

• actual or threatened terrorist attacks, global instability and potential U.S. military actions or activities;

• our reliance on automated systems and the risks associated with changes made to those systems;

• changes in laws and regulations.

You should not place undue reliance on our forward-looking statements because the matters they describe are subject to known and unknown risks, uncertainties and other unpredictable factors, many of which are beyond our control. Our forward-looking statements are based on the information currently available to us and speak only as of the date on which this report was filed with the SEC. We expressly disclaim any obligation to issue any updates or revisions to our forward-looking statements, even if subsequent events cause our expectations to change regarding the matters discussed in those statements. Over time, our actual results, performance or achievements will likely differ from the anticipated results, performance or achievements that are expressed or implied by our forward-looking statements, and such differences might be significant and materially adverse to our shareholders. For a discussion of these and other risk factors, see Item 1A. "Risk Factors” of the Company’s annual report on Form 10-K for the year ended December 31, 2017, and Item 1A. "Risk Factors" included herein. Please consider our forward-looking statements in light of those risks as you read this report.

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PART I

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ALASKA AIR GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

(in millions)	September 30, 2018		December 31, 2017
ASSETS
Current Assets
Cash and cash equivalents	$	174	$	194
Marketable securities	1,223		1,427
Total cash and marketable securities	1,397		1,621
Receivables—net	422		341
Inventories and supplies—net	57		57
Prepaid expenses and other current assets	180		133
Total Current Assets	2,056		2,152
Property and Equipment
Aircraft and other flight equipment	7,911		7,559
Other property and equipment	1,322		1,222
Deposits for future flight equipment	429		494
	9,662		9,275
Less accumulated depreciation and amortization	3,167		2,991
Total Property and Equipment—Net	6,495		6,284
Goodwill	1,943		1,943
Intangible assets	128		133
Other noncurrent assets	271		234
Other Assets	2,342		2,310
Total Assets	$	10,893	$	10,746

Certain historical information has been adjusted to reflect the adoption of new accounting standards. See accompanying notes to condensed consolidated financial statements.

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ALASKA AIR GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

(in millions, except share amounts)	September 30, 2018			December 31, 2017
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable	$	114		$	120
Accrued wages, vacation and payroll taxes	334			418
Air traffic liability	950			806
Other accrued liabilities	452			400
Deferred revenue	693			635
Current portion of long-term debt	345			307
Total Current Liabilities	2,888			2,686
Long-Term Debt, Net of Current Portion	1,684			2,262
Other Liabilities and Credits
Deferred income taxes	494			370
Deferred revenue	1,138			1,090
Obligation for pension and postretirement medical benefits	470			453
Other liabilities	428			425
	2,530			2,338
Commitments and Contingencies
Shareholders' Equity
Preferred stock, $0.01 par value, Authorized: 5,000,000 shares, none issued or outstanding	—			—
Common stock, $0.01 par value, Authorized: 400,000,000 shares, Issued: 2018 - 130,786,648 shares; 2017 - 129,903,498 shares, Outstanding: 2018 - 123,360,846 shares; 2017 - 123,060,638 shares	1			1
Capital in excess of par value	224			164
Treasury stock (common), at cost: 2018 - 7,425,802 shares; 2017 - 6,842,860 shares	(556		)	(518		)
Accumulated other comprehensive loss	(428		)	(380		)
Retained earnings	4,550			4,193
	3,791			3,460
Total Liabilities and Shareholders' Equity	$	10,893		$	10,746

Certain historical information has been adjusted to reflect the adoption of new accounting standards. See accompanying notes to condensed consolidated financial statements.

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ALASKA AIR GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
(in millions, except per share amounts)	2018			2017			2018			2017
Operating Revenues
Passenger revenue	$	2,043		$	1,958		5,725			5,505
Mileage Plan other revenue	114			105			329			314
Cargo and other	55			47			146			133
Total Operating Revenues	2,212			2,110			6,200			5,952
Operating Expenses
Wages and benefits	549			477			1,629			1,397
Variable incentive pay	27			40			104			98
Aircraft fuel, including hedging gains and losses	513			368			1,397			1,051
Aircraft maintenance	107			88			320			271
Aircraft rent	82			70			233			204
Landing fees and other rentals	135			124			371			338
Contracted services	70			76			227			234
Selling expenses	79			92			245			277
Depreciation and amortization	99			95			290			275
Food and beverage service	53			50			158			145
Third-party regional carrier expense	38			30			114			84
Other	141			150			423			421
Special items—merger-related costs	22			23			67			86
Special items—other	—			—			25			—
Total Operating Expenses	1,915			1,683			5,603			4,881
Operating Income	297			427			597			1,071
Nonoperating Income (Expense)
Interest income	11			9			29			25
Interest expense	(22		)	(26		)	(71		)	(77		)
Interest capitalized	5			5			14			13
Other—net	(7		)	2			(20		)	1
Total Nonoperating Income (Expense)	(13		)	(10		)	(48		)	(38		)
Income Before Income Tax	284			417			549			1,033
Income tax expense	67			158			135			388
Net Income	$	217		$	259		$	414		$	645
Basic Earnings Per Share:	$	1.76		$	2.10		$	3.36		$	5.22
Diluted Earnings Per Share:	$	1.75		$	2.09		$	3.34		$	5.19
Shares used for computation:
Basic	123.224			123.467			123.216			123.501
Diluted	123.864			124.220			123.804			124.341
Cash dividend declared per share:	$	0.32		$	0.30		$	0.96		$	0.90

Certain historical information has been adjusted to reflect the adoption of new accounting standards. See accompanying notes to condensed consolidated financial statements.

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ALASKA AIR GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS (unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
(in millions)	2018			2017			2018			2017
Net Income	$	217		$	259		$	414		$	645
Other Comprehensive Income (Loss):
Related to marketable securities:
Unrealized holding gain (loss) arising during the period	(2		)	1			(19		)	5
Reclassification of (gain) loss into Other—net nonoperating income (expense)	2			(1		)	5			—
Income tax effect	1			—			4			(2		)
Total	1			—			(10		)	3
Related to employee benefit plans:
Reclassification of net pension expense into Wages and benefits	7			5			21			16
Income tax effect	(2		)	(2		)	(5		)	(5		)
Total	5			3			16			11
Related to interest rate derivative instruments:
Unrealized holding gain (loss) arising during the period	—			—			8			(2		)
Reclassification of (gain) loss into Aircraft rent	2			2			3			4
Income tax effect	(1		)	(1		)	(3		)	(1		)
Total	1			1			8			1
Other Comprehensive Income	7			4			14			15
Comprehensive Income	$	224		$	263		$	428		$	660

Certain historical information has been adjusted to reflect the adoption of new accounting standards. See accompanying notes to condensed consolidated financial statements.

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ALASKA AIR GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

	Nine Months Ended September 30,
(in millions)	2018			2017
Cash flows from operating activities:
Net income	$	414		$	645
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	290			275
Stock-based compensation and other	34			43
Changes in certain assets and liabilities:
Changes in deferred tax provision	122			208
Increase in air traffic liability	144			223
Increase in deferred revenue	106			130
Other—net	(124		)	(167		)
Net cash provided by operating activities	986			1,357
Cash flows from investing activities:
Property and equipment additions:
Aircraft and aircraft purchase deposits	(349		)	(679		)
Other flight equipment	(76		)	(70		)
Other property and equipment	(129		)	(92		)
Total property and equipment additions, including capitalized interest	(554		)	(841		)
Purchases of marketable securities	(672		)	(1,408		)
Sales and maturities of marketable securities	857			1,069
Other investing activities	36			38
Net cash used in investing activities	(333		)	(1,142		)
Cash flows from financing activities:
Long-term debt payments	(544		)	(265		)
Common stock repurchases	(37		)	(50		)
Dividends paid	(118		)	(111		)
Other financing activities	33			27
Net cash used in financing activities	(666		)	(399		)
Net increase (decrease) in cash, cash equivalents, and restricted cash	(13		)	(184		)
Cash, cash equivalents, and restricted cash at beginning of year	197			328
Cash, cash equivalents, and restricted cash at end of the period	$	184		$	144
Cash paid during the period for:
Interest (net of amount capitalized)	$	60		$	68
Income taxes	—			129
Reconciliation of cash, cash equivalents, and restricted cash at end of the period
Cash and cash equivalents	$	174		$	144
Restricted cash included in Prepaid expenses and other current assets	10			—
Total cash, cash equivalents, and restricted cash at end of the period	$	184		$	144

Certain historical information has been adjusted to reflect the adoption of new accounting standards. See accompanying notes to condensed consolidated financial statements.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

NOTE 1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Basis of Presentation

The condensed consolidated financial statements include the accounts of Air Group, or the Company, and its primary subsidiaries, Alaska (including Virgin America) and Horizon. Our condensed consolidated financial statements also include McGee Air Services, a ground services subsidiary of Alaska. The Company conducts substantially all of its operations through these subsidiaries. All significant intercompany balances and transactions have been eliminated. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information. Consistent with these requirements, this Form 10-Q does not include all the information required by GAAP for complete financial statements. It should be read in conjunction with the consolidated financial statements and accompanying notes in the Form 10-K for the year ended December 31, 2017. In the opinion of management, all adjustments have been made that are necessary to fairly present the Company’s financial position as of September 30, 2018 and the results of operations for the three and nine months ended September 30, 2018 and 2017. Such adjustments were of a normal recurring nature.

Certain reclassifications have been made to prior year financial statements to conform to classifications used in the current year.

In preparing these statements, the Company is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities, as well as the reported amounts of revenues and expenses. Due to seasonal variations in the demand for air travel, the volatility of aircraft fuel prices, changes in global economic conditions, changes in the competitive environment and other factors, operating results for the three and nine months ended September 30, 2018 are not necessarily indicative of operating results for the entire year.

Recently Issued Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)," which requires lessees to recognize assets and liabilities for leases currently classified as operating leases. Under the new standard, a lessee will recognize a liability on the balance sheet representing the lease payments owed, and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and lease liabilities.

In July 2018, the FASB issued ASU 2018-11, "Targeted Improvements - Leases (Topic 842)" which amended Topic 842 to provide companies an alternative transition method which would not require adjusting comparative period financial information. The Company plans to utilize this alternative transition method, and will record a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The new standard is effective for the Company on January 1, 2019. The Company will not early adopt the standard.

At this time, the Company believes the most significant impact to the financial statements from the new lease accounting standard will relate to the recording of a right-of-use asset and related liability associated with leased aircraft. The Company does not expect the new standard to have a material impact on the pattern or amount of expense recognized for aircraft leases on the income statement. Other leases, including airports and real estate, equipment, software and other miscellaneous leases continue to be assessed.

In November 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows—Restricted Cash (Topic 230)" related to the presentation of restricted cash on the statement of cash flows, and within the accompanying footnotes. The Company adopted the standard effective January 1, 2018.

In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities." The ASU expands the activities that qualify for hedge accounting and simplifies the rules for reporting hedging relationships. The ASU is effective for the Company beginning January 1, 2019, and is required to be adopted using the modified retrospective approach.

In February 2018, the FASB issued ASU 2018-02, "Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." The standard allows a reclassification from accumulated other comprehensive income (AOCI) to retained earnings for stranded tax effects resulting

9

from the Tax Cuts and Jobs Act. The amount of the reclassification is the difference between the amount initially recorded directly to other comprehensive income at the previously enacted U.S. federal corporate income tax rate that remains in AOCI and the amount that would have been recorded directly to other comprehensive income using the newly enacted U.S. federal income tax rate. The standard is effective for interim and annual reporting periods beginning after December 15, 2018, and early adoption is permitted. The Company elected to early adopt the standard effective January 1, 2018. As a result, retained earnings increased approximately $62 million in 2018 due to the reclassification of tax effects in AOCI recorded in prior periods at previously enacted tax rates.

NOTE 2. RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

Revenue Recognition and Retirement Benefits Accounting Standards

In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)." The Company adopted the new standard as of January 1, 2018, utilizing a full retrospective transition method. Adoption of the new standard resulted in changes to accounting policies for revenue recognition related to frequent flyer activity, certain ancillary revenues such as change fees, air traffic liabilities, and sales and marketing expenses. As a result of adoption, the Company also changed certain financial statement line item disclosure captions. See Note 3 for a discussion of the impact of this standard.

Although less significant, in March 2017 the FASB issued ASU 2017-07, "Compensation - Retirement Benefits (Topic 715)," which requires the Company to present the service cost component of net periodic benefit cost as Wages and benefits in the statement of operations. The Company adopted the new standard as of January 1, 2018, utilizing a full retrospective transition method. Under this new standard, all components of net periodic benefit cost are presented in Nonoperating income (expense), except service cost, which remains in Wages and benefits.

Certain line item captions on the balance sheet and statement of operations changed as a result of the newly implemented standards. Accordingly, historical financial information presented below as reported has been presented using the new captions. The cumulative impact to retained earnings at January 1, 2016 as a result of the new revenue recognition standard was $171 million. Below are the impacts of these newly adopted accounting standards to the financial statements.

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Condensed consolidated statement of operations for the three and nine months ended September 30, 2017 (in millions):

	Three Months Ended September 30, 2017												Nine Months Ended September 30, 2017
				Adjustments												Adjustments
	As Reported			Revenue Recognition			Retirement Benefits			As Adjusted			As Reported			Revenue Recognition			Retirement Benefits			As Adjusted
Operating Revenues
Passenger Revenue	$	1,824		$	134		$	—		$	1,958		$	5,115		$	390		$	—		$	5,505
Mileage plan other revenue	122			(17		)	—			105			369			(55		)	—			314
Cargo and other revenue	174			(127		)	—			47			487			(354		)	—			133
Total Operating Revenue	2,120			(10		)	—			2,110			5,971			(19		)	—			5,952
Operating Expenses
Wages and benefits	475			—			2			477			1,392			—			5			1,397
Selling expenses	91			1			—			92			269			8			—			277
Special items—merger-related costs	24			(1		)	—			23			88			(2		)	—			86
All other operating expenses	1,091			—			—			1,091			3,121			—			—			3,121
Total Operating Expenses	1,681			—			2			1,683			4,870			6			5			4,881
Operating Income	439			(10		)	(2		)	427			1,101			(25		)	(5		)	1,071
Nonoperating Income (Expense)
Other—net	—			—			2			2			(4		)	—			5			1
All other nonoperating income (expense)	(12		)	—			—			(12		)	(39		)	—			—			(39		)
	(12		)	—			2			(10		)	(43		)	—			5			(38		)
Income (loss) before income tax	427			(10		)	—			417			1,058			(25		)	—			1,033
Income tax expense (benefit)	161			(3		)	—			158			397			(9		)	—			388
Net Income (Loss)	$	266		$	(7	)	$	—		$	259		$	661		$	(16	)	$	—		$	645

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Condensed consolidated statement of cash flows for the nine months ended September 30, 2017 (in millions):

	Nine Months Ended September 30, 2017
	As Reported			Adjustments - Revenue Recognition			As Adjusted
Cash flows from operating activities:
Net income	$	661		$	(16	)	$	645
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	275			—			275
Stock-based compensation and other	43			—			43
Changes in certain assets and liabilities:
Changes in deferred tax provision	217			(9		)	208
Increase in air traffic liability	254			(31		)	223
Increase in deferred revenue	46			84			130
Other—net	(139		)	(28		)	(167		)
Net cash provided by operating activities	1,357			—			1,357
Net cash used in investing activities	(1,142		)	—			(1,142		)
Net cash used in financing activities	(399		)	—			(399		)
Net increase (decrease) in cash and cash equivalents	(184		)	—			(184		)
Cash and cash equivalents at beginning of year	328			—			328
Cash and cash equivalents at end of the period	$	144		$	—		$	144

NOTE 3. REVENUE

Ticket revenue is recorded as Passenger revenue, and represents the primary source of the Company's revenue. Also included in Passenger revenue are passenger ancillary revenues such as bag fees, on-board food and beverage, ticket change fees, and certain revenue from the frequent flyer program. Mileage Plan™ other revenue includes brand and marketing revenue from our affinity credit card and other partners and certain interline frequent flyer revenue, net of commissions. Cargo and other revenue includes freight and mail revenue, and to a lesser extent, other ancillary revenue products such as lounge membership and certain commissions.

The Company disaggregates revenue by segment in Note 9. The level of detail within the Company’s statements of operations, segment disclosures, and in this footnote depict the nature, amount, timing and uncertainty of revenue and how cash flows are affected by economic and other factors.

Passenger Ticket and Ancillary Services Revenue

The primary performance obligation on a typical passenger ticket is to provide air travel to the Company’s passenger. Ticket revenue is collected in advance of travel and recorded as Air Traffic Liability (ATL) on the consolidated balance sheets. The Company satisfies its performance obligation and recognizes ticket revenue on each flight segment when the transportation is provided.

Ancillary passenger revenues relate to items such as checked-bag fees, ticket change fees, and on-board food and beverage sales, all of which are provided at time of flight. As such, the obligation to perform these services is satisfied at the time of travel and is recorded with ticket revenue in Passenger revenue.

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Revenue is also recognized for tickets that are expected to expire unused, a concept referred to as “passenger ticket breakage.” Passenger ticket breakage is recorded at the flight date using estimates made at the time of sale based on the Company’s historical experience of expired tickets, and other facts such as program changes and modifications.

In addition to selling tickets on its own marketed flights, the Company has interline agreements with partner airlines under which it sells multi-city tickets with one or more segments of the trip flown by a partner airline, or it operates a connecting flight sold by a partner airline. Each segment in a connecting flight represents a separate performance obligation. Revenue on segments sold and operated by the Company is recognized as Passenger revenue in the gross amount of the allocated ticket price when the travel occurs, while the commission paid to the partner airline is recognized as a selling expense when the related transportation is provided. Revenue on segments operated by a partner airline is deferred for the full amount of the consideration received at the time the ticket is sold and, once the segment has been flown the Company records the net amount, after compensating the partner airline, as Cargo and other revenue.

A portion of revenue from the Mileage Plan™ program is recorded in Passenger revenue. As members are awarded mileage credits on flown tickets, these credits become a distinct performance obligation for the Company. The Company allocates the transaction price to each performance obligation identified in a passenger ticket contract on a relative standalone selling price basis. The standalone selling price for loyalty mileage credits issued is discussed in the LoyaltyMileage Credits section of this Note below. The amount allocated to the mileage credits is deferred on the balance sheet. Once a member travels using a travel award redeemed with mileage credits on one of the Company's airline carriers, the revenue associated with those mileage credits is recorded as Passenger revenue.

Taxes collected from passengers, including transportation excise taxes, airport and security fees and other fees, are recorded on a net basis within passenger revenue in the consolidated statements of operations.

Passenger revenue recognized in the condensed consolidated statements of operations (in millions):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Passenger ticket revenue, including ticket breakage and net of taxes and fees	$	1,744	$	1,683	$	4,865	$	4,709
Passenger ancillary revenue	146		141		401		391
Mileage PlanTM passenger revenue	153		134		459		405
Total passenger revenue	$	2,043	$	1,958	$	5,725	$	5,505

As passenger tickets and related ancillary services are primarily sold via credit cards, certain amounts due from credit card processors are recorded as airline traffic receivables. These credit card receivables and receivables from our affinity credit card partner represent the majority of the receivables balance on the Balance Sheet.

For performance obligations with performance periods of less than one year, GAAP provides a practical expedient that allows the Company not to disclose the transaction price allocated to remaining performance obligations and the timing of related revenue recognition. As passenger tickets expire one year from ticketing, the Company elected to apply this practical expedient for tickets unused or not exchanged.

Mileage Plan™ Loyalty Program

Loyalty mileage credits

The Company’s Mileage Plan™ loyalty program provides frequent flyer travel awards to program members based upon accumulated loyalty mileage credits. Mileage credits are earned through travel, purchases using the Mileage Plan™ co-branded credit card and purchases from other participating partners. The program has a 24-month expiration period for unused mileage credits from the month of last account activity. The Company offers redemption of mileage credits through free, discounted or upgraded air travel on Alaska flights or on one of its 15 airline partners, as well as redemption at partner hotels.

The Company uses a relative standalone selling price allocation to allocate consideration to material performance obligations in contracts with customers that include loyalty mileage credits. As directly observable selling prices for mileage credits are not available, the Company determines the standalone selling price of mileage credits primarily using actual ticket purchase prices for similar tickets flown, adjusted for the likelihood of redemption, or breakage. In determining similar tickets flown,

13

the Company considers current market prices, class of service, type of award, and other factors. For mileage credits accumulated through travel on partner airlines, the Company uses actual consideration received from the partners.

Revenue related to air transportation is deferred in the amount of the relative standalone selling price allocated to the mileage credits as they are issued. The Company satisfies its performance obligation when the mileage credits are redeemed and the related air transportation is delivered.

The Company estimates breakage for the portion of mileage credits not expected to be redeemed using a statistical analysis of historical data, including actual mileage credits expiring, slow-moving and low-credit accounts, among other factors. The breakage rate for the three and nine months ended September 30, 2018 and 2017 was 17.4%. The Company reviews the breakage rate used on an annual basis.

Co-brand credit card agreement and other

In addition to mileage credits, the co-brand credit card agreement, referred to herein as the Agreement, also includes performance obligations for waived bag fees, Companion Fare™ offers to purchase an additional ticket at a discount, marketing, and the use of intellectual property including the brand (unlimited access to the use of the Company’s brand and frequent flyer member lists), which is the predominant element in the Agreement. The affinity card bank partner is the customer for some elements, including the brand and marketing, while the Mileage Plan™ member is the customer for other elements such as mileage credits, bag waivers, and Companion Fares.

At the inception of the Agreement, management estimated the selling price of each of the performance obligations. The objective was to determine the price at which a sale would be transacted if the product or service was sold on a stand-alone basis. The Company determined its best estimate of selling price for each element by considering multiple inputs and methods including, but not limited to, the estimated selling price of comparable travel, discounted cash flows, brand value, published selling prices, number of miles awarded and number of miles redeemed. The Company estimated the selling prices and volumes over the term of the Agreement in order to determine the allocation of proceeds to each of the multiple deliverables. The estimates of the standalone selling prices of each element do not change subsequent to the original valuation of the contract unless the contract is materially modified, but the allocation between elements may change based upon the actual and updated projected volumes of each element delivered during the term of the contract.

Consideration received from the bank is variable and is primarily from consumer spend on the card, among other items. The Company allocates consideration to each of the performance obligations, including mileage credits, waived bag fees, Companion Fares, and brand and marketing, using their relative standalone selling price. Because the performance obligation related to providing use of intellectual property including the brand is satisfied over time, it is recognized in Mileage Plan^TM other revenue in the period that those elements are sold. The Company records passenger revenue related to the air transportation and certificates for discounted companion travel when the transportation is delivered.

In contracts with non-bank partners, the Company has identified two performance obligations in most cases - travel and brand. Revenue is recognized using the residual method, where the travel performance obligation is deferred until transportation is provided in the amount of the estimated standalone selling price of the ticket, less breakage. The residual amount, if any, is recognized as commission revenue when the brand element is sold. Mileage credit sales recorded under the residual approach are immaterial to the overall program.

Interline loyalty

The Company has interline arrangements with certain airlines whereby its members may earn and redeem Mileage Plan™ credits on those airlines, and members of a partner airline’s loyalty program may earn and redeem frequent flyer program credits on Alaska. When a Mileage Plan™ member earns credits on a partner airline, the partner airline remits a contractually-agreed upon fee to the Company which is deferred until credits are redeemed. When a Mileage Plan™ member redeems credits on a partner airline, the Company pays a contractually agreed upon fee to the other airline, which offsets the revenue recognized associated with the award travel. When a member of a partner airline redeems frequent flyer credits on Alaska, the partner airline remits a contractually-agreed upon amount to the Company, recognized as Passenger revenue upon travel. If the partner airline’s member earns frequent flyer program credits on an Alaska flight, the Company remits a contractually-agreed upon fee to the partner airline and records a commission expense.

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Mileage Plan™ revenue included in the condensed consolidated statements of operations (in millions):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Passenger revenue	$	153	$	134	$	459	$	405
Mileage PlanTM other revenue	114		105		329		314
Total Mileage Plan™ revenue	$	267	$	239	$	788	$	719

Mileage Plan™ other revenue is primarily brand and marketing revenue from our affinity card products.

Cargo and Other

The Company provides freight and mail services (cargo). The majority of cargo services are provided to commercial businesses and the United States Postal Service. The Company satisfies cargo service performance obligations and recognizes revenue when the shipment arrives at its final destination or is transferred to a third-party carrier for delivery.

The Company also earns other revenue for lounge memberships, hotel and car commissions, and certain other immaterial items not intrinsically tied to providing air travel to passengers. Revenue is recognized when these services are rendered and recorded as Cargo and other revenue. The transaction price for Cargo and other revenue is the price paid by the customer.

Cargo and other revenue included in the condensed consolidated statements of operations (in millions):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Cargo revenue	$	36	$	32	$	96	$	88
Other revenue	19		15		50		45
Total Cargo and other revenue	$	55	$	47	$	146	$	133

Air Traffic Liability and Deferred Revenue

Passenger ticket and ancillary services liabilities

Air traffic liability included on the condensed consolidated balance sheets represents the remaining obligation associated with passenger tickets and ancillary services. The air traffic liability balance fluctuates with seasonal travel patterns. The Company recognized Passenger revenue of $27 million and $23 million from the prior year-end air traffic liability balance for the three months ended September 30, 2018 and 2017, and $540 million and $543 million for the nine months ended September 30,2018 and 2017.

Mileage Plan^TM liabilities

The total deferred revenue liability included on the condensed consolidated balance sheets represents the remaining transaction price that has been allocated to Mileage Plan^TM performance obligations not yet satisfied by the Company. In general, the current amounts will be recognized as revenue within 12 months and the long-term amounts will be recognized as revenue over, on average, a period of approximately three to four years. This period of time represents the average time that members have historically taken to earn and redeem miles.

The Company records a receivable for amounts due from the bank partner and from other partners as mileage credits are sold until the payments are collected. The Company had $106 million of such receivables as of September 30, 2018 and $101 million as of December 31, 2017.

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Mileage credits are combined in one homogeneous pool and are not specifically identifiable. As such, loyalty revenues disclosed earlier in this Note are comprised of miles that were part of the deferred revenue and liabilities balances at the beginning of the period and miles that were issued during the period. The table below presents a roll forward of the total frequent flyer liability (in millions):

	Nine Months Ended September 30,
	2018			2017
Total Deferred Revenue balance at January 1	$	1,725		$	1,534
Travel miles and companion certificate redemption - Passenger revenue	(459		)	(405		)
Miles redeemed on partner airlines - Other revenue	(66		)	(54		)
Increase in liability for mileage credits issued	631			586
Total Deferred Revenue balance at September 30	$	1,831		$	1,661

Selling Costs

Certain costs such as credit card fees, travel agency and other commissions paid, as well as Global Distribution Systems (GDS) booking fees are incurred when the Company sells passenger tickets and ancillary services in advance of the travel date. The Company defers such costs and recognizes them as expenses when the travel occurs. Prepaid expense recorded on the consolidated balance sheets for such costs was $27 million and $24 million as of September 30, 2018 and December 31, 2017. The Company recorded related expense on the condensed consolidated statement of operations of $57 million and $61 million for the three months ended September 30,2018 and 2017, and $166 million and $183 million for the nine months ended September 30,2018 and 2017.

NOTE 4. FAIR VALUE MEASUREMENTS

In determining fair value, there is a three-level hierarchy based on the reliability of the inputs used. Level 1 refers to fair values based on quoted prices in active markets for identical assets or liabilities. Level 2 refers to fair values estimated using significant other observable inputs and Level 3 refers to fair values estimated using significant unobservable inputs.

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Fair Value of Financial Instruments on a Recurring Basis

As of September 30, 2018, total cost basis for all marketable securities was $1.2 billion. There were no significant differences between the cost basis and fair value of any individual class of marketable securities.

Fair values of financial instruments on the consolidated balance sheet (in millions):

September 30, 2018	Level 1		Level 2			Total
Assets
Marketable securities
U.S. government and agency securities	$	338	$	—		$	338
Foreign government bonds	—		29			29
Asset-backed securities	—		209			209
Mortgage-backed securities	—		79			79
Corporate notes and bonds	—		559			559
Municipal securities	—		9			9
Total Marketable securities	338		885			1,223
Derivative instruments
Fuel hedge—call options	—		54			54
Interest rate swap agreements	—		15			15
Total Assets	$	338	$	954		$	1,292
Liabilities
Derivative instruments
Interest rate swap agreements	—		(3		)	(3		)
Total Liabilities	$	—	$	(3	)	$	(3	)

December 31, 2017	Level 1		Level 2			Total
Assets
Marketable securities
U.S. government and agency securities	$	328	$	—		$	328
Foreign government bonds	—		43			43
Asset-backed securities	—		209			209
Mortgage-backed securities	—		99			99
Corporate notes and bonds	—		726			726
Municipal securities	—		22			22
Total Marketable securities	328		1,099			1,427
Derivative instruments
Fuel hedge—call options	—		22			22
Interest rate swap agreements	—		9			9
Total Assets	$	328	$	1,130		$	1,458
Liabilities
Derivative instruments
Interest rate swap agreements	—		(8		)	(8		)
Total Liabilities	$	—	$	(8	)	$	(8	)

The Company uses both the market and income approach to determine the fair value of marketable securities. U.S. government securities are Level 1 as the fair value is based on quoted prices in active markets. Foreign government bonds, asset-backed securities, mortgage-backed securities, corporate notes and bonds, and municipal securities are Level 2 as the fair value is based on standard valuation models that are calculated based on observable inputs such as quoted interest rates, yield curves, credit ratings of the security and other observable market information.

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The Company uses the market approach and the income approach to determine the fair value of derivative instruments. The fair value for fuel hedge call options is determined utilizing an option pricing model based on inputs that are readily available in active markets or can be derived from information available in active markets. In addition, the fair value considers the exposure to credit losses in the event of non-performance by counterparties. Interest rate swap agreements are Level 2 as the fair value of these contracts is determined based on the difference between the fixed interest rate in the agreements and the observable LIBOR-based interest forward rates at period end multiplied by the total notional value.

Activity and Maturities for Marketable Securities

Unrealized losses from marketable securities are primarily attributable to changes in interest rates. Management does not believe any unrealized losses represent other-than-temporary impairments based on its evaluation of available information as of September 30, 2018.

Maturities for marketable securities (in millions):

September 30, 2018	Cost Basis		Fair Value
Due in one year or less	$	126	$	126
Due after one year through five years	1,094		1,072
Due after five years through 10 years	26		25
Total	$	1,246	$	1,223

Fair Value of Other Financial Instruments

The Company uses the following methods and assumptions to determine the fair value of financial instruments that are not recognized at fair value as described below.

Cash, Cash Equivalents and Restricted Cash: Cash equivalents consist of highly liquid investments with original maturities of three months or less, such as money market funds, commercial paper and certificates of deposit. They are carried at cost, which approximates fair value.

The Company's restricted cash balances are primarily used to guarantee various letters of credit, self-insurance programs or other contractual rights. Restricted cash consists of highly liquid securities with original maturities of three months or less. They are carried at cost, which approximates fair value.

Debt: Debt assumed in the acquisition of Virgin America was subject to a non-recurring fair valuation adjustment as part of purchase price accounting. The adjustment is amortized over the life of the associated debt. All other fixed-rate debt is carried at cost. To estimate the fair value of all fixed-rate debt as of September 30, 2018, the Company uses the income approach by discounting cash flows using borrowing rates for comparable debt over the remaining life of the outstanding debt. The estimated fair value of the fixed-rate debt is Level 3 as certain inputs used are unobservable.

Fixed-rate debt on the consolidated balance sheet and the estimated fair value of long-term fixed-rate debt is as follows (in millions):

	September 30, 2018		December 31, 2017
Fixed-rate debt at cost	$	703	$	956
Non-recurring purchase price accounting fair value adjustment	3		3
Total fixed-rate debt	$	706	$	959
Estimated fair value	$	700	$	959

Assets and Liabilities Measured at Fair Value on Nonrecurring Basis

Certain assets and liabilities are recognized or disclosed at fair value on a nonrecurring basis, including property, plant and equipment, goodwill, and intangible assets. These assets are subject to fair valuation when there is evidence of impairment. No material impairment charges were taken in the three and nine months ended September 30, 2018 and September 30, 2017.

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NOTE 5. LONG-TERM DEBT

Long-term debt obligations on the consolidated balance sheet (in millions):

	September 30, 2018			December 31, 2017
Fixed-rate notes payable due through 2028	$	706		$	959
Variable-rate notes payable due through 2028	1,335			1,625
Less debt issuance costs	(12		)	(15		)
Total debt	2,029			2,569
Less current portion	345			307
Long-term debt, less current portion	$	1,684		$	2,262
Weighted-average fixed-interest rate	4.1		%	4.2		%
Weighted-average variable-interest rate	3.4		%	2.8		%

During the nine months ended September 30, 2018 the Company made debt payments of $544 million, including the prepayment of $231 million of debt.

At September 30, 2018 long-term debt principal payments for the next five years and thereafter are as follows (in millions):

	Total
Remainder of 2018	$	123
2019	267
2020	381
2021	363
2022	179
Thereafter	725
Total	$	2,038

Bank Lines of Credit

The Company had three credit facilities totaling $516 million as of September 30, 2018. All three facilities have variable interest rates based on LIBOR plus a specified margin. One credit facility for $250 million expires in June 2021 and is secured by aircraft. The second credit facility increased from $75 million to $116 million in July 2018. It expires in July 2019, with a mechanism for annual renewal, and is secured by aircraft. A third credit facility for $150 million expires in March 2022 and is secured by certain accounts receivable, spare engines, spare parts and ground service equipment. The Company has secured letters of credit against the $116 million facility, but has no plans to borrow using either of the two other facilities. All three credit facilities have a requirement to maintain a minimum unrestricted cash and marketable securities balance of $500 million. The Company was in compliance with this covenant at September 30, 2018.

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NOTE 6. EMPLOYEE BENEFIT PLANS

Net periodic benefit costs for qualified defined-benefit plans include the following (in millions): 

	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Service cost	$	12		$	10		$	36		$	30
Pension expense included in Wages and benefits	12			10			36			30
Interest cost	20			19			59			55
Expected return on assets	(27		)	(27		)	(80		)	(80		)
Amortization of prior service cost (credit)	(1		)	(1		)	(1		)	(1		)
Recognized actuarial loss (gain)	9			7			25			20
Pension expense (benefit) included in Nonoperating Income (Expense)	$	1		$	(2	)	$	3		$	(6	)

NOTE 7. COMMITMENTS AND CONTINGENCIES

Future minimum payments for commitments as of September 30, 2018 (in millions):

	Aircraft Leases		Facility Leases		Aircraft Commitments(a)		Capacity Purchase Agreements (b)		Aircraft Maintenance Deposits
Remainder of 2018	$	88	$	18	$	378	$	33	$	16
2019	349		64		514		138		65
2020	324		56		525		145		68
2021	282		50		558		166		64
2022	265		35		302		174		52
Thereafter	1,070		149		140		1,205		38
Total	$	2,378	$	372	$	2,417	$	1,861	$	303

(a) Includes non-cancelable contractual commitments for aircraft and engines, buyer furnished equipment, and aircraft maintenance and parts management.

(b) Includes all non-aircraft lease costs associated with capacity purchase agreements.

Lease Commitments

Aircraft lease commitments include future obligations for all of the Company's operating aircraft, as well as aircraft leases operated by third-parties. At September 30, 2018, the Company had lease contracts for 10 Boeing 737 (B737) aircraft, 61 Airbus aircraft, 9 Bombardier Q400 aircraft, and 32 Embraer 175 (E175) aircraft with SkyWest Airlines, Inc. (SkyWest). The Company has an additional two scheduled lease deliveries of A321neo aircraft through 2019, as well as three scheduled lease deliveries of E175 aircraft in 2021 to be operated by SkyWest. The Company does not intend to operate the three E175 aircraft currently scheduled for delivery in 2021, and is working to remove those aircraft from the capacity purchase agreement. All lease contracts have remaining non-cancelable lease terms ranging from 2018 to 2033. The Company has the option to increase capacity flown by SkyWest with eight additional E175 aircraft with deliveries from 2021 to 2022. Options to lease are not reflected in the commitments table above.

Facility lease commitments primarily include airport and terminal facilities and building leases. Total rent expense for aircraft and facility leases was $165 million and $145 million for the three months ended September 30, 2018 and 2017, and $455 million and $406 million for the nine months ended September 30, 2018 and 2017.

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Aircraft Commitments

Aircraft purchase commitments include non-cancelable contractual commitments for aircraft and engines. As of September 30, 2018, the Company had commitments to purchase 38 B737 aircraft (6 B737 NextGen aircraft and 32 B737 MAX aircraft), with deliveries in the remainder of 2018 through 2023. In the first quarter of 2018 the Company entered into a supplemental agreement with Boeing to defer certain B737 deliveries and to convert 15 MAX8 aircraft orders to MAX9 aircraft orders. The Company also has commitments to purchase 17 E175 aircraft with deliveries in the remainder of 2018 through 2021 and has cancelable purchase commitments for 30 Airbus A320neo aircraft with deliveries from 2022 through 2024. In addition, the Company has options to purchase 37 B737 aircraft from 2021 through 2024 and 30 E175 aircraft from 2021 through 2023. The cancelable purchase commitments and option payments are not reflected in the table above.

Contingencies

The Company is a party to routine litigation matters incidental to its business and with respect to which no material liability is expected. Liabilities for litigation related contingencies are recorded when a loss is determined to be probable and estimable.

In 2015, three flight attendants filed a class action lawsuit seeking to represent all Virgin America flight attendants for damages based on alleged violations of California and City of San Francisco wage and hour laws. Two thousand flight attendants were certified as a class in November 2016. The Company believes the claims in this case are without factual and legal merit.

In July 2018, the Court granted in part Plaintiffs' motion for summary judgment, finding Virgin America responsible for various damages and penalties sought by the class members. Plaintiffs value these damages and penalties at $85 million, and as of November 1, 2018, moved the Court to enter judgment against Virgin America in that amount. Plaintiffs do not seek monetary or behavioral relief from Alaska Airlines.

The Court will render its final judgment in March 2019. The Company will then seek an appellate court ruling that the California laws on which the judgment is based are invalid as applied to national airlines pursuant to the U.S. Constitution and federal law. The Company remains confident that a higher court will respect the federal preemption principles that were enacted to shield inter-state common carriers from a patchwork of state and local wage and hour regulations such as those at issue in this case.

This forward-looking statement is based on management's current understanding of the relevant law and facts, and it is subject to various contingencies, including the potential costs and risks associated with litigation and the actions of judges and juries.

NOTE 8. SHAREHOLDERS' EQUITY

Dividends

During the three months ended September 30, 2018, the Company declared and paid cash dividends of $0.32 per share, or $39 million. During the nine months ended September 30, 2018, the Company declared and paid cash dividends of $0.96 per share, or $118 million.

Common Stock Repurchase

In August 2015, the Board of Directors authorized a $1 billion share repurchase program. As of September 30, 2018, the Company has repurchased 5.7 million shares for $426 million under this program.

Share repurchase activity (in millions, except share amounts):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
	Shares	Amount		Shares	Amount		Shares	Amount		Shares	Amount
2015 Repurchase Program—$1 billion	193,203	$	12	355,415	$	28	582,942	$	37	612,095	$	50

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Accumulated Other Comprehensive Loss

Components of accumulated other comprehensive loss, net of tax (in millions):

	September 30, 2018			December 31, 2017
Related to marketable securities	$	(17	)	$	(5	)
Related to employee benefit plans	(420		)	(376		)
Related to interest rate derivatives	9			1
Total	$	(428	)	$	(380	)

The Company elected to early adopt ASU 2018-02 in the first quarter of 2018. As a result, the Company reclassified approximately $62 million of tax effects in AOCI recorded in prior periods at previously enacted tax rates thus increasing Retained earnings.

Earnings Per Share (EPS)

Diluted EPS is calculated by dividing net income by the average number of common shares outstanding plus the number of additional common shares that would have been outstanding assuming the exercise of in-the-money stock options and restricted stock units, using the treasury-stock method. For the three and nine months ended September 30, 2018 and 2017, anti-dilutive shares excluded from the calculation of EPS were not material.

NOTE 9. OPERATING SEGMENT INFORMATION

Alaska Air Group has two operating airlines—Alaska (including Virgin America after the single operating certificate was received in January 2018) and Horizon. Each is regulated by the U.S. Department of Transportation’s Federal Aviation Administration. Alaska has CPAs for regional capacity with Horizon, as well as with third-party carriers SkyWest and PenAir, under which Alaska receives all passenger revenues.

Under U.S. GAAP, operating segments are defined as components of a business for which there is discrete financial information that is regularly assessed by the Chief Operating Decision Maker (CODM) in making resource allocation decisions. Financial performance for the operating airlines and CPAs is managed and reviewed by the Company's CODM as part of three reportable operating segments:

• Mainline - includes scheduled air transportation on Alaska's Boeing or Airbus jet aircraft for passengers and cargo throughout the U.S., and in parts of Canada, Mexico, and Costa Rica.

• Regional - includes Horizon's and other third-party carriers’ scheduled air transportation for passengers across a shorter distance network within the U.S. under CPAs. This segment includes the actual revenues and expenses associated with regional flying, as well as an allocation of corporate overhead incurred by Air Group on behalf of the regional operations.

• Horizon - includes the capacity sold to Alaska under CPA. Expenses include those typically borne by regional airlines such as crew costs, ownership costs and maintenance costs.

The CODM makes resource allocation decisions for these reporting segments based on flight profitability data, aircraft type, route economics and other financial information.

The "Consolidating and Other" column reflects Air Group parent company activity, McGee Air Services, consolidating entries and other immaterial business units of the company. The “Air Group Adjusted” column represents a non-GAAP measure that is used by the Company's CODM to evaluate performance and allocate resources. Adjustments are further explained below in reconciling to consolidated GAAP results.

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Operating segment information is as follows (in millions):

	Three Months Ended September 30, 2018
	Mainline			Regional			Horizon			Consolidating & Other(a)			Air Group Adjusted(b)			Special Items(c)			Consolidated
Operating revenues
Passenger revenues	$	1,727		$	316		$	—		$	—		$	2,043		$	—		$	2,043
CPA revenues	—			—			128			(128		)	—			—			—
Mileage Plan other revenue	104			10			—			—			114			—			114
Cargo and other	53			—			2			—			55			—			55
Total operating revenues	1,884			326			130			(128		)	2,212			—			2,212
Operating expenses
Operating expenses, excluding fuel	1,126			267			118			(131		)	1,380			22			1,402
Economic fuel	438			70			—			—			508			5			513
Total operating expenses	1,564			337			118			(131		)	1,888			27			1,915
Nonoperating income (expense)
Interest income	15			—			—			(4		)	11			—			11
Interest expense	(20		)	—			(6		)	4			(22		)	—			(22		)
Interest capitalized	4			—			1			—			5			—			5
Other—net	(5		)	(2		)	—			—			(7		)	—			(7		)
Total Nonoperating income (expense)	(6		)	(2		)	(5		)	—			(13		)	—			(13		)
Income (loss) before income tax	$	314		$	(13	)	$	7		$	3		$	311		$	(27	)	$	284

	Three Months Ended September 30, 2017(d)
	Mainline			Regional		Horizon			Consolidating & Other(a)			Air Group Adjusted(b)			Special Items(c)			Consolidated
Operating revenues
Passenger revenues	$	1,677		$	281	$	—		$	—		$	1,958		$	—		$	1,958
CPA revenues	—			—		112			(112		)	—			—			—
Mileage Plan other revenue	97			8		—			—			105			—			105
Cargo and other	46			—		1			—			47			—			47
Total operating revenues	1,820			289		113			(112		)	2,110			—			2,110
Operating expenses
Operating expenses, excluding fuel	1,081			219		104			(112		)	1,292			23			1,315
Economic fuel	328			45		—			—			373			(5		)	368
Total operating expenses	1,409			264		104			(112		)	1,665			18			1,683
Nonoperating income (expense)
Interest income	12			—		—			(3		)	9			—			9
Interest expense	(25		)	—		(4		)	3			(26		)	—			(26		)
Interest capitalized	5			—		—			—			5			—			5
Other—net	2			—		—			—			2			—			2
Total Nonoperating income (expense)	(6		)	—		(4		)	—			(10		)	—			(10		)
Income (loss) before income tax	$	405		$	25	$	5		$	—		$	435		$	(18	)	$	417

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	Nine Months Ended September 30, 2018
(in millions)	Mainline			Regional			Horizon			Consolidating & Other(a)			Air Group Adjusted(b)			Special Items(c)			Consolidated
Operating revenues
Passenger revenues	$	4,880		$	845		$	—		$	—		$	5,725		$	—		$	5,725
CPA revenues	—			—			375			(375		)	—			—			—
Mileage Plan other revenue	301			28			—			—			329			—			329
Cargo and other	141			1			4			—			146			—			146
Total operating revenues	5,322			874			379			(375		)	6,200			—			6,200
Operating expenses
Operating expenses, excluding fuel	3,392			755			345			(378		)	4,114			92			4,206
Economic fuel	1,237			190			—			—			1,427			(30		)	1,397
Total operating expenses	4,629			945			345			(378		)	5,541			62			5,603
Nonoperating income (expense)
Interest income	39			—			—			(10		)	29			—			29
Interest expense	(64		)	—			(16		)	9			(71		)	—			(71		)
Interest capitalized	12			—			2			—			14			—			14
Other	(9		)	(11		)	—			—			(20		)	—			(20		)
Total Nonoperating income (expense)	(22		)	(11		)	(14		)	(1		)	(48		)	—			(48		)
Income (loss) before income tax	$	671		$	(82	)	$	20		$	2		$	611		$	(62	)	$	549

	Nine Months Ended September 30, 2017(d)
(in millions)	Mainline			Regional		Horizon			Consolidating & Other(a)			Air Group Adjusted(b)			Special Items(c)			Consolidated
Operating revenues
Passenger revenues	$	4,729		$	776	$	—		$	—		$	5,505		$	—		$	5,505
CPA revenues	—			—		317			(317		)	—			—			—
Mileage Plan other revenue	291			23		—			—			314			—			314
Cargo and other	127			3		3			—			133			—			133
Total operating revenues	5,147			802		320			(317		)	5,952			—			5,952
Operating expenses
Operating expenses, excluding fuel	3,111			625		323			(315		)	3,744			86			3,830
Economic fuel	924			120		—			—			1,044			7			1,051
Total operating expenses	4,035			745		323			(315		)	4,788			93			4,881
Nonoperating income (expense)
Interest income	29			—		—			(4		)	25			—			25
Interest expense	(72		)	—		(9		)	4			(77		)	—			(77		)
Interest capitalized	12			—		1			—			13			—			13
Other	1			—		—			—			1			—			1
Total Nonoperating income (expense)	(30		)	—		(8		)	—			(38		)	—			(38		)
Income (loss) before income tax	$	1,082		$	57	$	(11	)	$	(2	)	$	1,126		$	(93	)	$	1,033

(a) Includes consolidating entries, Air Group parent company, McGee Air Services, and other immaterial business units.

(b) The Air Group Adjusted column represents the financial information that is reviewed by management to assess performance of operations and determine capital allocations and does not include certain income and charges.

(c) Includes merger-related costs, mark-to-market fuel-hedge accounting charges, and other special items.

(d) Certain historical information has been adjusted to reflect the adoption of new accounting standards.

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Total assets were as follows (in millions):

	September 30, 2018			December 31, 2017
Mainline	$	14,725		$	16,663
Horizon	1,037			929
Consolidating & Other	(4,869		)	(6,846		)
Consolidated	$	10,893		$	10,746

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help the reader understand our company, segment operations and the present business environment. MD&A is provided as a supplement to – and should be read in conjunction with – our consolidated financial statements and the accompanying notes. All statements in the following discussion that are not statements of historical information or descriptions of current accounting policy are forward-looking statements. Please consider our forward-looking statements in light of the risks referred to in this report’s introductory cautionary note and the risks mentioned in "Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2017. This overview summarizes the MD&A, which includes the following sections:

• Third Quarter Review—highlights from the third quarter of 2018 outlining some of the major events that happened during the period and how they affected our financial performance.

• Results of Operations—an in-depth analysis of our revenues by segment and our expenses from a consolidated perspective for the three and nine months ended September 30, 2018. To the extent material to the understanding of segment profitability, we more fully describe the segment expenses per financial statement line item. Financial and statistical data is also included here. This section includes forward-looking statements regarding our view of the remainder of 2018. 

• Liquidity and Capital Resources—an overview of our financial position, analysis of cash flows, and relevant contractual obligations and commitments.

THIRD QUARTER REVIEW

Our consolidated pretax income was $284 million during the third quarter of 2018, compared to $417 million in the third quarter of 2017. The decrease in pretax income of $133 million was driven largely by an increase in fuel expense of $145 million and an increase in non-fuel operating expenses of $87 million, partially offset by an increase in operating revenues of $102 million.

See “Results of Operations” below for further discussion of changes in revenues and operating expenses and our reconciliation of non-GAAP measures to the most directly comparable GAAP measure.

Operations Performance

During the third quarter of 2018, our on-time performance was 80.9% for our Mainline operations and 81.2% for our Regional operations. These on-time results are in-line with our historical high standard of running an excellent operation.

New Markets

We launched two new routes and announced three new routes during the third quarter of 2018. Approximately 88% of our growth in 2018 is from additional flight frequency within our core markets and annualization of new markets announced in 2017. The remaining growth is attributable to adding moreroutes connecting guests along the West Coast to high demand markets in the lower 48 states and Hawaii.

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Shareholder Return

During the third quarter of 2018, we paid cash dividends of $39 million and repurchased 193,203 shares for $12 million.

Recent Events

On August 10, 2018, one of our Q400 aircraft was taken without authorization by an employee from Sea-Tac International Airport. The aircraft crashed in a remote area south of the airport, resulting in the loss of life of the individual flying the aircraft. There were no other fatalities, and no ground structures were involved at the crash site. The loss of the aircraft is a fully insured event with no deductibles. Air Group's aviation insurance program is secured with a number of highly rated insurers on quota share programs. Presenting a claim to all insurers on the programs commenced only after the aircraft wreckage was released from governmental authorities in late September 2018. Air Group expects to finalize the claim process after the FBI ends its current investigation.

Labor Update

In July 2018, Alaska dispatchers, represented by the Transport Workers Union (TWU), ratified a merger transition agreement. In the third quarter, we also finalized the integrated seniority list for the Alaska pilot group. As a result, all Mainline groups except for aircraft technicians are now under a single contract and have an integrated seniority list.

Outlook

In 2018 and beyond, we are focused on successfully completing the integration of Virgin America. We have completed a number of significant integration milestones to date and continue to make progress on our integration. In January 2018, Alaska and Virgin America received a Single Operating Certificate (SOC) from the FAA, which recognizes Alaska and Virgin America as one airline. In April, we transitioned to a single Passenger Service System (PSS), which allows us to provide one reservation system, one website and one inventory of flights to our guests. Our transition to a single PSS allows us to unlock many of the revenue synergies expected from the acquisition, as well as provide consistent branding to our guests at all airports gates, ticketing, and check-in areas.

Additionally, in June, we received FAA approval for our Airbus emergency procedures. This allowed us to move forward with transition training for flight attendants so they can work on both Boeing and Airbus aircraft, which will begin to occur in early 2019. We also integrated to a single weight and balance system in June. This allowed us to take cargo on Airbus aircraft, which provides an important revenue synergy beginning in the third quarter of 2018 and beyond.

With the completion of our most recent milestones, our integration is now approximately 90 percent complete. One major milestone remaining to complete is our Airbus fleet reconfiguration. Between now and the end of 2019, we will complete painting all of our Airbus aircraft with the Alaska livery and will continue reconfiguring Airbus aircraft to align with the Boeing aircraft to achieve one consistent cabin experience for our guests. We will also be integrating our crew management systems in early 2019.

We continue to make investments to enhance our onboard guest experience. We began our fleet-wide installation of high-speed satellite Wi-Fi, we completed the updates and expansion of our airport lounges in the JFK and Seattle airports, and we continue to make headway in our investment in our Seattle hub airport to open a state-of-the-art 20-gate North Terminal facility. Throughout 2018 we have also introduced new food and beverage menus, which include more fresh, local, and healthy offerings with a distinct West Coast vibe including salads, protein plates, and fresh snacks. All Boeing and Airbus flights introduced new beverage offerings, including craft beers, new juices and, coming later this fall, an updated wine selection.

In April, we entered into an agreement to lease 12 airport slots at LaGuardia Airport (LGA) and eight airport slots at Regan National Airport (DCA) to another carrier. The lease began in October 2018 and continues through 2028. This agreement enables us to monetize these valuable slots, and reallocate flying from Dallas Love Field (DAL) to more strategic and profitable opportunities on the West Coast. We maintain the right to resume flying using these slots, should we choose to do so, in 2028 when the agreement expires, or if perimeter restrictions change.

We have also announced new revenue initiatives that are incremental to merger synergies. This fall, we will introduce a new option for our guests called the "Saver Fare," a low-priced product which we believe will result in incremental annual revenue of approximately $100 million. In addition, we have implemented a series of other revenue initiatives, such as offering exit rows for sale, introducing demand-based pricing for our premium class seats, leveraging new technology to better manage revenue post-sale, and eliminating fee waivers for changes made outside of 60 days. Furthermore, we recently announced an

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increase in our checked bag fees which is expected to add approximately $50 million of incremental revenue. We believe these changes provide guests with more options and reflect the significant increase in the value of our expanded network and product, as well as unlocking the substantial synergies from the merger.

Currently, we expect to grow our combined network capacity by approximately 5% in 2018 and approximately 2% in 2019. Current schedules indicate competitive capacity will increase by approximately 4% in the fourth quarter of 2018, and approximately 6% in the first quarter of 2019. We believe that our product, our operation, our engaged employees, our award-winning service, and our competitive Mileage Plan™ program, combined with our strong balance sheet and focus on low costs, give us a competitive advantage in our markets.

Our current expectations for capacity and CASM excluding fuel and special items for the fourth quarter and full year 2018 are summarized below:

	Forecast Q4 2018	Q4 2017	% Change
Capacity (ASMs in millions)	16,120 - 16,170	15,901	~ 1.4%
Cost per ASM excluding fuel and special items (cents)(a)	8.97¢ - 9.01¢	8.68¢	~ 3.6%

	Forecast Full Year 2018	Full Year 2017	% Change
Capacity (ASMs in millions)	65,375 - 65,425	62,072	~ 5.3%
Cost per ASM excluding fuel and special items (cents)(a)	8.50¢ - 8.52¢	8.25¢	~ 3.2%

(a) 2017 CASMex reflects the impacts of the updated accounting standards, effective for the Company January 1, 2018.

RESULTSOF OPERATIONS

ADJUSTED (NON-GAAP) RESULTS ANDPER-SHARE AMOUNTS

We believe disclosure of earnings excluding the impact of merger-related costs, mark-to-market gains or losses or other individual special revenues or expenses is useful information to investors because:

• By excluding fuel expense and certain special items (including merger-related costs) from our unit metrics, we believe that we have better visibility into the results of operations and our non-fuel cost initiatives. Our industry is highly competitive and is characterized by high fixed costs, so even a small reduction in non-fuel operating costs can lead to a significant improvement in operating results. In addition, we believe that all domestic carriers are similarly impacted by changes in jet fuel costs over the long run, so it is important for management (and thus investors) to understand the impact of (and trends in) company-specific cost drivers, such as labor rates and productivity, airport costs, maintenance costs, etc., which are more controllable by management.

• Cost per ASM (CASM) excluding fuel and certain special items, such as merger-related costs, is one of the most important measures used by management and by the Air Group Board of Directors in assessing quarterly and annual cost performance.

• Adjusted income before income tax and CASM excluding fuel (and other items as specified in our plan documents) are important metrics for the employee cash incentive plan, which covers the majority of employees within the Air Group organization.

• CASM excluding fuel and certain special items is a measure commonly used by industry analysts and we believe it is an important metric by which they compare our airlines to others in the industry. The measure is also the subject of frequent questions from investors.

• Disclosure of the individual impact of certain noted items provides investors the ability to measure and monitor performance both with and without these special items. We believe that disclosing the impact of certain items, such as merger-related costs, and mark-to-market hedging adjustments, is important because it provides information on significant items that are not necessarily indicative of future performance. Industry analysts and investors consistently measure our performance without these items for better comparability between periods and among other airlines.

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• Although we disclose our unit revenues, we do not (nor are we able to) evaluate unit revenues excluding the impact that changes in fuel costs have had on ticket prices. Fuel expense represents a large percentage of our total operating expenses. Fluctuations in fuel prices often drive changes in unit revenues in the mid-to-long term. Although we believe it is useful to evaluate non-fuel unit costs for the reasons noted above, we would caution readers of these financial statements not to place undue reliance on unit costs excluding fuel as a measure or predictor of future profitability because of the significant impact of fuel costs on our business.

Although we are presenting these non-GAAP amounts for the reasons above, investors and other readers should not necessarily conclude that these amounts are non-recurring, infrequent, or unusual in nature.

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OPERATING STATISTICS SUMMARY (unaudited)

Below are operating statistics we use to measure operating performance. We often refer to unit revenues and adjusted unit costs, which are non-GAAP measures.

	Three Months Ended September 30,			Nine Months Ended September 30,
	2018	2017	Change	2018	2017	Change
Consolidated Operating Statistics:(a)
Revenue passengers (000)	12,128	11,639	4.2%	34,685	33,038	5.0%
RPMs (000,000) "traffic"	14,386	13,811	4.2%	41,272	39,072	5.6%
ASMs (000,000) "capacity"	16,943	16,164	4.8%	49,256	46,169	6.7%
Load factor	84.9%	85.4%	(0.5) pts	83.8%	84.6%	(0.8) pts
Yield(d)	14.20¢	14.18¢	0.1%	13.87¢	14.10¢	(1.6)%
RASM(d)	13.05¢	13.06¢	(0.1)%	12.59¢	12.89¢	(2.3)%
CASM excluding fuel and special items(b)(d)	8.15¢	8.00¢	1.9%	8.35¢	8.11¢	3.0%
Economic fuel cost per gallon(b)	$2.33	$1.80	29.4%	$2.26	$1.76	28.4%
Fuel gallons (000,000)	218	207	5.3%	631	592	6.6%
ASMs per fuel gallon	77.7	78.1	(0.5)%	78.1	78.0	0.1%
Average full-time equivalent employees (FTEs)	21,804	20,743	5.1%	21,575	19,723	9.4%
Mainline Operating Statistics:
Revenue passengers (000)	9,435	9,136	3.3%	27,107	25,850	4.9%
RPMs (000,000) "traffic"	13,096	12,694	3.2%	37,677	36,045	4.5%
ASMs (000,000) "capacity"	15,343	14,796	3.7%	44,730	42,397	5.5%
Load factor	85.4%	85.8%	(0.4) pts	84.2%	85.0%	(0.8) pts
Yield(d)	13.18¢	13.23¢	(0.4)%	12.95¢	13.13¢	(1.4)%
RASM(d)	12.28¢	12.35¢	(0.6)%	11.90¢	12.19¢	(2.4)%
CASM excluding fuel and special items(b)(d)	7.34¢	7.30¢	0.5%	7.58¢	7.34¢	3.3%
Economic fuel cost per gallon(b)	$2.32	$1.79	29.6%	$2.25	$1.76	27.8%
Fuel gallons (000,000)	189	183	3.3%	549	526	4.4%
ASMs per fuel gallon	81.2	80.9	0.4%	81.5	80.6	1.1%
Average FTEs	16,499	15,862	4.0%	16,330	15,439	5.8%
Aircraft utilization	11.4	11.4	—%	11.4	11.1	2.7%
Average aircraft stage length	1,291	1,300	(0.7)%	1,293	1,296	(0.2)%
Operating fleet	231	218	13 a/c	231	218	13 a/c
Regional Operating Statistics:(c)
Revenue passengers (000)	2,693	2,503	7.6%	7,578	7,188	5.4%
RPMs (000,000) "traffic"	1,290	1,117	15.5%	3,595	3,027	18.8%
ASMs (000,000) "capacity"	1,600	1,368	17.0%	4,526	3,772	20.0%
Load factor	80.6%	81.7%	(1.1 pts)	79.4%	80.2%	(0.8 pts)
Yield(d)	24.50¢	25.15¢	(2.6)%	23.49¢	25.65¢	(8.4)%
RASM(d)	20.41¢	20.61¢	(1.0)%	19.32¢	20.67¢	(6.5)%
Operating fleet	89	83	6 a/c	89	83	6 a/c

(a) Except for FTEs, data includes information related to third-party regional capacity purchase flying arrangements.

(b) See reconciliation of this non-GAAP measure to the most directly related GAAP measure in the accompanying pages.

(c) Data presented includes information related to flights operated by Horizon and third-party carriers.

(d) Certain historical information has been adjusted to reflect the adoption of new accounting standards.

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COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2018 TO THREE MONTHS ENDED SEPTEMBER 30, 2017

Our consolidated net income for the three months ended September 30, 2018 was $217 million, or $1.75 per diluted share, compared to net income of $259 million, or $2.09 per diluted share, for the three months ended September 30, 2017.

Excluding the impact of merger-related costs and mark-to-market fuel hedge adjustments, our adjusted net income for the third quarter of 2018 was $237 million, or $1.91 per diluted share, compared to an adjusted net income of $270 million, or $2.18 per diluted share, in the third quarter of 2017. Historical information has been adjusted to reflect the adoption of new accounting standards effective for the Company January 1, 2018. The following tables reconcile our adjusted net income and adjusted earnings per diluted share (EPS) to amounts as reported in accordance with GAAP:

	Three Months Ended September 30,
	2018						2017
(in millions, except per share amounts)	Dollars			Diluted EPS			Dollars			Diluted EPS
GAAP net income and diluted EPS	$	217		$	1.75		$	259		$	2.09
Mark-to-market fuel hedge adjustments	5			0.04			(5		)	(0.04		)
Special items—merger-related costs	22			0.18			23			0.19
Income tax effect of reconciling items above	(7		)	(0.06		)	(7		)	(0.06		)
Non-GAAP adjusted net income and diluted EPS	$	237		$	1.91		$	270		$	2.18

CASM reconciliation is summarized below:

	Three Months Ended September 30,
(in cents)	2018			2017			% Change
Consolidated:
CASM		11.30	¢		10.41	¢	9	%
Less the following components:
Aircraft fuel, including hedging gains and losses	3.02			2.27			33	%
Special items—merger-related costs and other	0.13			0.14			(7	)%
CASM excluding fuel and special items		8.15	¢		8.00	¢	2	%
Mainline:
CASM		10.37	¢		9.64	¢	8	%
Less the following components:
Aircraft fuel, including hedging gains and losses	2.89			2.18			33	%
Special items—merger-related costs and other	0.14			0.16			(13	)%
CASM excluding fuel and special items		7.34	¢		7.30	¢	1	%

OPERATING REVENUES

Total operating revenues increased$102 million, or 5%, during the third quarter of 2018 compared to the same period in 2017. The changes are summarized in the following table:

	Three Months Ended September 30,
(in millions)	2018		2017		% Change
Passenger revenue	$	2,043	$	1,958	4	%
Mileage Plan other revenue	114		105		9	%
Cargo and other	55		47		17	%
Total operating revenues	$	2,212	$	2,110	5	%

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Passenger Revenue

On a consolidated basis, Passenger revenue for the third quarter of 2018increased by $85 million, or 4%, on a 5%increase in capacity, partially offset by a 0.5 pt decrease in load factor. The increase in capacity was driven by our continued network expansion and aircraft added to our fleet since the third quarter of 2017. As discussed above, we are working on a number of revenue initiatives to help improve our revenue performance.

OPERATING EXPENSES

Total operating expenses increased$232 million, or 14%, compared to the third quarter of 2017. We believe it is useful to summarize operating expenses as follows, which is consistent with the way expenses are reported internally and evaluated by management:

	Three Months Ended September 30,
(in millions)	2018		2017		% Change
Fuel expense	$	513	$	368	39	%
Non-fuel operating expenses, excluding special items	1,380		1,292		7	%
Special items—merger-related costs	22		23		(4	)%
Total operating expenses	$	1,915	$	1,683	14	%

Fuel Expense

Aircraft fuel expense includes raw fuel expense (as defined below) plus the effect of mark-to-market adjustments to our fuel hedge portfolio as the value of that portfolio increases and decreases. Our aircraft fuel expense can be volatile because it includes these gains or losses in the value of the underlying instrument as crude oil prices and refining margins increase or decrease. Raw fuel expense is defined as the price that we generally pay at the airport, or the “into-plane” price, including taxes and fees. Raw fuel prices are impacted by world oil prices and refining costs, which can vary by region in the U.S.  Raw fuel expense approximates cash paid to suppliers and does not reflect the effect of our fuel hedges.

Aircraft fuel expense increased$145 million, or 39%, compared to the third quarter of 2017. The elements of the change are illustrated in the following table: 

	Three Months Ended September 30,
	2018						2017
(in millions, except for per gallon amounts)	Dollars			Cost/Gal			Dollars			Cost/Gal
Raw or "into-plane" fuel cost	$	520		$	2.38		$	368		$	1.78
(Gains) losses on settled hedges	(12		)	(0.05		)	5			0.02
Consolidated economic fuel expense	508			2.33			$	373		$	1.80
Mark-to-market fuel hedge adjustments	5			0.02			(5		)	(0.02		)
GAAP fuel expense	$	513		$	2.35		$	368		$	1.78
Fuel gallons	218						207

Raw fuel expense per gallon for the three months ended September 30, 2018increased by approximately 34% due to higher West Coast jet fuel prices. West Coast jet fuel prices are impacted by both the price of crude oil, and refining margins associated with the conversion of crude oil to jet fuel. The increase in raw fuel price per gallon during the third quarter of 2018 was primarily driven by a 43% increase in crude oil prices and a 6% increase in refining margins, when compared to the prior year. Fuel gallons consumed increased by 11 million gallons, or 5%, in line with the increase in capacity.

We also evaluate economic fuel expense, which we define as raw fuel expense adjusted for the cash we receive from, or pay to, hedge counterparties for hedges that settle during the period, and for the premium expense that we paid for those contracts. A key difference between aircraft fuel expense and economic fuel expense is the timing of gain or loss recognition on our hedge portfolio. When we refer to economic fuel expense, we include gains and losses only when they are realized for those contracts that were settled during the period based on their original contract terms. We believe this is the best measure of the effect that fuel prices are currently having on our business as it most closely approximates the net cash outflow associated with purchasing

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fuel for our operations. Accordingly, many industry analysts evaluate our results using this measure, and it is the basis for most internal management reporting and incentive pay plans.

Gains recognized for hedges that settled during the third quarter were $12 million in 2018, compared to losses of $5 million in the same period in 2017. These amounts represent cash received from hedges at settlement, offset by cash paid for premium expense.

Non-fuel Expenses

The table below provides the reconciliation of the operating expense line items, excluding fuel and special items. Significant operating expense variances from 2017 are more fully described below.

	Three Months Ended September 30,
(in millions)	2018		2017		% Change
Wages and benefits	$	549	$	477	15	%
Variable incentive pay	27		40		(33	)%
Aircraft maintenance	107		88		22	%
Aircraft rent	82		70		17	%
Landing fees and other rentals	135		124		9	%
Contracted services	70		76		(8	)%
Selling expenses	79		92		(14	)%
Depreciation and amortization	99		95		4	%
Food and beverage service	53		50		6	%
Third-party regional carrier expense	38		30		27	%
Other	141		150		(6	)%
Total non-fuel operating expenses, excluding special items	$	1,380	$	1,292	7	%

Wages and Benefits

Wages and benefits increased during the third quarter of 2018 by $72 million, or 15%. The primary components of Wages and benefits are shown in the following table:

	Three Months Ended September 30,
(in millions)	2018		2017		% Change
Wages	$	412	$	359	15	%
Pension—Defined benefit plans service cost	12		10		20	%
Defined contribution plans	30		25		20	%
Medical and other benefits	65		58		12	%
Payroll taxes	30		25		20	%
Total wages and benefits	$	549	$	477	15	%

Wages increased15% on a 5% increase in FTEs. The increase in FTEs is primarily attributable to the growth in McGee Air Services, which has assumed certain airport group service functions that were previously provided by third-party vendors and reflected in Contracted Services expense. To a lesser extent, we have experienced FTE growth in other areas as the business has grown. Additionally, the increase in wages is driven by increased wage rates in many work groups, including on average a 24% increase for our Mainline pilots and a 10% increase for our Mainline flight attendants, whose new contract rates became effective in the fourth quarter of 2017 and first quarter of 2018, respectively.

Variable Incentive Pay

Variable incentive pay expense decreased by $13 million, or 33%, during the third quarter of 2018 compared to the same period in 2017. This decrease was primarily due to adjustments taken in the third quarter of 2018 to revise our estimate of full year performance-based pay based on our tracking in relation to the current year's goals.

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Aircraft Maintenance

Aircraft maintenance expense increased by $19 million, or 22%, during the third quarter of 2018 compared to the same period in 2017. Maintenance costs increased primarily due to a power-by-the-hour engine maintenance arrangement on our B737-800 aircraft which was entered into, and became effective, in the fourth quarter of 2017. Although the agreement results in increased expense earlier in the engine life cycle of B737-800 aircraft, it allows for much more predictable expense patterns over the fleet life. The remaining increase was due to a higher volume of scheduled airframe maintenance events as compared to the prior period.

Aircraft Rent

Aircraft rent expense increased by $12 million, or 17%, during the third quarter of 2018 compared to the same period in 2017, primarily due to the addition of six A321neos to our Mainline fleet and 11 E175s to our regional fleet since September 30, 2017, partially offset by the return of two Q400 aircraft.

Landing Fees and Other Rentals

Landing fees and other rental expenses increased by $11 million, or 9%, during the third quarter of 2018 compared to the same period in 2017. This increase was primarily driven by our 5% increase in capacity and rate increases at many of our hub airports.

Selling Expenses

Selling expenses decreased$13 million, or 14%, during the third quarter of 2018 compared to the same period in 2017. This decrease was primarily due to lower credit card commissions and decreased promotional and advertising activities, notably those related to Virgin America.

ADDITIONAL SEGMENT INFORMATION

Refer to Note 9 of the consolidated financial statements for a detailed description of each segment. Below is a summary of each segment's profitability.

Mainline

Mainline recorded pretax profit of $314 million in the third quarter of 2018, compared to $405 million in the third quarter of 2017. The $91 milliondecrease in pretax profit was primarily driven by a $110 millionincrease in economic fuel cost and a $45 millionincrease in non-fuel operating expenses, partially offset by a $50 millionincrease in passenger revenues and a $7 millionincrease in Mileage Plan™ other revenue.

The increase in Mainline passenger revenue for the third quarter of 2018 was primarily driven by capacity growth, partially offset by lower average fares.

Higher raw fuel prices and an increase in gallons consumed to support additional flying drove the increase in Mainline fuel expense. Non-fuel operating expenses increased due to higher wages to support our growth, and higher operating expenses as described above.

Regional

Our Regional operations incurred a pretax loss of $13 million in the third quarter of 2018, compared to a pretax profit of $25 million in the third quarter of 2017. The pretax loss was attributable to a $25 millionincrease in fuel costs and a $48 millionincrease in non-fuel operating expenses, partially offset by a $37 millionincrease in operating revenues.

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Regional passenger revenue increased 12% compared to the third quarter of 2017, primarily driven by a 17%increase in capacity, partially offset by 3%lower ticket yields and a decrease in load factor of 1.1 pts. The increase in capacity is due to an increase in departures from new E175 deliveries, an increase in average aircraft stage length, and the annualization of new routes introduced over the past 12 months. Lower yields are a result of competitive pricing pressure we are experiencing, specifically on the West Coast.

The increase in non-fuel operating expenses is primarily due to higher ownership costs associated with 11 E175 aircraft operated by SkyWest that were added to the regional fleet over the past twelve months, as well as higher CPA rates on a 17%increase in capacity.

Horizon

Horizon achieved a pretax profit of $7 million in the third quarter of 2018, compared to a pretax profit of $5 million in the third quarter of 2017. The change was primarily driven by a $17 millionincrease in operating revenue, attributable to the additional 6 E175 aircraft added to Horizon's fleet since the third quarter of 2017 and better operating performance in 2018.

COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2018 TO NINE MONTHS ENDED SEPTEMBER 30, 2017

Our consolidated net income for the nine months ended September 30, 2018 was $414 million, or $3.34 per diluted share, compared to net income of $645 million, or $5.19 per diluted share, for the nine months ended September 30, 2017.

Excluding the impact of merger-related costs, mark-to-market fuel hedge adjustments, and a special employee tax reform bonus in connection with the passing of the Tax Cuts and Jobs Act (TCJA), our adjusted net income for the nine months ended September 30, 2018 was $461 million, or $3.72 per diluted share, compared to an adjusted net income of $703 million, or $5.66 per diluted share, in the nine months ended September 30, 2017. Historical information has been adjusted to reflect the adoption of new accounting standards effective for the Company as of January 1, 2018. The following tables reconcile our adjusted net income and adjusted earnings per diluted share (EPS) to amounts as reported in accordance with GAAP:

	Nine Months Ended September 30,
	2018						2017
(in millions, except per share amounts)	Dollars			Diluted EPS			Dollars			Diluted EPS
Reported GAAP net income and diluted EPS	$	414		$	3.34		$	645		$	5.19
Mark-to-market fuel hedge adjustments	(30		)	(0.24		)	7			0.06
Special items—employee tax reform bonus	25			0.20			—			—
Special items—merger-related costs	67			0.54			86			0.69
Income tax effect on special items and fuel hedge adjustments	(15		)	(0.12		)	(35		)	(0.28		)
Non-GAAP adjusted net income and diluted EPS	$	461		$	3.72		$	703		$	5.66

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Our operating costs per ASM are summarized below:

	Nine Months Ended September 30,
(in cents)	2018			2017			% Change
Consolidated:
CASM		11.38	¢		10.57	¢	8	%
Less the following components:
Aircraft fuel, including hedging gains and losses	2.84			2.27			25	%
Special items—merger-related costs	0.19			0.19			—	%
CASM excluding fuel and special items		8.35	¢		8.11	¢	3	%
Mainline:
CASM		10.49	¢		9.74	¢	8	%
Less the following components:
Aircraft fuel, including hedging gains and losses	2.70			2.20			23	%
Special items—merger-related costs	0.21			0.20			5	%
CASM excluding fuel and special items		7.58	¢		7.34	¢	3	%

OPERATING REVENUES

Total operating revenues increased$248 million, or 4%, during the first nine months of 2018 compared to the same period in 2017. The changes are summarized in the following table:

	Nine Months Ended September 30,
(in millions)	2018		2017		% Change
Passenger revenue	$	5,725	$	5,505	4	%
Mileage Plan other revenue	329		314		5	%
Cargo and other	146		133		10	%
Total operating revenues	$	6,200	$	5,952	4	%

Passenger Revenue

On a consolidated basis, Passenger revenue for the first nine months of 2018increased by $220 million, or 4%, on a 7%increase in capacity, partially offset by 1.6%lower ticket yields and a 0.8 ptdecrease in load factor. The increase in capacity was driven by our continued network expansion and aircraft added to our fleet since September 30, 2017. Lower yields are a result of competitive pricing pressure we are experiencing, specifically on the West Coast, while lower load factor is a result of significant capacity growth in our markets by us and our competitors. We began executing on a number of initiatives to help improve our revenue performance, including changing our bag fees, reconfiguring our Airbus cabins, and we will be introducing our "Saver Fare" in the fourth quarter of 2018.

Cargo and Other Revenue

On a consolidated basis, Cargo and other revenue increased$13 million, or 10%, in the first nine months of 2018 compared to the first nine months of 2017. The increase is primarily attributable to increased freight and mail capacity from our three freighters and utilizing our Airbus fleet to transport cargo. The remainder of the increase was due to increased lounge revenue as a result of our new lounges at JFK and SeaTac Airport.

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OPERATING EXPENSES

Total operating expenses increased$722 million, or 15%, compared to the first nine months of 2017. We believe it is useful to summarize operating expenses as follows, which is consistent with the way expenses are reported internally and evaluated by management:

	Nine Months Ended September 30,
(in millions)	2018		2017		% Change
Fuel expense	$	1,397	$	1,051	33	%
Non-fuel operating expenses, excluding special items	4,114		3,744		10	%
Special items—merger-related costs	67		86		(22	)%
Special items—employee tax reform bonus	25		—		NM
Total operating expenses	$	5,603	$	4,881	15	%

Fuel Expense

Aircraft fuel expense increased$346 million, or 33%, compared to the nine months ended September 30, 2017. The elements of the change are illustrated in the following table: 

	Nine Months Ended September 30,
	2018						2017
(in millions, except for per gallon amounts)	Dollars			Cost/Gal			Dollars		Cost/Gal
Raw or "into-plane" fuel cost	$	1,450		$	2.30		$	1,030	$	1.74
(Gains) losses on settled hedges	(23		)	(0.04		)	14		0.02
Consolidated economic fuel expense	1,427			2.26			$	1,044	$	1.76
Mark-to-market fuel hedge adjustments	(30		)	(0.05		)	7		0.01
GAAP fuel expense	$	1,397		$	2.21		$	1,051	$	1.77
Fuel gallons	631						592

The raw fuel price per gallon increased32% due to higher West Coast jet fuel prices. West Coast jet fuel prices are impacted by both the price of crude oil, as well as refining margins associated with the conversion of crude oil to jet fuel. The increase in raw fuel price per gallon during the first nine months of 2018 was driven by a 35%increase in crude oil prices and a 30%increase in refining margins.

Gains recognized for hedges that settled in the first nine months of 2018 were $23 million, compared to losses of $14 million in the same period in 2017. These amounts represent cash received from settled hedges, offset by cash paid for premium expense.

We currently expect our economic fuel price per gallon to be approximately 18.5% higher in the fourth quarter of 2018 compared to the fourth quarter of 2017 due to our current estimate of higher crude prices and higher refining margins.

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Non-fuel Expense and Non- special items

	Nine Months Ended September 30,
(in millions)	2018		2017		% Change
Wages and benefits	$	1,629	$	1,397	17	%
Variable incentive pay	104		98		6	%
Aircraft maintenance	320		271		18	%
Aircraft rent	233		204		14	%
Landing fees and other rentals	371		338		10	%
Contracted services	227		234		(3	)%
Selling expenses	245		277		(12	)%
Depreciation and amortization	290		275		5	%
Food and beverage service	158		145		9	%
Third-party regional carrier expense	114		84		36	%
Other	423		421		—	%
Total non-fuel operating expenses, excluding special items	$	4,114	$	3,744	10	%

Wages and Benefits

Wages and benefits increased during the first nine months of 2018 by $232 million, or 17%, compared to 2017. The primary components of wages and benefits are shown in the following table:

	Nine Months Ended September 30,
(in millions)	2018		2017		% Change
Wages	$	1,230	$	1,055	17	%
Pension—Defined benefit plans service cost	36		30		20	%
Defined contribution plans	88		73		21	%
Medical and other benefits	186		162		15	%
Payroll taxes	89		77		16	%
Total wages and benefits	$	1,629	$	1,397	17	%

Wages increased$175 million, or 17%, on a 9%increase in FTEs. The increase in FTEs is primarily attributable to the growth in McGee Air Services, which has assumed certain airport ground service functions that were previously provided by third-party vendors and reflected in Contracted services expense. Additionally, the increase in wages is driven by higher wage rates for many work groups, including on average a 24% increase for our Mainline pilots and a 10% increase for our Mainline flight attendants whose new contract rates became effective in the fourth quarter of 2017 and the first quarter of 2018, respectively.

Costs associated with our defined contribution plans increased $15 million, or 21%, due to FTE growth, increased participation throughout all labor groups, and higher contribution rates for Mainline pilots and flight attendants as a result of new contract rates effective in the fourth quarter of 2017 and the first quarter of 2018, respectively.

Medical and other benefits expense increased $24 million, or 15%, primarily due to FTE growth and rising medical costs.

For the full year, we expect wages and benefits to increase at a rate greater than capacity growth, due to higher wage rates for certain labor groups and the continued growth of McGee Air Services.

Aircraft Maintenance

Aircraft maintenance expense increased by $49 million, or 18%, during the first nine months of 2018 compared to the same period in 2017. Maintenance costs increased primarily due to a power-by-the-hour engine maintenance arrangement on our B737-800 aircraft that we entered into, and became effective, in the fourth quarter of 2017, as well as a higher volume of scheduled maintenance events as compared to the prior period.

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For the full year, we expect aircraft maintenance expense to be approximately 9-10% higher than in 2017 for the same reasons mentioned above.

Aircraft Rent

Aircraft rent expense increased by $29 million, or 14%, during the first nine months of 2018 compared to the same period in 2017. Aircraft rent increased primarily due to the addition of six A321neos to our mainline fleet and 11 E175s to our regional fleet since September 30, 2017, partially offset by the return of six Q400 aircraft.

For the full year, we expect aircraft rent to be approximately 15-16% higher than in 2017 due to leased A321neo and E175 aircraft added to our fleet in 2018.

Landing Fees and Other Rentals

Landing fees and other rental expenses increased by $33 million, or 10%, during the first nine months of 2018 compared to the same period in 2017. This increase was primarily driven by our capacity increase of 7% and rate increases at airports across our network.

For the full year, we expect landing fees and other rental expense to be approximately 9-10% higher than in 2017 due to the same reasons noted above.

Selling Expenses

Selling expenses decreased$32 million, or 12%, during the first nine months of 2018 compared to the same period in 2017. This decrease was primarily due to decreased commission costs from other airlines for transporting their frequent flyer members, lower credit card commissions, and decreased promotional and advertising activities, notably those related to Virgin America.

For the full year, we expect selling expenses to be approximately 8-9% lower than in 2017 for the reasons mentioned above.

Third-Party Regional Carrier Expense

Third-party regional carrier expense, which represents payments made to SkyWest and PenAir under our CPAs, increased$30 million, or 36%, during the first nine months of 2018 compared to the same period in 2017. The increase is primarily due to the additional 11 E175 aircraft operated by SkyWest in the current year.

For the full year, we expect third-party regional carrier expense to be higher than in 2017 due to increased flying by our regional partners.

Special Items—Merger-Related Costs

We recorded special items of $67 million for merger-related costs associated with our acquisition of Virgin America in the first nine months of 2018, compared to $86 million in the first nine months of 2017. Costs incurred in the first nine months of 2018 consisted primarily of severance and retention costs, IT integration costs, and the write off of Virgin America related assets connected with our transition to a single PSS in April. We expect to incur merger-related costs for the remainder of 2018, and continuing through 2019.

ADDITIONAL SEGMENT INFORMATION

Refer to Note 9 of the condensed consolidated financial statements for a detailed description of each segment. Below is a summary of each segment's profitability.

Mainline

Mainline adjusted pretax profit was $671 million in the first nine months of 2018, compared to $1.08 billion in the same period in 2017. The $411 milliondecrease in pretax profit was primarily driven by a $281 millionincrease in Mainline non-fuel operating expenses and a $313 millionincrease in Mainline fuel expense. These increases were partially offset by a $175 millionincrease in Mainline operating revenue.

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Non-fuel operating expenses increased on higher wages related to new contract wage rates for pilots and flight attendants, and higher other operating expense categories as described above. Higher raw fuel prices and an increase in gallons consumed drove an increase in Mainline fuel expense. Mainline revenue increased primarily due to increased revenue passengers on lower average fares.

Regional

Our Regional operations incurred a pretax loss of $82 million in the first nine months of 2018, compared to a pretax profit of $57 million in the first nine months of 2017. The pretax loss was attributable to a $70 millionincrease in fuel costs and a $130 millionincrease in non-fuel operating expenses, partially offset by a $72 millionincrease in operating revenues. The increase in non-fuel operating expenses is primarily due to higher ownership costs associated with 11 E175 aircraft operated by SkyWest that were added to the regional fleet over the past twelve months, as well as higher CPA rates on a 20%increase in capacity.

Horizon

Horizon achieved a pretax profit of $20 million in the first nine months of 2018, compared to pretax loss of $11 million in the same period in 2017. The change was primarily driven by a $59 millionincrease in operating revenue, attributable to the addition of six E175 aircraft added to Horizon's fleet over the past twelve months, a $17 milliondecrease in aircraft maintenance expense due to a lower volume of scheduled maintenance events as compared to the prior period, and a significantly improved operation in 2018 compared to 2017.

LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of liquidity are:

• Our existing cash and marketable securities balance of $1.4 billion, and our expected cash from operations;

• Our 98 unencumbered aircraft that could be financed, if necessary;

• Our combined bank line-of-credit facilities, with no outstanding borrowings, of $400 million. Information about these facilities can be found in Note 5 to the condensed consolidated financial statements.

During the nine months ended September 30, 2018, we took free and clear delivery of six B737-900ER aircraft and six E175 aircraft. We made debt payments totaling $544 million, including the prepayment of $231 million of debt, and paid dividends totaling $118 million.

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

(in millions)	September 30, 2018			December 31, 2017			Change
Cash and marketable securities	$	1,397		$	1,621		(14) %
Cash, marketable securities, and unused lines of credit as a percentage of trailing twelve months' revenue	22		%	26		%	(4) pts
Long-term debt, net of current portion	$	1,684		$	2,262		(26)%
Shareholders’ equity	$	3,791		$	3,460		10%

Debt-to-capitalization, adjusted for aircraft operating leases
(in millions)	September 30, 2018			December 31, 2017			Change
Long-term debt	$	1,684		$	2,262		(26)%
Capitalization of aircraft operating leases(a)	1,887			1,671			13%
Adjusted debt	$	3,571		$	3,933		(9)%
Shareholders' equity	3,791			3,460			10%
Total Capital	$	7,362		$	7,393		—%
Debt-to-capitalization, adjusted for aircraft operating leases	49		%	53		%	(4) pts

(a) Calculated using the present value of remaining aircraft lease payments for aircraft in our operating fleet as of the balance sheet date.

The following discussion summarizes the primary drivers of the increase in our cash and marketable securities balance and our expectation of future cash requirements.

ANALYSIS OF OUR CASH FLOWS

Cash Provided by Operating Activities

For the first nine months of 2018, net cash provided by operating activities was $986 million, compared to $1.4 billion during the same period in 2017. The $371 milliondecrease in our operating cash flows is primarily attributable to a decrease in net income, driven by rising fuel prices, higher non-fuel operating costs, significant new market development, and continuing competitive pressures. Cash collected for future travel is down relative to the prior year primarily as a result of lower yields driven by competitive pricing pressure on the West Coast.

We typically generate positive cash flows from operations and expect to use that cash flow to purchase aircraft and capital equipment, make scheduled debt payments, and return capital to shareholders.

Cash Used in Investing Activities

Cash used in investing activities was $333 million during the first nine months of 2018, compared to $1.1 billion during the same period of 2017. Our capital expenditures were $554 million in the first nine months of 2018, a decrease of $287 million compared to the nine months ended September 30, 2017. This is primarily driven by fewer aircraft deliveries as compared to the same period of 2017. Our net sales of marketable securities were 185 million in the first nine months of 2018, compared to net purchases of 339 million in the nine months ended September 30, 2017. The shift to net sales is primarily due to funds being utilized to prepay certain debt. Internally, we analyze and manage our cash and marketable securities balance in the aggregate.

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The table below reflects our full-year expectation for capital expenditures based on our current intentions. It does not reflect our actual contractual obligations at this time, nor does it reflect the capital expenditures that would be incurred if we exercised options or cancellable purchase commitments that are available to us. We have options to acquire 37 B737 aircraft with deliveries from 2021 through 2024, and options to acquire 30 E175 aircraft with deliveries in 2021 to 2023. Options will be exercised only if we believe return on invested capital targets can be met. The table below excludes any associated capitalized interest.

(in millions)	2018		2019		2020
Targeted capital expenditures	$	1,000	$	750	$	750

Cash Used in Financing Activities

Cash used in financing activities was $666 million during the first nine months of 2018 compared to $399 million during the same period in 2017. During the first nine months of 2018 we made debt payments of $544 million, including the prepayment of $231 million of debt, dividend payments totaling $118 million, and had $37 million in common stock repurchases.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

Aircraft Commitments

As of September 30, 2018, we have firm orders to purchase or lease 60 aircraft. We also have cancelable purchase commitments for 30 Airbus A320neo with deliveries from 2022 through 2024. We could incur a loss of pre-delivery payments and credits as a cancellation fee. We also have options to acquire 37 B737 aircraft with deliveries from 2021 through 2024 and 30 E175 aircraft with deliveries from 2021 through 2023. In addition to the 32 E175 aircraft currently operated by SkyWest in our regional fleet, we have options in future periods to add regional capacity by having SkyWest operate up to eight more E175 aircraft.

The following table summarizes expected fleet activity by year as of September 30, 2018:

	Actual Fleet	Expected Fleet Activity(a)
Aircraft	September 30, 2018	2018 Additions	2018 Removals		December 31, 2018	2019 Changes		December 31, 2019
B737 Freighters	3	—	—		3	—		3
B737 Passenger Aircraft(c)	157	2	—		159	7		166
Airbus Passenger Aircraft	71	—	—		71	1		72
Total Mainline Fleet	231	2	—		233	8		241
Q400 operated by Horizon(b)	41	—	(4	)	37	(7	)	30
E175 operated by Horizon(b)	16	10	—		26	4		30
E175 operated by third party(b)	32	—	—		32	—		32
Total Regional Fleet	89	10	(4	)	95	(3	)	92
Total	320	12	(4	)	328	5		333

(a) The expected fleet counts at December 31, 2018 and 2019 are subject to change. 

(b) Aircraft are either owned or leased by Horizon or operated under capacity purchase agreement with a third party.

(c) Aircraft deliveries reflect the supplemental agreement entered with Boeing in the first quarter of 2018 which deferred certain B737 deliveries. Our first MAX9 delivery is scheduled for 2019.

For future firm orders and option exercises, we may finance the aircraft through cash flow from operations, long-term debt, or lease arrangements.

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Fuel Hedge Positions

All of our future oil positions are call options, which are designed to effectively cap the cost of the crude oil component of our jet fuel purchases. With call options, we are hedged against volatile crude oil price increases. During a period of decline in crude oil prices, we only forfeit cash previously paid for hedge premiums. Our crude oil positions are as follows:

	Approximate % of Expected Fuel Requirements		Weighted-Average Crude Oil Price per Barrel		Average Premium Cost per Barrel
Remainder 2018	51	%	$	68	$	1
First Quarter 2019	50	%	72		1
Second Quarter 2019	40	%	73		2
Third Quarter 2019	30	%	75		2
Fourth Quarter 2019	20	%	77		2
Full Year 2019	35	%	$	74	$	2
First Quarter 2020	10	%	76		3
Full Year 2020	2	%	$	76	$	3

Contractual Obligations

The following table provides a summary of our obligations as of September 30, 2018. For agreements with variable terms, amounts included reflect our minimum obligations.

(in millions)	Remainder of 2018		2019		2020		2021		2022		Beyond 2022		Total
Current and long-term debt obligations	$	123	$	267	$	381	$	363	$	179	$	725	$	2,038
Operating lease commitments (a)	106		413		380		332		300		1,219		2,750
Aircraft maintenance deposits (b)	16		65		68		64		52		38		303
Aircraft commitments (c)	378		514		525		558		302		140		2,417
Interest obligations (d)	16		73		63		46		33		69		300
Other obligations	35		145		152		173		181		1,225		1,911
Total	$	674	$	1,477	$	1,569	$	1,536	$	1,047	$	3,416	$	9,719

(a) Operating lease commitments generally include aircraft operating leases, airport property and hangar leases, office space, and other equipment leases. Included here are E175 aircraft operated by SkyWest under a capacity purchase agreement.

(b) Aircraft maintenance deposits relate to leased Airbus aircraft.

(c) Represents non-cancelable contractual payment commitments for aircraft and engines, buyer furnished equipment, and aircraft maintenance and parts management.

(d) For variable-rate debt, future obligations are shown above using forecasted interest rates as of September 30, 2018.

Credit Card Agreements

We have agreements with a number of credit card companies to process the sale of tickets and other services. Under these agreements, there are material adverse change clauses that, if triggered, could result in the credit card companies holding back a reserve from our credit card receivables. Under one such agreement, we could be required to maintain a reserve if our credit rating is downgraded to or below a rating specified by the agreement or our cash and marketable securities balance fell below $500 million. Under another such agreement, we could be required to maintain a reserve if our cash and marketable securities balance fell below $500 million. We are not currently required to maintain any reserve under these agreements, but if we were, our financial position and liquidity could be materially harmed.

Deferred Income Taxes

For federal income tax purposes, the majority of our assets are fully depreciated over a seven-year life using an accelerated depreciation method or bonus depreciation, if available. For financial reporting purposes, the majority of our assets are depreciated over 15 to 25 years to an estimated salvage value using the straight-line basis. This difference has created a significant deferred tax liability. At some point in the future the depreciation basis will reverse, potentially resulting in an increase in income taxes paid.

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While it is possible that we could have material cash obligations for this deferred liability at some point in the future, we cannot estimate the timing of long-term cash flows with reasonable accuracy. Taxable income and cash taxes payable in the short-term are impacted by many items, including the amount of book income generated (which can be volatile depending on revenue and fuel prices), usage of net operating losses, whether "bonus depreciation" provisions are available, any future tax reform efforts at the federal level, as well as other legislative changes that are beyond our control. We believe that we will have the liquidity available to make our future tax payments.

CRITICAL ACCOUNTING ESTIMATES

With the exception of the items noted below, there have been no material changes to our critical accounting estimates for the nine months ended September 30, 2018. For information on our critical accounting estimates, see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year ended December 31, 2017.

Frequent Flyer Programs

Alaska's Mileage Plan^TM loyalty program awards mileage credits to members who fly on our airlines and our airline partners, referred to as flown miles. We also sell services, including miles for transportation, Companion Fare^TM certificates, bag fee waivers, and access to our brand and customer lists to a major bank that offers Alaska affinity credit cards. To a lesser extent, miles for transportation are also sold to other non-airline partners, such as hotels and car rental agencies. The outstanding miles may be redeemed for travel on our airlines or any of our airline partners. As long as Mileage Plan^TM is in existence, we have an obligation to provide this future travel.

Mileage credits and the various other services we sell under our loyalty program represent performance obligations that are part of a multiple deliverable revenue arrangement. Accounting guidance requires that we use a relative standalone selling price allocation to allocate consideration received to the material performance obligations in these contracts. Our relative standalone selling price allocation models are refreshed when contracts originate or are materially modified.

At September 30, 2018 we had approximately 236 billion miles outstanding, resulting in an aggregate deferred revenue balance of $1.8 billion. The deferred revenue resulting from our relative selling price allocations requires significant management judgment. There are uncertainties inherent in these estimates. Therefore, different assumptions could affect the amount and/or timing of revenue recognition. The most significant assumptions are described below.

1. The rate at which we defer sales proceeds related to services sold:

We estimate the standalone selling price for each performance obligation, including mileage credits, by considering multiple inputs and methods, including but not limited to, the estimated selling price of comparable travel, discounted cash flows, brand value published selling prices, number of miles awarded and the number of miles redeemed. We estimate the selling prices and volumes over the terms of the agreements in order to determine the allocation of proceeds to each of the multiple deliverables.

2. The number of miles that will not be redeemed for travel (breakage):

We estimate how many miles will be used per award. For example, our members may redeem mileage credits for award travel to various locations or choose between a highly restricted award and an unrestricted award. Our estimates are based on the current requirements in our Mileage Plan^TM program and historical award redemption patterns.

We regularly review significant Mileage Plan^TM assumptions and change our assumptions if facts and circumstances indicate that a change is necessary. Any such change in assumptions could have a significant effect on our financial position and results of operations.

GLOSSARY OF AIRLINE TERMS

Aircraft Utilization - block hours per day; this represents the average number of hours per day our aircraft are in transit

Aircraft Stage Length - represents the average miles flown per aircraft departure

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ASMs - available seat miles, or “capacity”; represents total seats available across the fleet multiplied by the number of miles flown

CASM - operating costs per ASM, or "unit cost"; represents all operating expenses including fuel and special items

CASMex - operating costs excluding fuel and special items per ASM; this metric is used to help track progress toward reduction of non-fuel operating costs since fuel is largely out of our control

Debt-to-capitalization ratio - represents adjusted debt (long-term debt plus the present value of future operating lease payments) divided by total equity plus adjusted debt

Diluted Earnings per Share - represents earnings per share (EPS) using fully diluted shares outstanding

Diluted Shares - represents the total number of shares that would be outstanding if all possible sources of conversion, such as stock options, were exercised

Economic Fuel - best estimate of the cash cost of fuel, net of the impact of settled fuel-hedging contracts in the period

Free Cash Flow - total operating cash flow generated less cash paid for capital expenditures

Load Factor - RPMs as a percentage of ASMs; represents the number of available seats that were filled with paying passengers

Mainline - represents flying Boeing 737 and Airbus 320 family jets and all associated revenues and costs

Productivity - number of revenue passengers per full-time equivalent employee

RASM - operating revenue per ASMs, or "unit revenue"; operating revenue includes all passenger revenue, freight & mail, Mileage Plan™ and other ancillary revenue; represents the average total revenue for flying one seat one mile

Regional - represents capacity purchased by Alaska from Horizon, SkyWest and PenAir. In this segment, Regional records actual on-board passenger revenue, less costs such as fuel, distribution costs, and payments made to Horizon, SkyWest and PenAir under the respective capacity purchase arrangement (CPAs). Additionally, Regional includes an allocation of corporate overhead such as IT, finance, other administrative costs incurred by Alaska and on behalf of Horizon.

RPMs - revenue passenger miles, or "traffic"; represents the number of seats that were filled with paying passengers; one passenger traveling one mile is one RPM

Yield - passenger revenue per RPM; represents the average revenue for flying one passenger one mile

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

There have been no material changes in market risk from the information provided in Item 7A. “Quantitative and Qualitative Disclosure About Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2017.

44

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of September 30, 2018, an evaluation was performed under the supervision and with the participation of our management, including our chief executive officer and chief financial officer (collectively, our “certifying officers”), of the effectiveness of the design and operation of our disclosure controls and procedures. These disclosure controls and procedures are designed to ensure that the information required to be disclosed by us in our periodic reports filed with or submitted to the Securities and Exchange Commission (the SEC) is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms, and includes, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to our management, including our certifying officers, as appropriate, to allow timely decisions regarding required disclosure. Our certifying officers concluded, based on their evaluation, that disclosure controls and procedures were effective as of September 30, 2018.

Changes in Internal Control over Financial Reporting

There have been no changes in the Company’s internal controls over financial reporting during the quarter ended September 30, 2018, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

Our internal control over financial reporting is based on the 2013 framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO Framework).

45

PART II

ITEM 1. LEGAL PROCEEDINGS

We are a party to routine litigation matters incidental to our business. Management believes the ultimate disposition of these matters is not likely to materially affect our financial position or results of operations. This forward-looking statement is based on management’s current understanding of the relevant law and facts, and it is subject to various contingencies, including the potential costs and risks associated with litigation and the actions of judges and juries.

In 2015, three flight attendants filed a class action lawsuit seeking to represent all Virgin America flight attendants for damages based on alleged violations of California and City of San Francisco wage and hour laws. Two thousand flight attendants were certified as a class in November 2016. The Company believes the claims in this case are without factual and legal merit.

In July 2018, the Court granted in part Plaintiffs' motion for summary judgment, finding Virgin America responsible for various damages and penalties sought by the class members. Plaintiffs value these damages and penalties at $85 million, and as of November 1, 2018, moved the Court to enter judgment against Virgin America in that amount. Plaintiffs do not seek monetary or behavioral relief from Alaska Airlines.

The Court will render its final judgment in March 2019. The Company will then seek an appellate court ruling that the California laws on which the judgment is based are invalid as applied to national airlines pursuant to the U.S. Constitution and federal law. The Company remains confident that a higher court will respect the federal preemption principles that were enacted to shield inter-state common carriers from a patchwork of state and local wage and hour regulations such as those at issue in this case.

ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors affecting our business, financial condition or future results from those set forth in Item 1A."Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

This table provides certain information with respect to our purchases of shares of our common stock during the third quarter of 2018.

	Total Number of Shares Purchased	Average Price Paid per Share		Maximum remaining dollar value of shares that can be purchased under the plan (in millions)
July 1, 2018 - July 31, 2018	67,915	$	61.83
August 1, 2018 - August 31, 2018	69,777	64.51
September 1, 2018 - September 30, 2018	55,511	68.44
Total	193,203	$	64.70	$	574

The shares were purchased pursuant to a $1 billion repurchase plan authorized by the Board of Directors in August 2015.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

None.

46

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

The following documents are filed as part of this report:

1. Exhibits: See Exhibit Index.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

ALASKA AIR GROUP, INC.

/s/ CHRISTOPHER M. BERRY

Christopher M. Berry

Vice President Finance and Controller

November 2, 2018

47

EXHIBIT INDEX

Exhibit Number	Exhibit Description	Form	Date of First Filing	Exhibit Number
3.1	Amended and Restated Certificate of Incorporation of Registrant	10-Q	August 3, 2017	3.1
10.1*	Alaska Air Group Operational Performance Rewards Plan Description, adopted January 3, 2005; Amended January 17, 2018	10-K	February 15, 2018	10.25
10.2*	Alaska Air Group Performance Based Pay Plan, Amended and Restated January 17, 2018	10-K	February 15, 2018	10.26
31.1†	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	10-Q
31.2†	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	10-Q
32.1†	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	10-Q
32.2†	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	10-Q
101.INS†	XBRL Instance Document
101.SCH†	XBRL Taxonomy Extension Schema Document
101.CAL†	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF†	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB†	XBRL Taxonomy Extension Label Linkbase Document
101.PRE†	XBRL Taxonomy Extension Presentation Linkbase Document
†	Filed herewith
*	Indicates management contract or compensatory plan arrangement

48

EX-31.1

EXHIBIT 31.1

CERTIFICATIONS

I, Bradley D. Tilden, certify that:

1. I have reviewed this annual report on Form 10-Q of Alaska Air Group, Inc. for the period ended September 30, 2018;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

November 2, 2018

By	/s/ BRADLEY D. TILDEN
	Bradley D. Tilden
	Chairman, President and Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATIONS

I, Brandon S. Pedersen, certify that:

1. I have reviewed this annual report on Form 10-Q of Alaska Air Group, Inc. for the period ended September 30, 2018;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

November 2, 2018

By	/s/ BRANDON S. PEDERSEN
	Brandon S. Pedersen
	Executive Vice President/Finance and Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Alaska Air Group, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2018 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Bradley D. Tilden, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

November 2, 2018

By	/s/ BRADLEY D. TILDEN
	Bradley D. Tilden
	Chairman, President and Chief Executive Officer

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Alaska Air Group, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2018 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Brandon S. Pedersen, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

November 2, 2018

By	/s/ BRANDON S. PEDERSEN
	Brandon S. Pedersen
	Executive Vice President/Finance and Chief Financial Officer

XML

DOCUMENT AND ENTITY INFORMATION - shares	9 Months Ended
	Sep. 30, 2018	Oct. 31, 2018
Document and Entity Information [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Sep. 30, 2018
Document Fiscal Year Focus	2018
Document Fiscal Period Focus	Q3
Entity Registrant Name	ALASKA AIR GROUP, INC.
Entity Central Index Key	0000766421
Current Fiscal Year End Date	--12-31
Entity Filer Category	Large Accelerated Filer
Entity Common Stock, Shares Outstanding		123,299,895
Entity Small Business	false
Entity Emerging Growth Company	false

XML

CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($) $ in Millions	Sep. 30, 2018	Dec. 31, 2017
Current Assets
Cash and cash equivalents	$ 174	$ 194
Marketable securities	1,223	1,427
Total cash and marketable securities	1,397	1,621
Receivables—net	422	341
Inventories and supplies—net	57	57
Prepaid expenses and other current assets	180	133
Total Current Assets	2,056	2,152
Property and Equipment
Aircraft and other flight equipment	7,911	7,559
Other property and equipment	1,322	1,222
Deposits for future flight equipment	429	494
Property and Equipment Total	9,662	9,275
Less accumulated depreciation and amortization	3,167	2,991
Total Property and Equipment—Net	6,495	6,284
Goodwill	1,943	1,943
Intangible assets	128	133
Other noncurrent assets	271	234
Other Assets	2,342	2,310
Total Assets	10,893	10,746
Current Liabilities
Accounts payable	114	120
Accrued wages, vacation and payroll taxes	334	418
Air traffic liability	950	806
Other accrued liabilities	452	400
Deferred revenue, current	693	635
Current portion of long-term debt	345	307
Total Current Liabilities	2,888	2,686
Long-Term Debt, Net of Current Portion	1,684	2,262
Other Liabilities and Credits
Deferred income taxes	494	370
Deferred revenue, noncurrent	1,138	1,090
Obligation for pension and postretirement medical benefits	470	453
Other liabilities	428	425
Other Liabilities and Credits Totals	2,530	2,338
Commitments and Contingencies
Shareholders' Equity
Preferred stock, $0.01 par value, Authorized: 5,000,000 shares, none issued or outstanding	0	0
Common stock, $0.01 par value, Authorized: 400,000,000 shares, Issued: 2018 - 130,786,648 shares; 2017 - 129,903,498 shares, Outstanding: 2018 - 123,360,846 shares; 2017 - 123,060,638 shares	1	1
Capital in excess of par value	224	164
Treasury stock (common), at cost: 2018 - 7,425,802 shares; 2017 - 6,842,860 shares	(556)	(518)
Accumulated other comprehensive loss	(428)	(380)
Retained earnings	4,550	4,193
Total Shareholders' Equity	3,791	3,460
Total Liabilities and Shareholders' Equity	$ 10,893	$ 10,746

XML

CONDENSED CONSOLIDATED BALANCE SHEETS (PARENTHETICALS) - $ / shares	Sep. 30, 2018	Dec. 31, 2017
Stockholders' Equity:
Preferred Stock, par value (usd per share)	$ 0.01	$ 0.01
Preferred stock, shares authorized (shares)	5,000,000	5,000,000
Preferred stock, shares issued (shares)	0	0
Preferred stock, shares outstanding (shares)	0	0
Common stock, par value (usd per share)	$ 0.01	$ 0.01
Common stock, shares authorized (shares)	400,000,000	400,000,000
Common stock, shares issued (shares)	130,786,648	129,903,498
Common stock, shares outstanding (shares)	123,360,846	123,060,638
Treasury Stock, Shares (shares)	7,425,802	6,842,860

XML

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($) shares in Thousands, $ in Millions	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Operating Revenues
Total Operating Revenues	$ 2,212	$ 2,110	$ 6,200	$ 5,952
Operating Expenses
Wages and benefits	549	477	1,629	1,397
Variable incentive pay	27	40	104	98
Aircraft fuel, including hedging gains and losses	513	368	1,397	1,051
Aircraft maintenance	107	88	320	271
Aircraft rent	82	70	233	204
Landing fees and other rentals	135	124	371	338
Contracted services	70	76	227	234
Selling expenses	79	92	245	277
Depreciation and amortization	99	95	290	275
Food and beverage service	53	50	158	145
Third-party regional carrier expense	38	30	114	84
Other	141	150	423	421
Special items—merger-related costs	22	23	67	86
Special items—other	0	0	25	0
Total Operating Expenses	1,915	1,683	5,603	4,881
Operating Income	297	427	597	1,071
Nonoperating Income (Expense)
Interest income	11	9	29	25
Interest expense	(22)	(26)	(71)	(77)
Interest capitalized	5	5	14	13
Other—net	(7)	2	(20)	1
Nonoperating Income (Expense) Total	(13)	(10)	(48)	(38)
Income Before Income Tax	284	417	549	1,033
Income tax expense	67	158	135	388
Net Income	$ 217	$ 259	$ 414	$ 645
Basic Earnings Per Share (usd per share)	$ 1.76	$ 2.10	$ 3.36	$ 5.22
Diluted Earnings Per Share (usd per share)	$ 1.75	$ 2.09	$ 3.34	$ 5.19
Shares used for computation:
Basic shares (shares)	123,224	123,467	123,216	123,501
Diluted shares (shares)	123,864	124,220	123,804	124,341
Cash dividend declared per share (usd per share)	$ 0.32	$ 0.3	$ 0.96	$ 0.90
Passenger Revenue [Member]
Operating Revenues
Revenue from Contract with Customer, Excluding Assessed Tax	$ 2,043	$ 1,958	$ 5,725	$ 5,505
Passenger Revenue [Member] | Passenger [Member]
Operating Revenues
Revenue from Contract with Customer, Excluding Assessed Tax	2,043	1,958	5,725	5,505
Mileage Plan Revenue [Member]
Operating Revenues
Revenue from Contract with Customer, Excluding Assessed Tax	267	239	788	719
Mileage Plan Revenue [Member] | Passenger [Member]
Operating Revenues
Revenue from Contract with Customer, Excluding Assessed Tax	153	134	459	405
Mileage Plan Revenue [Member] | Mileage plan other revenue [Member]
Operating Revenues
Revenue from Contract with Customer, Excluding Assessed Tax	114	105	329	314
Cargo and Other Revenue [Member]
Operating Revenues
Revenue from Contract with Customer, Excluding Assessed Tax	55	47	146	133
Cargo and Other Revenue [Member] | Cargo and Freight [Member]
Operating Revenues
Revenue from Contract with Customer, Excluding Assessed Tax	$ 55	$ 47	$ 146	$ 133

XML

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS - USD ($) $ in Millions	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Statement of Comprehensive Income [Abstract]
Net Income	$ 217	$ 259	$ 414	$ 645
Related to marketable securities:
Unrealized holding gain (loss) arising during the period	(2)	1	(19)	5
Reclassification of (gain) loss into Other—net nonoperating income (expense)	2	(1)	5	0
Income tax effect	1	0	4	(2)
Total	1	0	(10)	3
Related to employee benefit plans:
Reclassification of net pension expense into Wages and benefits	7	5	21	16
Income tax effect	(2)	(2)	(5)	(5)
Total	5	3	16	11
Related to interest rate derivative instruments:
Unrealized holding gain (loss) arising during the period	0	0	8	(2)
Reclassification of (gain) loss into Aircraft rent	2	2	3	4
Income tax effect	(1)	(1)	(3)	(1)
Total	1	1	8	1
Other Comprehensive Income	7	4	14	15
Comprehensive Income	$ 224	$ 263	$ 428	$ 660

XML

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($) $ in Millions	9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017
Cash flows from operating activities:
Net Income	$ 414	$ 645
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	290	275
Stock-based compensation and other	34	43
Changes in certain assets and liabilities:
Changes in deferred tax provision	122	208
Increase in air traffic liability	144	223
Increase in deferred revenue	106	130
Other—net	(124)	(167)
Net cash provided by operating activities	986	1,357
Property and equipment additions:
Aircraft and aircraft purchase deposits	(349)	(679)
Other flight equipment	(76)	(70)
Other property and equipment	(129)	(92)
Total property and equipment additions, including capitalized interest	(554)	(841)
Purchases of marketable securities	(672)	(1,408)
Sales and maturities of marketable securities	857	1,069
Other investing activities	36	38
Net cash used in investing activities	(333)	(1,142)
Cash flows from financing activities:
Long-term debt payments	(544)	(265)
Common stock repurchases	(37)	(50)
Dividends paid	(118)	(111)
Other financing activities	33	27
Net cash used in financing activities	(666)	(399)
Net increase (decrease) in cash, cash equivalents, and restricted cash	(13)	(184)
Cash, cash equivalents, and restricted cash at beginning of year	197	328
Cash, cash equivalents, and restricted cash at end of the period	184	144
Cash paid during the period for:
Interest (net of amount capitalized)	60	68
Income taxes	$ 0	$ 129

XML

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Parenthetical) - USD ($) $ in Millions	Sep. 30, 2018	Sep. 30, 2017
Statement of Cash Flows [Abstract]
Cash and cash equivalents	$ 174	$ 144
Restricted cash included in Prepaid expenses and other current assets	10	0
Total cash, cash equivalents, and restricted cash at end of the period	$ 184	$ 144

XML

GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

9 Months Ended

Sep. 30, 2018

Accounting Policies [Abstract]

GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Basis of Presentation

The condensed consolidated financial statements include the accounts of Air Group, or the Company, and its primary subsidiaries, Alaska (including Virgin America) and Horizon. Our condensed consolidated financial statements also include McGee Air Services, a ground services subsidiary of Alaska. The Company conducts substantially all of its operations through these subsidiaries. All significant intercompany balances and transactions have been eliminated. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information. Consistent with these requirements, this Form 10-Q does not include all the information required by GAAP for complete financial statements. It should be read in conjunction with the consolidated financial statements and accompanying notes in the Form 10-K for the year ended December 31, 2017. In the opinion of management, all adjustments have been made that are necessary to fairly present the Company’s financial position as of September 30, 2018 and the results of operations for the three and nine months ended September 30, 2018 and 2017. Such adjustments were of a normal recurring nature.

Certain reclassifications have been made to prior year financial statements to conform to classifications used in the current year.

In preparing these statements, the Company is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities, as well as the reported amounts of revenues and expenses. Due to seasonal variations in the demand for air travel, the volatility of aircraft fuel prices, changes in global economic conditions, changes in the competitive environment and other factors, operating results for the three and nine months ended September 30, 2018 are not necessarily indicative of operating results for the entire year.

Recently Issued Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)," which requires lessees to recognize assets and liabilities for leases currently classified as operating leases. Under the new standard, a lessee will recognize a liability on the balance sheet representing the lease payments owed, and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and lease liabilities.

In July 2018, the FASB issued ASU 2018-11, "Targeted Improvements - Leases (Topic 842)" which amended Topic 842 to provide companies an alternative transition method which would not require adjusting comparative period financial information. The Company plans to utilize this alternative transition method, and will record a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The new standard is effective for the Company on January 1, 2019. The Company will not early adopt the standard.

At this time, the Company believes the most significant impact to the financial statements from the new lease accounting standard will relate to the recording of a right-of-use asset and related liability associated with leased aircraft. The Company does not expect the new standard to have a material impact on the pattern or amount of expense recognized for aircraft leases on the income statement. Other leases, including airports and real estate, equipment, software and other miscellaneous leases continue to be assessed.

In November 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows—Restricted Cash (Topic 230)" related to the presentation of restricted cash on the statement of cash flows, and within the accompanying footnotes. The Company adopted the standard effective January 1, 2018.

In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities." The ASU expands the activities that qualify for hedge accounting and simplifies the rules for reporting hedging relationships. The ASU is effective for the Company beginning January 1, 2019, and is required to be adopted using the modified retrospective approach.

In February 2018, the FASB issued ASU 2018-02, "Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." The standard allows a reclassification from accumulated other comprehensive income (AOCI) to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The amount of the reclassification is the difference between the amount initially recorded directly to other comprehensive income at the previously enacted U.S. federal corporate income tax rate that remains in AOCI and the amount that would have been recorded directly to other comprehensive income using the newly enacted U.S. federal income tax rate. The standard is effective for interim and annual reporting periods beginning after December 15, 2018, and early adoption is permitted. The Company elected to early adopt the standard effective January 1, 2018. As a result, retained earnings increased approximately $62 million in 2018 due to the reclassification of tax effects in AOCI recorded in prior periods at previously enacted tax rates.

XML

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

9 Months Ended

Sep. 30, 2018

Accounting Changes and Error Corrections [Abstract]

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

Revenue Recognition and Retirement Benefits Accounting Standards

In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)." The Company adopted the new standard as of January 1, 2018, utilizing a full retrospective transition method. Adoption of the new standard resulted in changes to accounting policies for revenue recognition related to frequent flyer activity, certain ancillary revenues such as change fees, air traffic liabilities, and sales and marketing expenses. As a result of adoption, the Company also changed certain financial statement line item disclosure captions. See Note 3 for a discussion of the impact of this standard.

Although less significant, in March 2017 the FASB issued ASU 2017-07, "Compensation - Retirement Benefits (Topic 715)," which requires the Company to present the service cost component of net periodic benefit cost as Wages and benefits in the statement of operations. The Company adopted the new standard as of January 1, 2018, utilizing a full retrospective transition method. Under this new standard, all components of net periodic benefit cost are presented in Nonoperating income (expense), except service cost, which remains in Wages and benefits.

Certain line item captions on the balance sheet and statement of operations changed as a result of the newly implemented standards. Accordingly, historical financial information presented below as reported has been presented using the new captions. The cumulative impact to retained earnings at January 1, 2016 as a result of the new revenue recognition standard was $171 million. Below are the impacts of these newly adopted accounting standards to the financial statements.

Condensed consolidated statement of operations for the three and nine months ended September 30, 2017 (in millions):

	Three Months Ended September 30, 2017												Nine Months Ended September 30, 2017
				Adjustments												Adjustments
	As Reported			Revenue Recognition			Retirement Benefits			As Adjusted			As Reported			Revenue Recognition			Retirement Benefits			As Adjusted
Operating Revenues
Passenger Revenue	$	1,824		$	134		$	—		$	1,958		$	5,115		$	390		$	—		$	5,505
Mileage plan other revenue	122			(17		)	—			105			369			(55		)	—			314
Cargo and other revenue	174			(127		)	—			47			487			(354		)	—			133
Total Operating Revenue	2,120			(10		)	—			2,110			5,971			(19		)	—			5,952
Operating Expenses
Wages and benefits	475			—			2			477			1,392			—			5			1,397
Selling expenses	91			1			—			92			269			8			—			277
Special items—merger-related costs	24			(1		)	—			23			88			(2		)	—			86
All other operating expenses	1,091			—			—			1,091			3,121			—			—			3,121
Total Operating Expenses	1,681			—			2			1,683			4,870			6			5			4,881
Operating Income	439			(10		)	(2		)	427			1,101			(25		)	(5		)	1,071
Nonoperating Income (Expense)
Other—net	—			—			2			2			(4		)	—			5			1
All other nonoperating income (expense)	(12		)	—			—			(12		)	(39		)	—			—			(39		)
	(12		)	—			2			(10		)	(43		)	—			5			(38		)
Income (loss) before income tax	427			(10		)	—			417			1,058			(25		)	—			1,033
Income tax expense (benefit)	161			(3		)	—			158			397			(9		)	—			388
Net Income (Loss)	$	266		$	(7	)	$	—		$	259		$	661		$	(16	)	$	—		$	645

Condensed consolidated statement of cash flows for the nine months ended September 30, 2017 (in millions):

	Nine Months Ended September 30, 2017
	As Reported			Adjustments - Revenue Recognition			As Adjusted
Cash flows from operating activities:
Net income	$	661		$	(16	)	$	645
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	275			—			275
Stock-based compensation and other	43			—			43
Changes in certain assets and liabilities:
Changes in deferred tax provision	217			(9		)	208
Increase in air traffic liability	254			(31		)	223
Increase in deferred revenue	46			84			130
Other—net	(139		)	(28		)	(167		)
Net cash provided by operating activities	1,357			—			1,357
Net cash used in investing activities	(1,142		)	—			(1,142		)
Net cash used in financing activities	(399		)	—			(399		)
Net increase (decrease) in cash and cash equivalents	(184		)	—			(184		)
Cash and cash equivalents at beginning of year	328			—			328
Cash and cash equivalents at end of the period	$	144		$	—		$	144

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REVENUE FROM CONTRACTS WITH CUSTOMERS

9 Months Ended

Sep. 30, 2018

Revenue Recognition [Abstract]

REVENUE FROM CONTRACTS WITH CUSTOMERS

REVENUE

Ticket revenue is recorded as Passenger revenue, and represents the primary source of the Company's revenue. Also included in Passenger revenue are passenger ancillary revenues such as bag fees, on-board food and beverage, ticket change fees, and certain revenue from the frequent flyer program. Mileage Plan™ other revenue includes brand and marketing revenue from our affinity credit card and other partners and certain interline frequent flyer revenue, net of commissions. Cargo and other revenue includes freight and mail revenue, and to a lesser extent, other ancillary revenue products such as lounge membership and certain commissions.

The Company disaggregates revenue by segment in Note 9. The level of detail within the Company’s statements of operations, segment disclosures, and in this footnote depict the nature, amount, timing and uncertainty of revenue and how cash flows are affected by economic and other factors.

Passenger Ticket and Ancillary Services Revenue

The primary performance obligation on a typical passenger ticket is to provide air travel to the Company’s passenger. Ticket revenue is collected in advance of travel and recorded as Air Traffic Liability (ATL) on the consolidated balance sheets. The Company satisfies its performance obligation and recognizes ticket revenue on each flight segment when the transportation is provided.

Ancillary passenger revenues relate to items such as checked-bag fees, ticket change fees, and on-board food and beverage sales, all of which are provided at time of flight. As such, the obligation to perform these services is satisfied at the time of travel and is recorded with ticket revenue in Passenger revenue.

Revenue is also recognized for tickets that are expected to expire unused, a concept referred to as “passenger ticket breakage.” Passenger ticket breakage is recorded at the flight date using estimates made at the time of sale based on the Company’s historical experience of expired tickets, and other facts such as program changes and modifications.

In addition to selling tickets on its own marketed flights, the Company has interline agreements with partner airlines under which it sells multi-city tickets with one or more segments of the trip flown by a partner airline, or it operates a connecting flight sold by a partner airline. Each segment in a connecting flight represents a separate performance obligation. Revenue on segments sold and operated by the Company is recognized as Passenger revenue in the gross amount of the allocated ticket price when the travel occurs, while the commission paid to the partner airline is recognized as a selling expense when the related transportation is provided. Revenue on segments operated by a partner airline is deferred for the full amount of the consideration received at the time the ticket is sold and, once the segment has been flown the Company records the net amount, after compensating the partner airline, as Cargo and other revenue.

A portion of revenue from the Mileage Plan™ program is recorded in Passenger revenue. As members are awarded mileage credits on flown tickets, these credits become a distinct performance obligation for the Company. The Company allocates the transaction price to each performance obligation identified in a passenger ticket contract on a relative standalone selling price basis. The standalone selling price for loyalty mileage credits issued is discussed in the LoyaltyMileage Credits section of this Note below. The amount allocated to the mileage credits is deferred on the balance sheet. Once a member travels using a travel award redeemed with mileage credits on one of the Company's airline carriers, the revenue associated with those mileage credits is recorded as Passenger revenue.

Taxes collected from passengers, including transportation excise taxes, airport and security fees and other fees, are recorded on a net basis within passenger revenue in the consolidated statements of operations.

Passenger revenue recognized in the condensed consolidated statements of operations (in millions):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Passenger ticket revenue, including ticket breakage and net of taxes and fees	$	1,744	$	1,683	$	4,865	$	4,709
Passenger ancillary revenue	146		141		401		391
Mileage PlanTM passenger revenue	153		134		459		405
Total passenger revenue	$	2,043	$	1,958	$	5,725	$	5,505

As passenger tickets and related ancillary services are primarily sold via credit cards, certain amounts due from credit card processors are recorded as airline traffic receivables. These credit card receivables and receivables from our affinity credit card partner represent the majority of the receivables balance on the Balance Sheet.

For performance obligations with performance periods of less than one year, GAAP provides a practical expedient that allows the Company not to disclose the transaction price allocated to remaining performance obligations and the timing of related revenue recognition. As passenger tickets expire one year from ticketing, the Company elected to apply this practical expedient for tickets unused or not exchanged.

Mileage Plan™ Loyalty Program

Loyalty mileage credits

The Company’s Mileage Plan™ loyalty program provides frequent flyer travel awards to program members based upon accumulated loyalty mileage credits. Mileage credits are earned through travel, purchases using the Mileage Plan™ co-branded credit card and purchases from other participating partners. The program has a 24-month expiration period for unused mileage credits from the month of last account activity. The Company offers redemption of mileage credits through free, discounted or upgraded air travel on Alaska flights or on one of its 15 airline partners, as well as redemption at partner hotels.

The Company uses a relative standalone selling price allocation to allocate consideration to material performance obligations in contracts with customers that include loyalty mileage credits. As directly observable selling prices for mileage credits are not available, the Company determines the standalone selling price of mileage credits primarily using actual ticket purchase prices for similar tickets flown, adjusted for the likelihood of redemption, or breakage. In determining similar tickets flown, the Company considers current market prices, class of service, type of award, and other factors. For mileage credits accumulated through travel on partner airlines, the Company uses actual consideration received from the partners.

Revenue related to air transportation is deferred in the amount of the relative standalone selling price allocated to the mileage credits as they are issued. The Company satisfies its performance obligation when the mileage credits are redeemed and the related air transportation is delivered.

The Company estimates breakage for the portion of mileage credits not expected to be redeemed using a statistical analysis of historical data, including actual mileage credits expiring, slow-moving and low-credit accounts, among other factors. The breakage rate for the three and nine months ended September 30, 2018 and 2017 was 17.4%. The Company reviews the breakage rate used on an annual basis.

Co-brand credit card agreement and other

In addition to mileage credits, the co-brand credit card agreement, referred to herein as the Agreement, also includes performance obligations for waived bag fees, Companion Fare™ offers to purchase an additional ticket at a discount, marketing, and the use of intellectual property including the brand (unlimited access to the use of the Company’s brand and frequent flyer member lists), which is the predominant element in the Agreement. The affinity card bank partner is the customer for some elements, including the brand and marketing, while the Mileage Plan™ member is the customer for other elements such as mileage credits, bag waivers, and Companion Fares.

At the inception of the Agreement, management estimated the selling price of each of the performance obligations. The objective was to determine the price at which a sale would be transacted if the product or service was sold on a stand-alone basis. The Company determined its best estimate of selling price for each element by considering multiple inputs and methods including, but not limited to, the estimated selling price of comparable travel, discounted cash flows, brand value, published selling prices, number of miles awarded and number of miles redeemed. The Company estimated the selling prices and volumes over the term of the Agreement in order to determine the allocation of proceeds to each of the multiple deliverables. The estimates of the standalone selling prices of each element do not change subsequent to the original valuation of the contract unless the contract is materially modified, but the allocation between elements may change based upon the actual and updated projected volumes of each element delivered during the term of the contract.

Consideration received from the bank is variable and is primarily from consumer spend on the card, among other items. The Company allocates consideration to each of the performance obligations, including mileage credits, waived bag fees, Companion Fares, and brand and marketing, using their relative standalone selling price. Because the performance obligation related to providing use of intellectual property including the brand is satisfied over time, it is recognized in Mileage Plan^TM other revenue in the period that those elements are sold. The Company records passenger revenue related to the air transportation and certificates for discounted companion travel when the transportation is delivered.

In contracts with non-bank partners, the Company has identified two performance obligations in most cases - travel and brand. Revenue is recognized using the residual method, where the travel performance obligation is deferred until transportation is provided in the amount of the estimated standalone selling price of the ticket, less breakage. The residual amount, if any, is recognized as commission revenue when the brand element is sold. Mileage credit sales recorded under the residual approach are immaterial to the overall program.

Interline loyalty

The Company has interline arrangements with certain airlines whereby its members may earn and redeem Mileage Plan™ credits on those airlines, and members of a partner airline’s loyalty program may earn and redeem frequent flyer program credits on Alaska. When a Mileage Plan™ member earns credits on a partner airline, the partner airline remits a contractually-agreed upon fee to the Company which is deferred until credits are redeemed. When a Mileage Plan™ member redeems credits on a partner airline, the Company pays a contractually agreed upon fee to the other airline, which offsets the revenue recognized associated with the award travel. When a member of a partner airline redeems frequent flyer credits on Alaska, the partner airline remits a contractually-agreed upon amount to the Company, recognized as Passenger revenue upon travel. If the partner airline’s member earns frequent flyer program credits on an Alaska flight, the Company remits a contractually-agreed upon fee to the partner airline and records a commission expense.

Mileage Plan™ revenue included in the condensed consolidated statements of operations (in millions):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Passenger revenue	$	153	$	134	$	459	$	405
Mileage PlanTM other revenue	114		105		329		314
Total Mileage Plan™ revenue	$	267	$	239	$	788	$	719

Mileage Plan™ other revenue is primarily brand and marketing revenue from our affinity card products.

Cargo and Other

The Company provides freight and mail services (cargo). The majority of cargo services are provided to commercial businesses and the United States Postal Service. The Company satisfies cargo service performance obligations and recognizes revenue when the shipment arrives at its final destination or is transferred to a third-party carrier for delivery.

The Company also earns other revenue for lounge memberships, hotel and car commissions, and certain other immaterial items not intrinsically tied to providing air travel to passengers. Revenue is recognized when these services are rendered and recorded as Cargo and other revenue. The transaction price for Cargo and other revenue is the price paid by the customer.

Cargo and other revenue included in the condensed consolidated statements of operations (in millions):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Cargo revenue	$	36	$	32	$	96	$	88
Other revenue	19		15		50		45
Total Cargo and other revenue	$	55	$	47	$	146	$	133

Air Traffic Liability and Deferred Revenue

Passenger ticket and ancillary services liabilities

Air traffic liability included on the condensed consolidated balance sheets represents the remaining obligation associated with passenger tickets and ancillary services. The air traffic liability balance fluctuates with seasonal travel patterns. The Company recognized Passenger revenue of $27 million and $23 million from the prior year-end air traffic liability balance for the three months ended September 30, 2018 and 2017, and $540 million and $543 million for the nine months ended September 30,2018 and 2017.

Mileage Plan^TM liabilities

The total deferred revenue liability included on the condensed consolidated balance sheets represents the remaining transaction price that has been allocated to Mileage Plan^TM performance obligations not yet satisfied by the Company. In general, the current amounts will be recognized as revenue within 12 months and the long-term amounts will be recognized as revenue over, on average, a period of approximately three to four years. This period of time represents the average time that members have historically taken to earn and redeem miles.

The Company records a receivable for amounts due from the bank partner and from other partners as mileage credits are sold until the payments are collected. The Company had $106 million of such receivables as of September 30, 2018 and $101 million as of December 31, 2017.

Mileage credits are combined in one homogeneous pool and are not specifically identifiable. As such, loyalty revenues disclosed earlier in this Note are comprised of miles that were part of the deferred revenue and liabilities balances at the beginning of the period and miles that were issued during the period. The table below presents a roll forward of the total frequent flyer liability (in millions):

	Nine Months Ended September 30,
	2018			2017
Total Deferred Revenue balance at January 1	$	1,725		$	1,534
Travel miles and companion certificate redemption - Passenger revenue	(459		)	(405		)
Miles redeemed on partner airlines - Other revenue	(66		)	(54		)
Increase in liability for mileage credits issued	631			586
Total Deferred Revenue balance at September 30	$	1,831		$	1,661

Selling Costs

Certain costs such as credit card fees, travel agency and other commissions paid, as well as Global Distribution Systems (GDS) booking fees are incurred when the Company sells passenger tickets and ancillary services in advance of the travel date. The Company defers such costs and recognizes them as expenses when the travel occurs. Prepaid expense recorded on the consolidated balance sheets for such costs was $27 million and $24 million as of September 30, 2018 and December 31, 2017. The Company recorded related expense on the condensed consolidated statement of operations of $57 million and $61 million for the three months ended September 30,2018 and 2017, and $166 million and $183 million for the nine months ended September 30,2018 and 2017.

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FAIR VALUE MEASUREMENTS

9 Months Ended

Sep. 30, 2018

Fair Value Disclosures [Abstract]

FAIR VALUE MEASUREMENTS

FAIR VALUE MEASUREMENTS

In determining fair value, there is a three-level hierarchy based on the reliability of the inputs used. Level 1 refers to fair values based on quoted prices in active markets for identical assets or liabilities. Level 2 refers to fair values estimated using significant other observable inputs and Level 3 refers to fair values estimated using significant unobservable inputs.

Fair Value of Financial Instruments on a Recurring Basis

As of September 30, 2018, total cost basis for all marketable securities was $1.2 billion. There were no significant differences between the cost basis and fair value of any individual class of marketable securities.

Fair values of financial instruments on the consolidated balance sheet (in millions):

September 30, 2018	Level 1		Level 2			Total
Assets
Marketable securities
U.S. government and agency securities	$	338	$	—		$	338
Foreign government bonds	—		29			29
Asset-backed securities	—		209			209
Mortgage-backed securities	—		79			79
Corporate notes and bonds	—		559			559
Municipal securities	—		9			9
Total Marketable securities	338		885			1,223
Derivative instruments
Fuel hedge—call options	—		54			54
Interest rate swap agreements	—		15			15
Total Assets	$	338	$	954		$	1,292
Liabilities
Derivative instruments
Interest rate swap agreements	—		(3		)	(3		)
Total Liabilities	$	—	$	(3	)	$	(3	)

December 31, 2017	Level 1		Level 2			Total
Assets
Marketable securities
U.S. government and agency securities	$	328	$	—		$	328
Foreign government bonds	—		43			43
Asset-backed securities	—		209			209
Mortgage-backed securities	—		99			99
Corporate notes and bonds	—		726			726
Municipal securities	—		22			22
Total Marketable securities	328		1,099			1,427
Derivative instruments
Fuel hedge—call options	—		22			22
Interest rate swap agreements	—		9			9
Total Assets	$	328	$	1,130		$	1,458
Liabilities
Derivative instruments
Interest rate swap agreements	—		(8		)	(8		)
Total Liabilities	$	—	$	(8	)	$	(8	)

The Company uses both the market and income approach to determine the fair value of marketable securities. U.S. government securities are Level 1 as the fair value is based on quoted prices in active markets. Foreign government bonds, asset-backed securities, mortgage-backed securities, corporate notes and bonds, and municipal securities are Level 2 as the fair value is based on standard valuation models that are calculated based on observable inputs such as quoted interest rates, yield curves, credit ratings of the security and other observable market information.

The Company uses the market approach and the income approach to determine the fair value of derivative instruments. The fair value for fuel hedge call options is determined utilizing an option pricing model based on inputs that are readily available in active markets or can be derived from information available in active markets. In addition, the fair value considers the exposure to credit losses in the event of non-performance by counterparties. Interest rate swap agreements are Level 2 as the fair value of these contracts is determined based on the difference between the fixed interest rate in the agreements and the observable LIBOR-based interest forward rates at period end multiplied by the total notional value.

Activity and Maturities for Marketable Securities

Unrealized losses from marketable securities are primarily attributable to changes in interest rates. Management does not believe any unrealized losses represent other-than-temporary impairments based on its evaluation of available information as of September 30, 2018.

Maturities for marketable securities (in millions):

September 30, 2018	Cost Basis		Fair Value
Due in one year or less	$	126	$	126
Due after one year through five years	1,094		1,072
Due after five years through 10 years	26		25
Total	$	1,246	$	1,223

Fair Value of Other Financial Instruments

The Company uses the following methods and assumptions to determine the fair value of financial instruments that are not recognized at fair value as described below.

Cash, Cash Equivalents and Restricted Cash: Cash equivalents consist of highly liquid investments with original maturities of three months or less, such as money market funds, commercial paper and certificates of deposit. They are carried at cost, which approximates fair value.

The Company's restricted cash balances are primarily used to guarantee various letters of credit, self-insurance programs or other contractual rights. Restricted cash consists of highly liquid securities with original maturities of three months or less. They are carried at cost, which approximates fair value.

Debt: Debt assumed in the acquisition of Virgin America was subject to a non-recurring fair valuation adjustment as part of purchase price accounting. The adjustment is amortized over the life of the associated debt. All other fixed-rate debt is carried at cost. To estimate the fair value of all fixed-rate debt as of September 30, 2018, the Company uses the income approach by discounting cash flows using borrowing rates for comparable debt over the remaining life of the outstanding debt. The estimated fair value of the fixed-rate debt is Level 3 as certain inputs used are unobservable.

Fixed-rate debt on the consolidated balance sheet and the estimated fair value of long-term fixed-rate debt is as follows (in millions):

	September 30, 2018		December 31, 2017
Fixed-rate debt at cost	$	703	$	956
Non-recurring purchase price accounting fair value adjustment	3		3
Total fixed-rate debt	$	706	$	959
Estimated fair value	$	700	$	959

Assets and Liabilities Measured at Fair Value on Nonrecurring Basis

Certain assets and liabilities are recognized or disclosed at fair value on a nonrecurring basis, including property, plant and equipment, goodwill, and intangible assets. These assets are subject to fair valuation when there is evidence of impairment. No material impairment charges were taken in the three and nine months ended September 30, 2018 and September 30, 2017.

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LONG-TERM DEBT

9 Months Ended

Sep. 30, 2018

Debt Disclosure [Abstract]

LONG-TERM DEBT

LONG-TERM DEBT

Long-term debt obligations on the consolidated balance sheet (in millions):

	September 30, 2018			December 31, 2017
Fixed-rate notes payable due through 2028	$	706		$	959
Variable-rate notes payable due through 2028	1,335			1,625
Less debt issuance costs	(12		)	(15		)
Total debt	2,029			2,569
Less current portion	345			307
Long-term debt, less current portion	$	1,684		$	2,262
Weighted-average fixed-interest rate	4.1		%	4.2		%
Weighted-average variable-interest rate	3.4		%	2.8		%

During the nine months ended September 30, 2018 the Company made debt payments of $544 million, including the prepayment of $231 million of debt.

At September 30, 2018 long-term debt principal payments for the next five years and thereafter are as follows (in millions):

	Total
Remainder of 2018	$	123
2019	267
2020	381
2021	363
2022	179
Thereafter	725
Total	$	2,038

Bank Lines of Credit

The Company had three credit facilities totaling $516 million as of September 30, 2018. All three facilities have variable interest rates based on LIBOR plus a specified margin. One credit facility for $250 million expires in June 2021 and is secured by aircraft. The second credit facility increased from $75 million to $116 million in July 2018. It expires in July 2019, with a mechanism for annual renewal, and is secured by aircraft. A third credit facility for $150 million expires in March 2022 and is secured by certain accounts receivable, spare engines, spare parts and ground service equipment. The Company has secured letters of credit against the $116 million facility, but has no plans to borrow using either of the two other facilities. All three credit facilities have a requirement to maintain a minimum unrestricted cash and marketable securities balance of $500 million. The Company was in compliance with this covenant at September 30, 2018.

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EMPLOYEE BENEFIT PLANS

9 Months Ended

Sep. 30, 2018

Retirement Benefits [Abstract]

EMPLOYEE BENEFIT PLANS

EMPLOYEE BENEFIT PLANS

Net periodic benefit costs for qualified defined-benefit plans include the following (in millions): 

	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Service cost	$	12		$	10		$	36		$	30
Pension expense included in Wages and benefits	12			10			36			30
Interest cost	20			19			59			55
Expected return on assets	(27		)	(27		)	(80		)	(80		)
Amortization of prior service cost (credit)	(1		)	(1		)	(1		)	(1		)
Recognized actuarial loss (gain)	9			7			25			20
Pension expense (benefit) included in Nonoperating Income (Expense)	$	1		$	(2	)	$	3		$	(6	)

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COMMITMENTS

9 Months Ended

Sep. 30, 2018

Commitments and Contingencies Disclosure [Abstract]

COMMITMENTS

COMMITMENTS AND CONTINGENCIES

Future minimum payments for commitments as of September 30, 2018 (in millions):

	Aircraft Leases		Facility Leases		Aircraft Commitments(a)		Capacity Purchase Agreements (b)		Aircraft Maintenance Deposits
Remainder of 2018	$	88	$	18	$	378	$	33	$	16
2019	349		64		514		138		65
2020	324		56		525		145		68
2021	282		50		558		166		64
2022	265		35		302		174		52
Thereafter	1,070		149		140		1,205		38
Total	$	2,378	$	372	$	2,417	$	1,861	$	303

(a) Includes non-cancelable contractual commitments for aircraft and engines, buyer furnished equipment, and aircraft maintenance and parts management.

(b) Includes all non-aircraft lease costs associated with capacity purchase agreements.

Lease Commitments

Aircraft lease commitments include future obligations for all of the Company's operating aircraft, as well as aircraft leases operated by third-parties. At September 30, 2018, the Company had lease contracts for 10 Boeing 737 (B737) aircraft, 61 Airbus aircraft, 9 Bombardier Q400 aircraft, and 32 Embraer 175 (E175) aircraft with SkyWest Airlines, Inc. (SkyWest). The Company has an additional two scheduled lease deliveries of A321neo aircraft through 2019, as well as three scheduled lease deliveries of E175 aircraft in 2021 to be operated by SkyWest. The Company does not intend to operate the three E175 aircraft currently scheduled for delivery in 2021, and is working to remove those aircraft from the capacity purchase agreement. All lease contracts have remaining non-cancelable lease terms ranging from 2018 to 2033. The Company has the option to increase capacity flown by SkyWest with eight additional E175 aircraft with deliveries from 2021 to 2022. Options to lease are not reflected in the commitments table above.

Facility lease commitments primarily include airport and terminal facilities and building leases. Total rent expense for aircraft and facility leases was $165 million and $145 million for the three months ended September 30, 2018 and 2017, and $455 million and $406 million for the nine months ended September 30, 2018 and 2017.

Aircraft Commitments

Aircraft purchase commitments include non-cancelable contractual commitments for aircraft and engines. As of September 30, 2018, the Company had commitments to purchase 38 B737 aircraft (6 B737 NextGen aircraft and 32 B737 MAX aircraft), with deliveries in the remainder of 2018 through 2023. In the first quarter of 2018 the Company entered into a supplemental agreement with Boeing to defer certain B737 deliveries and to convert 15 MAX8 aircraft orders to MAX9 aircraft orders. The Company also has commitments to purchase 17 E175 aircraft with deliveries in the remainder of 2018 through 2021 and has cancelable purchase commitments for 30 Airbus A320neo aircraft with deliveries from 2022 through 2024. In addition, the Company has options to purchase 37 B737 aircraft from 2021 through 2024 and 30 E175 aircraft from 2021 through 2023. The cancelable purchase commitments and option payments are not reflected in the table above.

Contingencies

The Company is a party to routine litigation matters incidental to its business and with respect to which no material liability is expected. Liabilities for litigation related contingencies are recorded when a loss is determined to be probable and estimable.

In 2015, three flight attendants filed a class action lawsuit seeking to represent all Virgin America flight attendants for damages based on alleged violations of California and City of San Francisco wage and hour laws. Two thousand flight attendants were certified as a class in November 2016. The Company believes the claims in this case are without factual and legal merit.

In July 2018, the Court granted in part Plaintiffs' motion for summary judgment, finding Virgin America responsible for various damages and penalties sought by the class members. Plaintiffs value these damages and penalties at $85 million, and as of November 1, 2018, moved the Court to enter judgment against Virgin America in that amount. Plaintiffs do not seek monetary or behavioral relief from Alaska Airlines.

The Court will render its final judgment in March 2019. The Company will then seek an appellate court ruling that the California laws on which the judgment is based are invalid as applied to national airlines pursuant to the U.S. Constitution and federal law. The Company remains confident that a higher court will respect the federal preemption principles that were enacted to shield inter-state common carriers from a patchwork of state and local wage and hour regulations such as those at issue in this case.

This forward-looking statement is based on management's current understanding of the relevant law and facts, and it is subject to various contingencies, including the potential costs and risks associated with litigation and the actions of judges and juries.

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SHAREHOLDERS' EQUITY

9 Months Ended

Sep. 30, 2018

Equity [Abstract]

SHAREHOLDERS' EQUITY

SHAREHOLDERS' EQUITY

Dividends

During the three months ended September 30, 2018, the Company declared and paid cash dividends of $0.32 per share, or $39 million. During the nine months ended September 30, 2018, the Company declared and paid cash dividends of $0.96 per share, or $118 million.

Common Stock Repurchase

In August 2015, the Board of Directors authorized a $1 billion share repurchase program. As of September 30, 2018, the Company has repurchased 5.7 million shares for $426 million under this program.

Share repurchase activity (in millions, except share amounts):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
	Shares	Amount		Shares	Amount		Shares	Amount		Shares	Amount
2015 Repurchase Program—$1 billion	193,203	$	12	355,415	$	28	582,942	$	37	612,095	$	50

Accumulated Other Comprehensive Loss

Components of accumulated other comprehensive loss, net of tax (in millions):

	September 30, 2018			December 31, 2017
Related to marketable securities	$	(17	)	$	(5	)
Related to employee benefit plans	(420		)	(376		)
Related to interest rate derivatives	9			1
Total	$	(428	)	$	(380	)

The Company elected to early adopt ASU 2018-02 in the first quarter of 2018. As a result, the Company reclassified approximately $62 million of tax effects in AOCI recorded in prior periods at previously enacted tax rates thus increasing Retained earnings.

Earnings Per Share (EPS)

Diluted EPS is calculated by dividing net income by the average number of common shares outstanding plus the number of additional common shares that would have been outstanding assuming the exercise of in-the-money stock options and restricted stock units, using the treasury-stock method. For the three and nine months ended September 30, 2018 and 2017, anti-dilutive shares excluded from the calculation of EPS were not material.

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OPERATING SEGMENT INFORMATION

9 Months Ended

Sep. 30, 2018

Segment Reporting [Abstract]

OPERATING SEGMENT INFORMATION

OPERATING SEGMENT INFORMATION

Alaska Air Group has two operating airlines—Alaska (including Virgin America after the single operating certificate was received in January 2018) and Horizon. Each is regulated by the U.S. Department of Transportation’s Federal Aviation Administration. Alaska has CPAs for regional capacity with Horizon, as well as with third-party carriers SkyWest and PenAir, under which Alaska receives all passenger revenues.

Under U.S. GAAP, operating segments are defined as components of a business for which there is discrete financial information that is regularly assessed by the Chief Operating Decision Maker (CODM) in making resource allocation decisions. Financial performance for the operating airlines and CPAs is managed and reviewed by the Company's CODM as part of three reportable operating segments:

• Mainline - includes scheduled air transportation on Alaska's Boeing or Airbus jet aircraft for passengers and cargo throughout the U.S., and in parts of Canada, Mexico, and Costa Rica.

• Regional - includes Horizon's and other third-party carriers’ scheduled air transportation for passengers across a shorter distance network within the U.S. under CPAs. This segment includes the actual revenues and expenses associated with regional flying, as well as an allocation of corporate overhead incurred by Air Group on behalf of the regional operations.

• Horizon - includes the capacity sold to Alaska under CPA. Expenses include those typically borne by regional airlines such as crew costs, ownership costs and maintenance costs.

The CODM makes resource allocation decisions for these reporting segments based on flight profitability data, aircraft type, route economics and other financial information.

The "Consolidating and Other" column reflects Air Group parent company activity, McGee Air Services, consolidating entries and other immaterial business units of the company. The “Air Group Adjusted” column represents a non-GAAP measure that is used by the Company's CODM to evaluate performance and allocate resources. Adjustments are further explained below in reconciling to consolidated GAAP results.

Operating segment information is as follows (in millions):

	Three Months Ended September 30, 2018
	Mainline			Regional			Horizon			Consolidating & Other(a)			Air Group Adjusted(b)			Special Items(c)			Consolidated
Operating revenues
Passenger revenues	$	1,727		$	316		$	—		$	—		$	2,043		$	—		$	2,043
CPA revenues	—			—			128			(128		)	—			—			—
Mileage Plan other revenue	104			10			—			—			114			—			114
Cargo and other	53			—			2			—			55			—			55
Total operating revenues	1,884			326			130			(128		)	2,212			—			2,212
Operating expenses
Operating expenses, excluding fuel	1,126			267			118			(131		)	1,380			22			1,402
Economic fuel	438			70			—			—			508			5			513
Total operating expenses	1,564			337			118			(131		)	1,888			27			1,915
Nonoperating income (expense)
Interest income	15			—			—			(4		)	11			—			11
Interest expense	(20		)	—			(6		)	4			(22		)	—			(22		)
Interest capitalized	4			—			1			—			5			—			5
Other—net	(5		)	(2		)	—			—			(7		)	—			(7		)
Total Nonoperating income (expense)	(6		)	(2		)	(5		)	—			(13		)	—			(13		)
Income (loss) before income tax	$	314		$	(13	)	$	7		$	3		$	311		$	(27	)	$	284

	Three Months Ended September 30, 2017(d)
	Mainline			Regional		Horizon			Consolidating & Other(a)			Air Group Adjusted(b)			Special Items(c)			Consolidated
Operating revenues
Passenger revenues	$	1,677		$	281	$	—		$	—		$	1,958		$	—		$	1,958
CPA revenues	—			—		112			(112		)	—			—			—
Mileage Plan other revenue	97			8		—			—			105			—			105
Cargo and other	46			—		1			—			47			—			47
Total operating revenues	1,820			289		113			(112		)	2,110			—			2,110
Operating expenses
Operating expenses, excluding fuel	1,081			219		104			(112		)	1,292			23			1,315
Economic fuel	328			45		—			—			373			(5		)	368
Total operating expenses	1,409			264		104			(112		)	1,665			18			1,683
Nonoperating income (expense)
Interest income	12			—		—			(3		)	9			—			9
Interest expense	(25		)	—		(4		)	3			(26		)	—			(26		)
Interest capitalized	5			—		—			—			5			—			5
Other—net	2			—		—			—			2			—			2
Total Nonoperating income (expense)	(6		)	—		(4		)	—			(10		)	—			(10		)
Income (loss) before income tax	$	405		$	25	$	5		$	—		$	435		$	(18	)	$	417

	Nine Months Ended September 30, 2018
(in millions)	Mainline			Regional			Horizon			Consolidating & Other(a)			Air Group Adjusted(b)			Special Items(c)			Consolidated
Operating revenues
Passenger revenues	$	4,880		$	845		$	—		$	—		$	5,725		$	—		$	5,725
CPA revenues	—			—			375			(375		)	—			—			—
Mileage Plan other revenue	301			28			—			—			329			—			329
Cargo and other	141			1			4			—			146			—			146
Total operating revenues	5,322			874			379			(375		)	6,200			—			6,200
Operating expenses
Operating expenses, excluding fuel	3,392			755			345			(378		)	4,114			92			4,206
Economic fuel	1,237			190			—			—			1,427			(30		)	1,397
Total operating expenses	4,629			945			345			(378		)	5,541			62			5,603
Nonoperating income (expense)
Interest income	39			—			—			(10		)	29			—			29
Interest expense	(64		)	—			(16		)	9			(71		)	—			(71		)
Interest capitalized	12			—			2			—			14			—			14
Other	(9		)	(11		)	—			—			(20		)	—			(20		)
Total Nonoperating income (expense)	(22		)	(11		)	(14		)	(1		)	(48		)	—			(48		)
Income (loss) before income tax	$	671		$	(82	)	$	20		$	2		$	611		$	(62	)	$	549

	Nine Months Ended September 30, 2017(d)
(in millions)	Mainline			Regional		Horizon			Consolidating & Other(a)			Air Group Adjusted(b)			Special Items(c)			Consolidated
Operating revenues
Passenger revenues	$	4,729		$	776	$	—		$	—		$	5,505		$	—		$	5,505
CPA revenues	—			—		317			(317		)	—			—			—
Mileage Plan other revenue	291			23		—			—			314			—			314
Cargo and other	127			3		3			—			133			—			133
Total operating revenues	5,147			802		320			(317		)	5,952			—			5,952
Operating expenses
Operating expenses, excluding fuel	3,111			625		323			(315		)	3,744			86			3,830
Economic fuel	924			120		—			—			1,044			7			1,051
Total operating expenses	4,035			745		323			(315		)	4,788			93			4,881
Nonoperating income (expense)
Interest income	29			—		—			(4		)	25			—			25
Interest expense	(72		)	—		(9		)	4			(77		)	—			(77		)
Interest capitalized	12			—		1			—			13			—			13
Other	1			—		—			—			1			—			1
Total Nonoperating income (expense)	(30		)	—		(8		)	—			(38		)	—			(38		)
Income (loss) before income tax	$	1,082		$	57	$	(11	)	$	(2	)	$	1,126		$	(93	)	$	1,033

(a) Includes consolidating entries, Air Group parent company, McGee Air Services, and other immaterial business units.

(b) The Air Group Adjusted column represents the financial information that is reviewed by management to assess performance of operations and determine capital allocations and does not include certain income and charges.

(c) Includes merger-related costs, mark-to-market fuel-hedge accounting charges, and other special items.

(d) Certain historical information has been adjusted to reflect the adoption of new accounting standards.

Total assets were as follows (in millions):

	September 30, 2018			December 31, 2017
Mainline	$	14,725		$	16,663
Horizon	1,037			929
Consolidating & Other	(4,869		)	(6,846		)
Consolidated	$	10,893		$	10,746

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GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

9 Months Ended

Sep. 30, 2018

Accounting Policies [Abstract]

Organization and Basis of Presentation

Organization and Basis of Presentation

The condensed consolidated financial statements include the accounts of Air Group, or the Company, and its primary subsidiaries, Alaska (including Virgin America) and Horizon. Our condensed consolidated financial statements also include McGee Air Services, a ground services subsidiary of Alaska. The Company conducts substantially all of its operations through these subsidiaries. All significant intercompany balances and transactions have been eliminated. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information. Consistent with these requirements, this Form 10-Q does not include all the information required by GAAP for complete financial statements. It should be read in conjunction with the consolidated financial statements and accompanying notes in the Form 10-K for the year ended December 31, 2017. In the opinion of management, all adjustments have been made that are necessary to fairly present the Company’s financial position as of September 30, 2018 and the results of operations for the three and nine months ended September 30, 2018 and 2017. Such adjustments were of a normal recurring nature.

Certain reclassifications have been made to prior year financial statements to conform to classifications used in the current year.

In preparing these statements, the Company is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities, as well as the reported amounts of revenues and expenses. Due to seasonal variations in the demand for air travel, the volatility of aircraft fuel prices, changes in global economic conditions, changes in the competitive environment and other factors, operating results for the three and nine months ended September 30, 2018 are not necessarily indicative of operating results for the entire year.

Recently Issued Accounting Pronouncements

Recently Issued Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)," which requires lessees to recognize assets and liabilities for leases currently classified as operating leases. Under the new standard, a lessee will recognize a liability on the balance sheet representing the lease payments owed, and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and lease liabilities.

In July 2018, the FASB issued ASU 2018-11, "Targeted Improvements - Leases (Topic 842)" which amended Topic 842 to provide companies an alternative transition method which would not require adjusting comparative period financial information. The Company plans to utilize this alternative transition method, and will record a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The new standard is effective for the Company on January 1, 2019. The Company will not early adopt the standard.

At this time, the Company believes the most significant impact to the financial statements from the new lease accounting standard will relate to the recording of a right-of-use asset and related liability associated with leased aircraft. The Company does not expect the new standard to have a material impact on the pattern or amount of expense recognized for aircraft leases on the income statement. Other leases, including airports and real estate, equipment, software and other miscellaneous leases continue to be assessed.

In November 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows—Restricted Cash (Topic 230)" related to the presentation of restricted cash on the statement of cash flows, and within the accompanying footnotes. The Company adopted the standard effective January 1, 2018.

In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities." The ASU expands the activities that qualify for hedge accounting and simplifies the rules for reporting hedging relationships. The ASU is effective for the Company beginning January 1, 2019, and is required to be adopted using the modified retrospective approach.

In February 2018, the FASB issued ASU 2018-02, "Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." The standard allows a reclassification from accumulated other comprehensive income (AOCI) to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The amount of the reclassification is the difference between the amount initially recorded directly to other comprehensive income at the previously enacted U.S. federal corporate income tax rate that remains in AOCI and the amount that would have been recorded directly to other comprehensive income using the newly enacted U.S. federal income tax rate. The standard is effective for interim and annual reporting periods beginning after December 15, 2018, and early adoption is permitted. The Company elected to early adopt the standard effective January 1, 2018. As a result, retained earnings increased approximately $62 million in 2018 due to the reclassification of tax effects in AOCI recorded in prior periods at previously enacted tax rates.

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RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS (Tables)

9 Months Ended

Sep. 30, 2018

Accounting Changes and Error Corrections [Abstract]

Schedule of New Accounting Pronouncements Impact

Condensed consolidated statement of operations for the three and nine months ended September 30, 2017 (in millions):

	Three Months Ended September 30, 2017												Nine Months Ended September 30, 2017
				Adjustments												Adjustments
	As Reported			Revenue Recognition			Retirement Benefits			As Adjusted			As Reported			Revenue Recognition			Retirement Benefits			As Adjusted
Operating Revenues
Passenger Revenue	$	1,824		$	134		$	—		$	1,958		$	5,115		$	390		$	—		$	5,505
Mileage plan other revenue	122			(17		)	—			105			369			(55		)	—			314
Cargo and other revenue	174			(127		)	—			47			487			(354		)	—			133
Total Operating Revenue	2,120			(10		)	—			2,110			5,971			(19		)	—			5,952
Operating Expenses
Wages and benefits	475			—			2			477			1,392			—			5			1,397
Selling expenses	91			1			—			92			269			8			—			277
Special items—merger-related costs	24			(1		)	—			23			88			(2		)	—			86
All other operating expenses	1,091			—			—			1,091			3,121			—			—			3,121
Total Operating Expenses	1,681			—			2			1,683			4,870			6			5			4,881
Operating Income	439			(10		)	(2		)	427			1,101			(25		)	(5		)	1,071
Nonoperating Income (Expense)
Other—net	—			—			2			2			(4		)	—			5			1
All other nonoperating income (expense)	(12		)	—			—			(12		)	(39		)	—			—			(39		)
	(12		)	—			2			(10		)	(43		)	—			5			(38		)
Income (loss) before income tax	427			(10		)	—			417			1,058			(25		)	—			1,033
Income tax expense (benefit)	161			(3		)	—			158			397			(9		)	—			388
Net Income (Loss)	$	266		$	(7	)	$	—		$	259		$	661		$	(16	)	$	—		$	645

Condensed consolidated statement of cash flows for the nine months ended September 30, 2017 (in millions):

	Nine Months Ended September 30, 2017
	As Reported			Adjustments - Revenue Recognition			As Adjusted
Cash flows from operating activities:
Net income	$	661		$	(16	)	$	645
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	275			—			275
Stock-based compensation and other	43			—			43
Changes in certain assets and liabilities:
Changes in deferred tax provision	217			(9		)	208
Increase in air traffic liability	254			(31		)	223
Increase in deferred revenue	46			84			130
Other—net	(139		)	(28		)	(167		)
Net cash provided by operating activities	1,357			—			1,357
Net cash used in investing activities	(1,142		)	—			(1,142		)
Net cash used in financing activities	(399		)	—			(399		)
Net increase (decrease) in cash and cash equivalents	(184		)	—			(184		)
Cash and cash equivalents at beginning of year	328			—			328
Cash and cash equivalents at end of the period	$	144		$	—		$	144

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REVENUE FROM CONTRACTS WITH CUSTOMERS (Tables)

9 Months Ended

Sep. 30, 2018

Revenue Recognition [Abstract]

Disaggregation of Revenue

Cargo and other revenue included in the condensed consolidated statements of operations (in millions):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Cargo revenue	$	36	$	32	$	96	$	88
Other revenue	19		15		50		45
Total Cargo and other revenue	$	55	$	47	$	146	$	133

Mileage Plan™ revenue included in the condensed consolidated statements of operations (in millions):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Passenger revenue	$	153	$	134	$	459	$	405
Mileage PlanTM other revenue	114		105		329		314
Total Mileage Plan™ revenue	$	267	$	239	$	788	$	719

Passenger revenue recognized in the condensed consolidated statements of operations (in millions):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Passenger ticket revenue, including ticket breakage and net of taxes and fees	$	1,744	$	1,683	$	4,865	$	4,709
Passenger ancillary revenue	146		141		401		391
Mileage PlanTM passenger revenue	153		134		459		405
Total passenger revenue	$	2,043	$	1,958	$	5,725	$	5,505

Contract with Customer Liabilities

The table below presents a roll forward of the total frequent flyer liability (in millions):

	Nine Months Ended September 30,
	2018			2017
Total Deferred Revenue balance at January 1	$	1,725		$	1,534
Travel miles and companion certificate redemption - Passenger revenue	(459		)	(405		)
Miles redeemed on partner airlines - Other revenue	(66		)	(54		)
Increase in liability for mileage credits issued	631			586
Total Deferred Revenue balance at September 30	$	1,831		$	1,661

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FAIR VALUE MEASUREMENTS (Tables)

9 Months Ended

Sep. 30, 2018

Fair Value Disclosures [Abstract]

Activity for Marketable Securities

Investments Classified by Contractual Maturity Date

Maturities for marketable securities (in millions):

September 30, 2018	Cost Basis		Fair Value
Due in one year or less	$	126	$	126
Due after one year through five years	1,094		1,072
Due after five years through 10 years	26		25
Total	$	1,246	$	1,223

Fair Value, by Balance Sheet Grouping

Fair values of financial instruments on the consolidated balance sheet (in millions):

September 30, 2018	Level 1		Level 2			Total
Assets
Marketable securities
U.S. government and agency securities	$	338	$	—		$	338
Foreign government bonds	—		29			29
Asset-backed securities	—		209			209
Mortgage-backed securities	—		79			79
Corporate notes and bonds	—		559			559
Municipal securities	—		9			9
Total Marketable securities	338		885			1,223
Derivative instruments
Fuel hedge—call options	—		54			54
Interest rate swap agreements	—		15			15
Total Assets	$	338	$	954		$	1,292
Liabilities
Derivative instruments
Interest rate swap agreements	—		(3		)	(3		)
Total Liabilities	$	—	$	(3	)	$	(3	)

December 31, 2017	Level 1		Level 2			Total
Assets
Marketable securities
U.S. government and agency securities	$	328	$	—		$	328
Foreign government bonds	—		43			43
Asset-backed securities	—		209			209
Mortgage-backed securities	—		99			99
Corporate notes and bonds	—		726			726
Municipal securities	—		22			22
Total Marketable securities	328		1,099			1,427
Derivative instruments
Fuel hedge—call options	—		22			22
Interest rate swap agreements	—		9			9
Total Assets	$	328	$	1,130		$	1,458
Liabilities
Derivative instruments
Interest rate swap agreements	—		(8		)	(8		)
Total Liabilities	$	—	$	(8	)	$	(8	)

Fixed-rate debt on the consolidated balance sheet and the estimated fair value of long-term fixed-rate debt is as follows (in millions):

	September 30, 2018		December 31, 2017
Fixed-rate debt at cost	$	703	$	956
Non-recurring purchase price accounting fair value adjustment	3		3
Total fixed-rate debt	$	706	$	959
Estimated fair value	$	700	$	959

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LONG-TERM DEBT (Tables)

9 Months Ended

Sep. 30, 2018

Debt Disclosure [Abstract]

Schedule of Long-term Debt Instruments

Long-term debt obligations on the consolidated balance sheet (in millions):

	September 30, 2018			December 31, 2017
Fixed-rate notes payable due through 2028	$	706		$	959
Variable-rate notes payable due through 2028	1,335			1,625
Less debt issuance costs	(12		)	(15		)
Total debt	2,029			2,569
Less current portion	345			307
Long-term debt, less current portion	$	1,684		$	2,262
Weighted-average fixed-interest rate	4.1		%	4.2		%
Weighted-average variable-interest rate	3.4		%	2.8		%

Schedule of Maturities of Long-term Debt

At September 30, 2018 long-term debt principal payments for the next five years and thereafter are as follows (in millions):

	Total
Remainder of 2018	$	123
2019	267
2020	381
2021	363
2022	179
Thereafter	725
Total	$	2,038

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EMPLOYEE BENEFIT PLANS (Tables)

9 Months Ended

Sep. 30, 2018

Retirement Benefits [Abstract]

Schedule of Net Benefit Costs

Net periodic benefit costs for qualified defined-benefit plans include the following (in millions): 

	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Service cost	$	12		$	10		$	36		$	30
Pension expense included in Wages and benefits	12			10			36			30
Interest cost	20			19			59			55
Expected return on assets	(27		)	(27		)	(80		)	(80		)
Amortization of prior service cost (credit)	(1		)	(1		)	(1		)	(1		)
Recognized actuarial loss (gain)	9			7			25			20
Pension expense (benefit) included in Nonoperating Income (Expense)	$	1		$	(2	)	$	3		$	(6	)

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COMMITMENTS (Tables)

9 Months Ended

Sep. 30, 2018

Commitments and Contingencies Disclosure [Abstract]

Schedule of Future Minimum Rental Payments for Operating Leases and Unrecorded Unconditional Purchase Obligtaions

Future minimum payments for commitments as of September 30, 2018 (in millions):

	Aircraft Leases		Facility Leases		Aircraft Commitments(a)		Capacity Purchase Agreements (b)		Aircraft Maintenance Deposits
Remainder of 2018	$	88	$	18	$	378	$	33	$	16
2019	349		64		514		138		65
2020	324		56		525		145		68
2021	282		50		558		166		64
2022	265		35		302		174		52
Thereafter	1,070		149		140		1,205		38
Total	$	2,378	$	372	$	2,417	$	1,861	$	303

(a) Includes non-cancelable contractual commitments for aircraft and engines, buyer furnished equipment, and aircraft maintenance and parts management.

(b) Includes all non-aircraft lease costs associated with capacity purchase agreements.

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SHAREHOLDERS' EQUITY (Tables)

9 Months Ended

Sep. 30, 2018

Equity [Abstract]

Schedule of Treasury Stock by Class

Share repurchase activity (in millions, except share amounts):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
	Shares	Amount		Shares	Amount		Shares	Amount		Shares	Amount
2015 Repurchase Program—$1 billion	193,203	$	12	355,415	$	28	582,942	$	37	612,095	$	50

Schedule of Accumulated Other Comprehensive Income (Loss)

Components of accumulated other comprehensive loss, net of tax (in millions):

	September 30, 2018			December 31, 2017
Related to marketable securities	$	(17	)	$	(5	)
Related to employee benefit plans	(420		)	(376		)
Related to interest rate derivatives	9			1
Total	$	(428	)	$	(380	)

XML

OPERATING SEGMENT INFORMATION (Tables)

9 Months Ended

Sep. 30, 2018

Segment Reporting [Abstract]

Schedule of Segment Reporting Information, by Segment

Operating segment information is as follows (in millions):

	Three Months Ended September 30, 2018
	Mainline			Regional			Horizon			Consolidating & Other(a)			Air Group Adjusted(b)			Special Items(c)			Consolidated
Operating revenues
Passenger revenues	$	1,727		$	316		$	—		$	—		$	2,043		$	—		$	2,043
CPA revenues	—			—			128			(128		)	—			—			—
Mileage Plan other revenue	104			10			—			—			114			—			114
Cargo and other	53			—			2			—			55			—			55
Total operating revenues	1,884			326			130			(128		)	2,212			—			2,212
Operating expenses
Operating expenses, excluding fuel	1,126			267			118			(131		)	1,380			22			1,402
Economic fuel	438			70			—			—			508			5			513
Total operating expenses	1,564			337			118			(131		)	1,888			27			1,915
Nonoperating income (expense)
Interest income	15			—			—			(4		)	11			—			11
Interest expense	(20		)	—			(6		)	4			(22		)	—			(22		)
Interest capitalized	4			—			1			—			5			—			5
Other—net	(5		)	(2		)	—			—			(7		)	—			(7		)
Total Nonoperating income (expense)	(6		)	(2		)	(5		)	—			(13		)	—			(13		)
Income (loss) before income tax	$	314		$	(13	)	$	7		$	3		$	311		$	(27	)	$	284

	Three Months Ended September 30, 2017(d)
	Mainline			Regional		Horizon			Consolidating & Other(a)			Air Group Adjusted(b)			Special Items(c)			Consolidated
Operating revenues
Passenger revenues	$	1,677		$	281	$	—		$	—		$	1,958		$	—		$	1,958
CPA revenues	—			—		112			(112		)	—			—			—
Mileage Plan other revenue	97			8		—			—			105			—			105
Cargo and other	46			—		1			—			47			—			47
Total operating revenues	1,820			289		113			(112		)	2,110			—			2,110
Operating expenses
Operating expenses, excluding fuel	1,081			219		104			(112		)	1,292			23			1,315
Economic fuel	328			45		—			—			373			(5		)	368
Total operating expenses	1,409			264		104			(112		)	1,665			18			1,683
Nonoperating income (expense)
Interest income	12			—		—			(3		)	9			—			9
Interest expense	(25		)	—		(4		)	3			(26		)	—			(26		)
Interest capitalized	5			—		—			—			5			—			5
Other—net	2			—		—			—			2			—			2
Total Nonoperating income (expense)	(6		)	—		(4		)	—			(10		)	—			(10		)
Income (loss) before income tax	$	405		$	25	$	5		$	—		$	435		$	(18	)	$	417

	Nine Months Ended September 30, 2018
(in millions)	Mainline			Regional			Horizon			Consolidating & Other(a)			Air Group Adjusted(b)			Special Items(c)			Consolidated
Operating revenues
Passenger revenues	$	4,880		$	845		$	—		$	—		$	5,725		$	—		$	5,725
CPA revenues	—			—			375			(375		)	—			—			—
Mileage Plan other revenue	301			28			—			—			329			—			329
Cargo and other	141			1			4			—			146			—			146
Total operating revenues	5,322			874			379			(375		)	6,200			—			6,200
Operating expenses
Operating expenses, excluding fuel	3,392			755			345			(378		)	4,114			92			4,206
Economic fuel	1,237			190			—			—			1,427			(30		)	1,397
Total operating expenses	4,629			945			345			(378		)	5,541			62			5,603
Nonoperating income (expense)
Interest income	39			—			—			(10		)	29			—			29
Interest expense	(64		)	—			(16		)	9			(71		)	—			(71		)
Interest capitalized	12			—			2			—			14			—			14
Other	(9		)	(11		)	—			—			(20		)	—			(20		)
Total Nonoperating income (expense)	(22		)	(11		)	(14		)	(1		)	(48		)	—			(48		)
Income (loss) before income tax	$	671		$	(82	)	$	20		$	2		$	611		$	(62	)	$	549

	Nine Months Ended September 30, 2017(d)
(in millions)	Mainline			Regional		Horizon			Consolidating & Other(a)			Air Group Adjusted(b)			Special Items(c)			Consolidated
Operating revenues
Passenger revenues	$	4,729		$	776	$	—		$	—		$	5,505		$	—		$	5,505
CPA revenues	—			—		317			(317		)	—			—			—
Mileage Plan other revenue	291			23		—			—			314			—			314
Cargo and other	127			3		3			—			133			—			133
Total operating revenues	5,147			802		320			(317		)	5,952			—			5,952
Operating expenses
Operating expenses, excluding fuel	3,111			625		323			(315		)	3,744			86			3,830
Economic fuel	924			120		—			—			1,044			7			1,051
Total operating expenses	4,035			745		323			(315		)	4,788			93			4,881
Nonoperating income (expense)
Interest income	29			—		—			(4		)	25			—			25
Interest expense	(72		)	—		(9		)	4			(77		)	—			(77		)
Interest capitalized	12			—		1			—			13			—			13
Other	1			—		—			—			1			—			1
Total Nonoperating income (expense)	(30		)	—		(8		)	—			(38		)	—			(38		)
Income (loss) before income tax	$	1,082		$	57	$	(11	)	$	(2	)	$	1,126		$	(93	)	$	1,033

(a) Includes consolidating entries, Air Group parent company, McGee Air Services, and other immaterial business units.

(b) The Air Group Adjusted column represents the financial information that is reviewed by management to assess performance of operations and determine capital allocations and does not include certain income and charges.

(c) Includes merger-related costs, mark-to-market fuel-hedge accounting charges, and other special items.

(d) Certain historical information has been adjusted to reflect the adoption of new accounting standards.

Total assets were as follows (in millions):

	September 30, 2018			December 31, 2017
Mainline	$	14,725		$	16,663
Horizon	1,037			929
Consolidating & Other	(4,869		)	(6,846		)
Consolidated	$	10,893		$	10,746

XML

GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NARRATIVE (Details) - USD ($) $ in Millions	Jan. 01, 2018	Jan. 01, 2016
New Accounting Pronouncements or Change in Accounting Principle [Line Items]
Reclassification from AOCI to retained earnings	$ 62
Accounting Standards Update 2014-09 [Member]
New Accounting Pronouncements or Change in Accounting Principle [Line Items]
Cumulative effect of new accounting pronouncements		$ 171

XML

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS (Details) - USD ($) $ in Millions	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Dec. 31, 2017	Sep. 30, 2017	Jan. 01, 2016
New Accounting Pronouncements or Change in Accounting Principle [Line Items]
Cash and cash equivalents					$ 174	$ 194	$ 144
Cash, cash equivalents, and restricted cash	$ 184	$ 144	$ 197	$ 328	184	197	144
Current Assets
Prepaid expenses and other current assets					180	133
Current Liabilities
Air traffic liability					950	806
Other accrued liabilities					452	400
Deferred revenue, current					693	635
Other Liabilities and Credits
Deferred income taxes					494	370
Deferred revenue, noncurrent					1,138	1,090
Other liabilities					428	425
Shareholders' Equity
Retained earnings					$ 4,550	$ 4,193
Operating Revenues
Total Operating Revenues	2,212	2,110	6,200	5,952
Operating Expenses
Wages and benefits	549	477	1,629	1,397
Selling expenses	79	92	245	277
Special items—merger-related costs	22	23	67	86
All other operating expenses		1,091		3,121
Total Operating Expenses	1,915	1,683	5,603	4,881
Operating Income	297	427	597	1,071
Nonoperating Income (Expense)
Other—net	(7)	2	(20)	1
Nonoperating Income (Expense), Other		(12)		(39)
Nonoperating Income (Expense) Total	(13)	(10)	(48)	(38)
Income Before Income Tax	284	417	549	1,033
Income tax expense	67	158	135	388
Net Income (loss)	217	259	414	645
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	99	95	290	275
Stock-based compensation and other			34	43
Changes in deferred tax provision			122	208
Increase in air traffic liability			144	223
Increase in deferred revenue			106	130
Other—net			(124)	(167)
Net cash provided by operating activities			986	1,357
Net cash used in investing activities			(333)	(1,142)
Net cash used in financing activities			(666)	(399)
Net increase (decrease) in cash, cash equivalents, and restricted cash			(13)	(184)
Cash, cash equivalents, and restricted cash at beginning of year			197	328
Cash, cash equivalents, and restricted cash at end of the period	184	144	184	144
As Reported [Member]
New Accounting Pronouncements or Change in Accounting Principle [Line Items]
Cash, cash equivalents, and restricted cash		144		328			144
Operating Revenues
Mileage plan other revenue		122		369
Total Operating Revenues		2,120		5,971
Operating Expenses
Wages and benefits		475		1,392
Selling expenses		91		269
Special items—merger-related costs		24		88
All other operating expenses		1,091		3,121
Total Operating Expenses		1,681		4,870
Operating Income		439		1,101
Nonoperating Income (Expense)
Other—net		0		(4)
Nonoperating Income (Expense), Other		(12)		(39)
Nonoperating Income (Expense) Total		(12)		(43)
Income Before Income Tax		427		1,058
Income tax expense		161		397
Net Income (loss)		266		661
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization				275
Stock-based compensation and other				43
Changes in deferred tax provision				217
Increase in air traffic liability				254
Increase in deferred revenue				46
Other—net				(139)
Net cash provided by operating activities				1,357
Net cash used in investing activities				(1,142)
Net cash used in financing activities				(399)
Net increase (decrease) in cash, cash equivalents, and restricted cash				(184)
Cash, cash equivalents, and restricted cash at beginning of year				328
Cash, cash equivalents, and restricted cash at end of the period		144		144
Accounting Standards Update 2014-09 [Member]
New Accounting Pronouncements or Change in Accounting Principle [Line Items]
Cumulative effect of new accounting pronouncements								$ 171
Accounting Standards Update 2014-09 [Member] | Adjustments [Member]
New Accounting Pronouncements or Change in Accounting Principle [Line Items]
Cash, cash equivalents, and restricted cash		0		0			$ 0
Operating Revenues
Mileage plan other revenue		(17)		(55)
Total Operating Revenues		(10)		(19)
Operating Expenses
Wages and benefits		0		0
Selling expenses		1		8
Special items—merger-related costs		(1)		(2)
All other operating expenses		0		0
Total Operating Expenses		0		6
Operating Income		(10)		(25)
Nonoperating Income (Expense)
Other—net		0		0
Nonoperating Income (Expense), Other		0		0
Nonoperating Income (Expense) Total		0		0
Income Before Income Tax		(10)		(25)
Income tax expense		(3)		(9)
Net Income (loss)		(7)		(16)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization				0
Stock-based compensation and other				0
Changes in deferred tax provision				(9)
Increase in air traffic liability				(31)
Increase in deferred revenue				84
Other—net				(28)
Net cash provided by operating activities				0
Net cash used in investing activities				0
Net cash used in financing activities				0
Net increase (decrease) in cash, cash equivalents, and restricted cash				0
Cash, cash equivalents, and restricted cash at beginning of year				0
Cash, cash equivalents, and restricted cash at end of the period		0		0
Accounting Standards Update 2017-07 [Member] | Adjustments [Member]
Operating Revenues
Mileage plan other revenue		0		0
Total Operating Revenues		0		0
Operating Expenses
Wages and benefits		2		5
Selling expenses		0		0
Special items—merger-related costs		0		0
All other operating expenses		0		0
Total Operating Expenses		2		5
Operating Income		(2)		(5)
Nonoperating Income (Expense)
Other—net		2		5
Nonoperating Income (Expense), Other		0		0
Nonoperating Income (Expense) Total		2		5
Income Before Income Tax		0		0
Income tax expense		0		0
Net Income (loss)		0		0
Cargo and Freight [Member]
Operating Revenues
Revenue from contract with customer, including assessed taxes	55	47	146	133
Cargo and Freight [Member] | As Reported [Member]
Operating Revenues
Revenue from contract with customer, including assessed taxes		174		487
Cargo and Freight [Member] | Accounting Standards Update 2014-09 [Member] | Adjustments [Member]
Operating Revenues
Revenue from contract with customer, including assessed taxes		(127)		(354)
Cargo and Freight [Member] | Accounting Standards Update 2017-07 [Member] | Adjustments [Member]
Operating Revenues
Revenue from contract with customer, including assessed taxes		0		0
Passenger [Member]
Operating Revenues
Revenue from contract with customer, including assessed taxes	2,043	1,958	5,725	5,505
Passenger [Member] | As Reported [Member]
Operating Revenues
Revenue from contract with customer, including assessed taxes		1,824		5,115
Passenger [Member] | Accounting Standards Update 2014-09 [Member] | Adjustments [Member]
Operating Revenues
Revenue from contract with customer, including assessed taxes		134		390
Passenger [Member] | Accounting Standards Update 2017-07 [Member] | Adjustments [Member]
Operating Revenues
Revenue from contract with customer, including assessed taxes		0		0
Cargo and Other Revenue [Member]
Operating Revenues
Revenue from Contract with Customer, Excluding Assessed Tax	55	47	146	133
Cargo and Other Revenue [Member] | Cargo and Freight [Member]
Operating Revenues
Revenue from Contract with Customer, Excluding Assessed Tax	$ 55	$ 47	$ 146	$ 133

XML

REVENUE FROM CONTRACTS WITH CUSTOMERS - Disaggregation of Revenue (Details) - USD ($) $ in Millions	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Passenger Revenue [Member]
Disaggregation of Revenue [Line Items]
Revenue from Contract with Customer, Excluding Assessed Tax	$ 2,043	$ 1,958	$ 5,725	$ 5,505
Passenger Revenue [Member] | Passenger ticket revenue, including ticket breakage and net of taxes and fees [Member]
Disaggregation of Revenue [Line Items]
Revenue from Contract with Customer, Excluding Assessed Tax	1,744	1,683	4,865	4,709
Passenger Revenue [Member] | Passenger ancillary revenue [Member]
Disaggregation of Revenue [Line Items]
Revenue from Contract with Customer, Excluding Assessed Tax	146	141	401	391
Passenger Revenue [Member] | Mileage Plan passenger revenue [Member]
Disaggregation of Revenue [Line Items]
Revenue from Contract with Customer, Excluding Assessed Tax	153	134	459	405
Passenger Revenue [Member] | Passenger [Member]
Disaggregation of Revenue [Line Items]
Revenue from Contract with Customer, Excluding Assessed Tax	2,043	1,958	5,725	5,505
Mileage Plan Revenue [Member]
Disaggregation of Revenue [Line Items]
Revenue from Contract with Customer, Excluding Assessed Tax	267	239	788	719
Mileage Plan Revenue [Member] | Passenger [Member]
Disaggregation of Revenue [Line Items]
Revenue from Contract with Customer, Excluding Assessed Tax	153	134	459	405
Mileage Plan Revenue [Member] | Mileage plan other revenue [Member]
Disaggregation of Revenue [Line Items]
Revenue from Contract with Customer, Excluding Assessed Tax	114	105	329	314
Cargo and Other Revenue [Member]
Disaggregation of Revenue [Line Items]
Revenue from Contract with Customer, Excluding Assessed Tax	55	47	146	133
Cargo and Other Revenue [Member] | Cargo revenue [Member]
Disaggregation of Revenue [Line Items]
Revenue from Contract with Customer, Excluding Assessed Tax	36	32	96	88
Cargo and Other Revenue [Member] | Other revenue [Member]
Disaggregation of Revenue [Line Items]
Revenue from Contract with Customer, Excluding Assessed Tax	$ 19	$ 15	$ 50	$ 45

XML

REVENUE FROM CONTRACTS WITH CUSTOMERS - Narrative (Details) $ in Millions	3 Months Ended		9 Months Ended
	Sep. 30, 2018 USD ($)	Sep. 30, 2017 USD ($)	Sep. 30, 2018 USD ($) airline	Sep. 30, 2017 USD ($)	Dec. 31, 2017 USD ($)
Deferred Revenue Arrangement [Line Items]
Number of airline partners | airline			15
Breakage rate	17.40%	17.40%	17.40%	17.40%
Air traffic liability	$ 950		$ 950		$ 806
Receivable	422		422		341
Contract cost recognized	57	$ 61	166	$ 183
Prepaid Expenses and Other Current Assets [Member]
Deferred Revenue Arrangement [Line Items]
Contract costs	27		27		24
Mileage Plan Revenue [Member]
Deferred Revenue Arrangement [Line Items]
Receivable	106		106		$ 101
Mileage Plan Revenue [Member] | Mileage plan other revenue [Member]
Deferred Revenue Arrangement [Line Items]
Contract liability revenue recognized			(66)	(54)
Passenger Revenue [Member]
Deferred Revenue Arrangement [Line Items]
Contract liability revenue recognized	$ 27	$ 23	$ 540	$ 543

XML

REVENUE FROM CONTRACTS WITH CUSTOMERS - Contract Liabilities Activity (Details) - Mileage Plan Revenue [Member] - USD ($) $ in Millions	9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017
Change in Contract with Customer, Liability [Roll Forward]
Total Deferred Revenue balance at January 1	$ 1,725	$ 1,534
Increase in liability for mileage credits issued	631	586
Total Deferred Revenue balance at September 30	1,831	1,661
Passenger revenue [Member]
Change in Contract with Customer, Liability [Roll Forward]
Revenue recognized	(459)	(405)
Mileage plan other revenue [Member]
Change in Contract with Customer, Liability [Roll Forward]
Revenue recognized	$ (66)	$ (54)

XML

FAIR VALUE MEASUREMENTS - FAIR VALUE OF ASSETS AND LIABILITIES (Details) - Recurring [Member] - USD ($) $ in Millions	Sep. 30, 2018	Dec. 31, 2017
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Marketable securities	$ 1,223	$ 1,427
Assets, Fair Value Disclosure	1,292	1,458
Financial and Nonfinancial Liabilities, Fair Value Disclosure	3	8
Level 1 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Marketable securities	338	328
Assets, Fair Value Disclosure	338	328
Financial and Nonfinancial Liabilities, Fair Value Disclosure	0	0
Level 2 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Marketable securities	885	1,099
Assets, Fair Value Disclosure	954	1,130
Financial and Nonfinancial Liabilities, Fair Value Disclosure	3	8
Fuel hedge contracts [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Derivative instruments, assets	54	22
Fuel hedge contracts [Member] | Level 1 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Derivative instruments, assets	0	0
Fuel hedge contracts [Member] | Level 2 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Derivative instruments, assets	54	22
Interest rate swaps agreements [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Derivative instruments, assets	15	9
Derivative instruments, liabilities	3	8
Interest rate swaps agreements [Member] | Level 1 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Derivative instruments, assets	0	0
Derivative instruments, liabilities	0	0
Interest rate swaps agreements [Member] | Level 2 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Derivative instruments, assets	15	9
Derivative instruments, liabilities	3	8
U.S. government and agency securities [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Marketable securities	338	328
U.S. government and agency securities [Member] | Level 1 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Marketable securities	338	328
U.S. government and agency securities [Member] | Level 2 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Marketable securities	0	0
Foreign government bonds [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Marketable securities	29	43
Foreign government bonds [Member] | Level 1 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Marketable securities	0	0
Foreign government bonds [Member] | Level 2 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Marketable securities	29	43
Asset-backed securities [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Marketable securities	209	209
Asset-backed securities [Member] | Level 1 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Marketable securities	0	0
Asset-backed securities [Member] | Level 2 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Marketable securities	209	209
Mortgage-backed securities [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Marketable securities	79	99
Mortgage-backed securities [Member] | Level 1 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Marketable securities	0	0
Mortgage-backed securities [Member] | Level 2 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Marketable securities	79	99
Corporate notes and bonds [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Marketable securities	559	726
Corporate notes and bonds [Member] | Level 1 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Marketable securities	0	0
Corporate notes and bonds [Member] | Level 2 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Marketable securities	559	726
Municipal securities [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Marketable securities	9	22
Municipal securities [Member] | Level 1 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Marketable securities	0	0
Municipal securities [Member] | Level 2 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Marketable securities	$ 9	$ 22

XML

FAIR VALUE MEASUREMENTS - MATURITIES FOR MARKETABLE SECURITIES (Details) $ in Millions	Sep. 30, 2018 USD ($)
Cost Basis
Due in one year or less	$ 126
Due after one year through five years	1,094
Due after five years through 10 years	26
Total	1,246
Fair Value
Due in one year or less	126
Due after one year through five years	1,072
Due after five years through 10 years	25
Total	$ 1,223

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FAIR VALUE MEASUREMENTS - LONG-TERM DEBT (Details) - USD ($) $ in Millions	Sep. 30, 2018	Dec. 31, 2017
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Non-recurring purchase price accounting fair value adjustment	$ 3	$ 3
Carrying amount [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Fixed rate debt at cost	703	956
Long-term debt	706	959
Fair value [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Long-term debt	$ 700	$ 959

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LONG-TERM DEBT - SCHEDULE OF LONG-TERM DEBT (Details) - USD ($) $ in Millions	9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Dec. 31, 2017
Debt Instrument [Line Items]
Debt Issuance Costs, Net	$ (12)		$ (15)
Total	2,029		2,569
Less current portion	345		307
Long-term debt, less current portion	$ 1,684		$ 2,262
Weighted-average fixed-interest rate	4.10%		4.20%
Weighted-average variable-interest rate	3.40%		2.80%
Long-term debt payments	$ 544	$ 265
Repayments of Debt	231
Fixed rate notes payable due through 2028 [Member]
Debt Instrument [Line Items]
Total	706		$ 959
Variable rate notes payable due through 2028 [Member]
Debt Instrument [Line Items]
Total	$ 1,335		$ 1,625

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LONG-TERM DEBT LONG-TERM DEBT - FUTURE PAYMENTS (Details) $ in Millions	Sep. 30, 2018 USD ($)
Long-term Debt, Fiscal Year Maturity [Abstract]
Remainder of 2018	$ 123
2019	267
2020	381
2021	363
2022	179
Thereafter	725
Total	$ 2,038

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LONG-TERM DEBT - LINE OF CREDIT (Details)	9 Months Ended
	Sep. 30, 2018 USD ($) credit_facility	Jul. 30, 2018 USD ($)	Jun. 30, 2018 USD ($)
Line of Credit Facility [Line Items]
Line of Credit Facility, Number of Credit Facilities | credit_facility	3
Line of Credit Facility, Maximum Borrowing Capacity	$ 516,000,000
Line of Credit Facility, Asset Restrictions	500,000,000
Credit Facility 1 [Member] | Secured by aircraft [Member]
Line of Credit Facility [Line Items]
Line of Credit Facility, Maximum Borrowing Capacity	$ 250,000,000
Line of Credit Facility, Expiration Date	Jun. 30, 2021
Credit Facility 2 [Member] | Secured by aircraft [Member]
Line of Credit Facility [Line Items]
Line of Credit Facility, Maximum Borrowing Capacity		$ 116,000,000	$ 75,000,000
Line of Credit Facility, Expiration Date	Jul. 31, 2019
Credit Facility 3 [Member] | Secured by certain accounts receivable, spare engines, spare parts and ground service equipment [Member]
Line of Credit Facility [Line Items]
Line of Credit Facility, Maximum Borrowing Capacity	$ 150,000,000
Line of Credit Facility, Expiration Date	Mar. 31, 2022

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EMPLOYEE BENEFIT PLANS - NET PENSION EXPENSE (Details) - Qualified Defined Benefit [Member] - USD ($) $ in Millions	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Defined Benefit Plan, Net Periodic Benefit Cost (Credit) [Abstract]
Service cost	$ 12	$ 10	$ 36	$ 30
Interest cost	20	19	59	55
Expected return on assets	(27)	(27)	(80)	(80)
Defined Benefit Plan, Amortization of Prior Service Cost (Credit)	(1)	(1)	(1)	(1)
Recognized actuarial loss (gain)	9	7	25	20
Wages and Benefits [Member]
Defined Benefit Plan, Net Periodic Benefit Cost (Credit) [Abstract]
Net pension expense	12	10	36	30
Nonoperating Income (Expense) [Member]
Defined Benefit Plan, Net Periodic Benefit Cost (Credit) [Abstract]
Net pension expense	$ 1	$ (2)	$ 3	$ (6)

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COMMITMENTS (Details) $ in Millions	1 Months Ended	3 Months Ended		9 Months Ended
	Jul. 31, 2018 USD ($)	Sep. 30, 2018 USD ($) aircraft	Sep. 30, 2017 USD ($)	Sep. 30, 2018 USD ($) aircraft	Sep. 30, 2017 USD ($)
Unrecorded Unconditional Purchase Obligation, Fiscal Year Maturity [Abstract]
Rent Expense		$ 165	$ 145	$ 455	$ 406
B-737 [Member]
Unrecorded Unconditional Purchase Obligation, Fiscal Year Maturity [Abstract]
Committed to Purchase (in Aircraft) | aircraft		38		38
Options to Purchase Additional (in Aircraft) | aircraft		37		37
B737-900ER [Member]
Unrecorded Unconditional Purchase Obligation, Fiscal Year Maturity [Abstract]
Committed to Purchase (in Aircraft) | aircraft		6		6
B737 MAX [Member]
Unrecorded Unconditional Purchase Obligation, Fiscal Year Maturity [Abstract]
Committed to Purchase (in Aircraft) | aircraft		32		32
Unrecorded Unconditional Purchase Obligation, Minimum Quantity Required, Number Converted to MAX 9 | aircraft		15		15
A320neo [Member]
Unrecorded Unconditional Purchase Obligation, Fiscal Year Maturity [Abstract]
Unrecorded Unconditional Purchase Obligation, Option to Cancel | aircraft		30		30
E175 [Member]
Unrecorded Unconditional Purchase Obligation, Fiscal Year Maturity [Abstract]
Committed to Purchase (in Aircraft) | aircraft		17		17
Options to Purchase Additional (in Aircraft) | aircraft		30		30
Property Subject to Operating Lease [Member] | B-737 [Member]
Unrecorded Unconditional Purchase Obligation, Fiscal Year Maturity [Abstract]
Number of units involved in lease contracts | aircraft		10		10
Property Subject to Operating Lease [Member] | Airbus [Member]
Unrecorded Unconditional Purchase Obligation, Fiscal Year Maturity [Abstract]
Number of units involved in lease contracts | aircraft		61		61
Property Subject to Operating Lease [Member] | Q400 [Member]
Unrecorded Unconditional Purchase Obligation, Fiscal Year Maturity [Abstract]
Number of units involved in lease contracts | aircraft		9		9
Property Subject to Operating Lease [Member] | E175 [Member]
Unrecorded Unconditional Purchase Obligation, Fiscal Year Maturity [Abstract]
Number of units involved in lease contracts | aircraft		32		32
Property Available for Operating Lease [Member] | A321neo [Member]
Unrecorded Unconditional Purchase Obligation, Fiscal Year Maturity [Abstract]
Number of optional additional units | aircraft		2		2
Property Available for Operating Lease [Member] | E175 [Member]
Unrecorded Unconditional Purchase Obligation, Fiscal Year Maturity [Abstract]
Number of optional additional units | aircraft		3		3
Capacity Purchase Agreement with SkyWest [Member] | E175 [Member]
Unrecorded Unconditional Purchase Obligation, Fiscal Year Maturity [Abstract]
Number of optional additional units | aircraft		8		8
Aircraft Maintenance Deposits [Member]
Unrecorded Unconditional Purchase Obligation, Fiscal Year Maturity [Abstract]
Remainder of 2018		$ 16		$ 16
2019		65		65
2020		68		68
2021		64		64
2022		52		52
Thereafter		38		38
Total		303		303
Aircraft Commitments [Member]
Unrecorded Unconditional Purchase Obligation, Fiscal Year Maturity [Abstract]
Remainder of 2018		378		378
2019		514		514
2020		525		525
2021		558		558
2022		302		302
Thereafter		140		140
Total		2,417		2,417
Capacity Purchase Agreements [Member]
Unrecorded Unconditional Purchase Obligation, Fiscal Year Maturity [Abstract]
Remainder of 2018		33		33
2019		138		138
2020		145		145
2021		166		166
2022		174		174
Thereafter		1,205		1,205
Total		1,861		1,861
Aircraft Leases [Member]
Operating Leases, Future Minimum Payments Due, Fiscal Year Maturity [Abstract]
Remainder of 2018		88		88
2019		349		349
2020		324		324
2021		282		282
2022		265		265
Thereafter		1,070		1,070
Total		2,378		2,378
Facility Leases [Member]
Operating Leases, Future Minimum Payments Due, Fiscal Year Maturity [Abstract]
Remainder of 2018		18		18
2019		64		64
2020		56		56
2021		50		50
2022		35		35
Thereafter		149		149
Total		$ 372		$ 372
Virgin America Flight Attendants [Member]
Unrecorded Unconditional Purchase Obligation, Fiscal Year Maturity [Abstract]
Loss Contingency, Damages Sought, Value	$ 85

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SHAREHOLDERS' EQUITY, CASH DIVIDEND (Details) - USD ($) $ / shares in Units, $ in Millions	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Equity [Abstract]
Cash dividend declared per share (usd per share)	$ 0.32	$ 0.3	$ 0.96	$ 0.90
Payments of Dividends	$ 39		$ 118	$ 111

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SHAREHOLDERS' EQUITY, COMMON STOCK REPURCHASE (Details) - 2015 1 Billion Repurchase Program [Member] - USD ($) $ in Millions	3 Months Ended		9 Months Ended		37 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Aug. 31, 2015
Class of Stock [Line Items]
Stock repurchase program, authorized amount						$ 1,000
Stock repurchased during period (shares)					5,676,305
Value of stock repurchased during period					$ 426
Shares	193,203	355,415	582,942	612,095
Amount	$ 12	$ 28	$ 37	$ 50

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SHAREHOLDERS' EQUITY, ACCUMULATED OTHER COMPREHENSIVE LOSS (Details) - USD ($) $ in Millions	Jan. 01, 2018	Sep. 30, 2018	Dec. 31, 2017
Equity [Abstract]
Related to marketable securities		$ (17)	$ (5)
Related to employee benefit plans		(420)	(376)
Related to interest rate derivatives		9	1
Total		$ (428)	$ (380)
Reclassification from AOCI to retained earnings	$ 62

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OPERATING SEGMENT INFORMATION (Details) $ in Millions	3 Months Ended		9 Months Ended
	Sep. 30, 2018 USD ($)	Sep. 30, 2017 USD ($)	Sep. 30, 2018 USD ($) segment	Sep. 30, 2017 USD ($)
Segment Reporting Information [Line Items]
Number of Operating Segments | segment			3
Operating Revenues
Total Operating Revenues	$ 2,212	$ 2,110	$ 6,200	$ 5,952
Operating expenses
Operating Expenses, Excluding Fuel	1,402	1,315	4,206	3,830
Economic fuel	513	368	1,397	1,051
Total Operating Expenses	1,915	1,683	5,603	4,881
Nonoperating Income (Expense)
Interest income	11	9	29	25
Interest expense	(22)	(26)	(71)	(77)
Interest Costs Capitalized	5	5	14	13
Other	(7)	2	(20)	1
Nonoperating Income (Expense) Total	(13)	(10)	(48)	(38)
Income (loss) before income tax	284	417	549	1,033
Air Group Adjusted [Member]
Operating Revenues
Total Operating Revenues	2,212	2,110	6,200	5,952
Operating expenses
Operating Expenses, Excluding Fuel	1,380	1,292	4,114	3,744
Economic fuel	508	373	1,427	1,044
Total Operating Expenses	1,888	1,665	5,541	4,788
Nonoperating Income (Expense)
Interest income	11	9	29	25
Interest expense	(22)	(26)	(71)	(77)
Interest Costs Capitalized	5	5	14	13
Other	(7)	2	(20)	1
Nonoperating Income (Expense) Total	(13)	(10)	(48)	(38)
Income (loss) before income tax	311	435	611	1,126
Alaska Mainline [Member]
Operating Revenues
Total Operating Revenues	1,884	1,820	5,322	5,147
Operating expenses
Operating Expenses, Excluding Fuel	1,126	1,081	3,392	3,111
Economic fuel	438	328	1,237	924
Total Operating Expenses	1,564	1,409	4,629	4,035
Nonoperating Income (Expense)
Interest income	15	12	39	29
Interest expense	(20)	(25)	(64)	(72)
Interest Costs Capitalized	4	5	12	12
Other	(5)	2	(9)	1
Nonoperating Income (Expense) Total	(6)	(6)	(22)	(30)
Income (loss) before income tax	314	405	671	1,082
Alaska Regional [Member]
Operating Revenues
Total Operating Revenues	326	289	874	802
Operating expenses
Operating Expenses, Excluding Fuel	267	219	755	625
Economic fuel	70	45	190	120
Total Operating Expenses	337	264	945	745
Nonoperating Income (Expense)
Interest income	0	0	0	0
Interest expense	0	0	0	0
Interest Costs Capitalized	0	0	0	0
Other	(2)	0	(11)	0
Nonoperating Income (Expense) Total	(2)	0	(11)	0
Income (loss) before income tax	(13)	25	(82)	57
Horizon [Member]
Operating Revenues
Total Operating Revenues	130	113	379	320
Operating expenses
Operating Expenses, Excluding Fuel	118	104	345	323
Economic fuel	0	0	0	0
Total Operating Expenses	118	104	345	323
Nonoperating Income (Expense)
Interest income	0	0	0	0
Interest expense	(6)	(4)	(16)	(9)
Interest Costs Capitalized	1	0	2	1
Other	0	0	0	0
Nonoperating Income (Expense) Total	(5)	(4)	(14)	(8)
Income (loss) before income tax	7	5	20	(11)
Intersegment Elimination [Member]
Operating Revenues
Total Operating Revenues	(128)	(112)	(375)	(317)
Operating expenses
Operating Expenses, Excluding Fuel	(131)	(112)	(378)	(315)
Economic fuel	0	0	0	0
Total Operating Expenses	(131)	(112)	(378)	(315)
Nonoperating Income (Expense)
Interest income	(4)	(3)	(10)	(4)
Interest expense	4	3	9	4
Interest Costs Capitalized	0	0	0	0
Other	0	0	0	0
Nonoperating Income (Expense) Total	0	0	(1)	0
Income (loss) before income tax	3	0	2	(2)
Special Revenue and Charges [Member]
Operating Revenues
Total Operating Revenues	0	0	0	0
Operating expenses
Operating Expenses, Excluding Fuel	22	23	92	86
Economic fuel	5	(5)	(30)	7
Total Operating Expenses	27	18	62	93
Nonoperating Income (Expense)
Interest income	0	0	0	0
Interest expense	0	0	0	0
Interest Costs Capitalized	0	0	0	0
Other	0	0	0	0
Nonoperating Income (Expense) Total	0	0	0	0
Income (loss) before income tax	(27)	(18)	(62)	(93)
Passenger [Member]
Operating Revenues
Revenue from contract with customer, including assessed taxes	2,043	1,958	5,725	5,505
Passenger [Member] | Air Group Adjusted [Member]
Operating Revenues
Revenue from contract with customer, including assessed taxes	2,043	1,958	5,725	5,505
Passenger [Member] | Alaska Mainline [Member]
Operating Revenues
Revenue from contract with customer, including assessed taxes	1,727	1,677	4,880	4,729
Passenger [Member] | Alaska Regional [Member]
Operating Revenues
Revenue from contract with customer, including assessed taxes	316	281	845	776
Passenger [Member] | Horizon [Member]
Operating Revenues
Revenue from contract with customer, including assessed taxes	0	0	0	0
Passenger [Member] | Intersegment Elimination [Member]
Operating Revenues
Revenue from contract with customer, including assessed taxes	0	0	0	0
Passenger [Member] | Special Revenue and Charges [Member]
Operating Revenues
Revenue from contract with customer, including assessed taxes	0	0	0	0
Capacity Purchase Agreements [Member]
Operating Revenues
Revenue from contract with customer, including assessed taxes	0	0	0	0
Capacity Purchase Agreements [Member] | Air Group Adjusted [Member]
Operating Revenues
Revenue from contract with customer, including assessed taxes	0	0	0	0
Capacity Purchase Agreements [Member] | Alaska Mainline [Member]
Operating Revenues
Revenue from contract with customer, including assessed taxes	0	0	0	0
Capacity Purchase Agreements [Member] | Alaska Regional [Member]
Operating Revenues
Revenue from contract with customer, including assessed taxes	0	0	0	0
Capacity Purchase Agreements [Member] | Horizon [Member]
Operating Revenues
Revenue from contract with customer, including assessed taxes	128	112	375	317
Capacity Purchase Agreements [Member] | Intersegment Elimination [Member]
Operating Revenues
Revenue from contract with customer, including assessed taxes	(128)	(112)	(375)	(317)
Capacity Purchase Agreements [Member] | Special Revenue and Charges [Member]
Operating Revenues
Revenue from contract with customer, including assessed taxes	0	0	0	0
Mileage plan other revenue [Member]
Operating Revenues
Revenue from contract with customer, including assessed taxes	114	105	329	314
Mileage plan other revenue [Member] | Air Group Adjusted [Member]
Operating Revenues
Revenue from contract with customer, including assessed taxes	114	105	329	314
Mileage plan other revenue [Member] | Alaska Mainline [Member]
Operating Revenues
Revenue from contract with customer, including assessed taxes	104	97	301	291
Mileage plan other revenue [Member] | Alaska Regional [Member]
Operating Revenues
Revenue from contract with customer, including assessed taxes	10	8	28	23
Mileage plan other revenue [Member] | Horizon [Member]
Operating Revenues
Revenue from contract with customer, including assessed taxes	0	0	0	0
Mileage plan other revenue [Member] | Intersegment Elimination [Member]
Operating Revenues
Revenue from contract with customer, including assessed taxes	0	0	0	0
Mileage plan other revenue [Member] | Special Revenue and Charges [Member]
Operating Revenues
Revenue from contract with customer, including assessed taxes	0	0	0	0
Cargo and Freight [Member]
Operating Revenues
Revenue from contract with customer, including assessed taxes	55	47	146	133
Cargo and Freight [Member] | Air Group Adjusted [Member]
Operating Revenues
Revenue from contract with customer, including assessed taxes	55	47	146	133
Cargo and Freight [Member] | Alaska Mainline [Member]
Operating Revenues
Revenue from contract with customer, including assessed taxes	53	46	141	127
Cargo and Freight [Member] | Alaska Regional [Member]
Operating Revenues
Revenue from contract with customer, including assessed taxes	0	0	1	3
Cargo and Freight [Member] | Horizon [Member]
Operating Revenues
Revenue from contract with customer, including assessed taxes	2	1	4	3
Cargo and Freight [Member] | Intersegment Elimination [Member]
Operating Revenues
Revenue from contract with customer, including assessed taxes	0	0	0	0
Cargo and Freight [Member] | Special Revenue and Charges [Member]
Operating Revenues
Revenue from contract with customer, including assessed taxes	$ 0	$ 0	$ 0	$ 0

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OPERATING SEGMENT INFORMATION, ASSETS (Details) - USD ($) $ in Millions	Sep. 30, 2018	Dec. 31, 2017
Total assets	$ 10,893	$ 10,746
Alaska Airlines [Member]
Total assets	14,725	16,663
Horizon [Member]
Total assets	1,037	929
Parent [Member]
Total assets	$ (4,869)	$ (6,846)