The air show is held during the annual hydroplane races at Seafair.
There are no hotels where you could watch the air show from your room. I have not been down at the lake for many years. My understanding is that you can buy a seat in the grandstands for the whole race day on Sunday and there are busses which come from park and ride lots elsewhere.
Looking on the Seafair web site, there is a special air show VIP program you might be interested in to feed your air show jones. It's kind of expensive ($199/person) but I'll let you look at it and judge for yourself. (I'd have to sleep in my car and eat top ramen to afford that but you ain't me! ;))
http://www.seafair.com/news.aspx?ID=220&Mon=5&Yr=2012This site would have anything else you might want to know about the races and Seafair.
Jeff KB7AIL CN88