Annual Report of ALASKA AIR GROUP, INC\. for year 2019

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1\. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Basis of Presentation

The consolidated financial statements include the accounts of Air Group, or the Company, and its primary subsidiaries, Alaska and Horizon\. Our 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 conformity with accounting principles generally accepted in the United States of America and their preparation requires the use of management’s estimates\. Actual results may differ from these estimates\.

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

Cash and Cash Equivalents

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 market value\. The Company reduces cash balances when funds are disbursed\. Due to the time delay in funds clearing the banks, the Company normally maintains a negative balance in its cash disbursement accounts, which is reported as a current liability\. The amount of the negative cash balance was $7 million and $5 million at December 31, 2019 and 2018, and is included in accounts payable, with the change in the balance during the year included in other financing activities in the consolidated statements of cash flows\.

The Company's restricted cash balances are not material and are classified as Other noncurrent assets\. Restricted cash balances are primarily used to guarantee various letters of credit, self\-insurance programs or other contractual rights\. They consist of highly liquid securities with original maturities of three months or less\. They are carried at cost, which approximates fair value\.

Marketable Securities

Investments with original maturities of greater than three months and remaining maturities of less than one year are classified as short\-term investments\. Investments with maturities beyond one year may be classified as short\-term based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations\. All cash equivalents and short\-term investments are classified as available\-for\-sale and realized gains and losses are recorded using the specific identification method\. Changes in market value, excluding other\-than\-temporary impairments, are reflected in accumulated other comprehensive loss (AOCL)\.

Investments are considered to be impaired when a decline in fair value is judged to be other\-than\-temporary\. The Company uses a systematic methodology that considers available quantitative and qualitative evidence in evaluating potential impairment\. If the cost of an investment exceeds its fair value, management evaluates, among other factors, general market conditions, credit quality of debt instrument issuers, the duration and extent to which the fair value is less than cost, the Company's intent and ability to hold, or plans to sell, the investment\. Once a decline in fair value is determined to be other\-than\-temporary, an impairment charge is recorded to Other—net in the consolidated statements of operations and a new cost basis in the investment is established\.

Inventories and Supplies—net

Expendable aircraft parts, materials and supplies are stated at average cost and are included in Inventories and supplies — net\. An obsolescence allowance for expendable parts is accrued based on estimated lives of the corresponding fleet type and salvage values\. The allowance for expendable inventories was $41 million and $39 million at December 31, 2019 and 2018\. Inventory and supplies — net also includes fuel inventory of $28 million and $24 million at December 31, 2019 and 2018\. Repairable and rotable aircraft parts inventories are included in flight equipment\.

56


Annual Report of ALASKA AIR GROUP, INC\. for year 2017

***ADDITIONAL SEGMENT INFORMATION***

Refer to Note 12 of the 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 $1\.3 billion in 2017 compared to $1\.3 billion in 2016\. On a Combined Comparative basis, Mainline adjusted pretax profit decreased by $253 million\. The table below provides the reconciliation of the impact of Virgin America on the comparative results for our Mainline segment, excluding merger\-related costs and mark\-to\-market fuel\-hedge accounting charges:

|                                            |                                      |                                      |                                          |                                      |                |
| ------------------------------------------ | ------------------------------------ | ------------------------------------ | ---------------------------------------- | ------------------------------------ | -------------- |
|                                            | **Twelve Months Ended December 31,** | **Twelve Months Ended December 31,** | **Twelve Months Ended December 31,**     | **Twelve Months Ended December 31,** | **Change**     |
| ***(in millions)***                        | **2017**                             | **2016 as Reported**                 | **2016 Pre\-acquisition Virgin America** | **2016 Combined**                    | **$ Combined** |
| **Mainline**                               |                                      |                                      |                                          |                                      |                |
| Operating revenues                         | $6,890                               | $4,940                               | $1,564                                   | $6,504                               | $386           |
| Non\-fuel, non\-special operating expenses | 4,257                                | 2,883                                | 1,028                                    | 3,911                                | 346            |
| Economic fuel                              | 1,282                                | 719                                  | 293                                      | 1,012                                | 270            |
| Operating income                           | 1,351                                | 1,338                                | 243                                      | 1,581                                | (230)          |
| Nonoperating income (expense)              | (39)                                 | 3                                    | (19)                                     | (16)                                 | (23)           |
| Pretax profit                              | $1,312                               | $1,341                               | $224                                     | $1,565                               | $(253)         |

The $253 million decrease in Combined Comparative pretax profit was driven by a $270 millionincrease in Mainline fuel expense, a $346 million increase in Mainline non\-fuel operating expenses, and a $23 million increase in nonoperating expense\. These increases were partially offset by a $386 million increase in Mainline passenger revenue\. 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\. Nonoperating expense increased primarily due to increased interest expense\. Mainline revenue increased due to higher capacity from new routes added over the past twelve months\.

***Regional***

Our Regional operations contributed a pretax profit of $15 million in 2017 compared to $93 million in 2016\. The $78 million decrease in pretax profit was attributable to $82 million higher non\-fuel operating expense due in large part to increased capacity, and higher raw fuel costs, partially offset by a $51 million increase in operating revenues as described in Passenger Revenue—Regional\.

***Horizon***

Horizon incurred a pretax loss of $8 million in 2017 compared to pretax profit of $14 million in 2016\. The change was primarily driven by $20 million higher non\-fuel expenses\. Non\-fuel expenses increased primarily due to higher wage and training expense as a result of the increase in FTE’s, increased costs associated with flight cancellations, and a $9 million ratification bonus expense in connection with the agreement reached with Horizon's pilots\.

 46


Annual Report of DELTA AIR LINES, INC\.  for year 2017

[Table of Contents](http://ir.delta.com/.#s38B278257A885660AB93394F5F0EFBED)

ITEM 9\. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND  FINANCIAL DISCLOSURE

None\.

ITEM 9A\. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our management, including our Chief Executive Officer and Chief Financial Officer, performed an evaluation of our disclosure controls and procedures, which have been designed to permit us to record, process, summarize and report, within time periods specified by the SEC's rules and forms, information required to be disclosed\. Our management, including our Chief Executive Officer and Chief Financial Officer, concluded that the controls and procedures were effective as of  December 31, 2017  to ensure that material information was accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure\.

Changes in Internal Control

During the three months ended  December 31, 2017 , we did not make any changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting\.

Management's Annual Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a\-15(f) and 15d\-15(f) under the Securities Exchange Act of 1934\. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America\.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements\. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies may deteriorate\.

Management conducted an evaluation of the effectiveness of our internal control over financial reporting as of  December 31, 2017  using the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in the 2013 Internal Control\-Integrated Framework\. Based on that evaluation, management believes that our internal control over financial reporting was effective as of  December 31, 2017 \.

The effectiveness of our internal control over financial reporting as of  December 31, 2017  has been audited by Ernst & Young LLP, an independent registered public accounting firm, which also audited our Consolidated Financial Statements for the year ended  December 31, 2017 \. Ernst & Young LLP's report on our internal control over financial reporting is set forth below\.

 89


Annual Report of ALASKA AIR GROUP, INC\. for year 2019

Aircraft fuel expense decreased $58 million, or 3%, compared to 2018\. The elements of the change are illustrated in the following table:

|                                                |                                                |                                                |                                  |                                  |                                  |                                  |                                  |                                  |                                  |                                  |                                  |                                  |                                  |                                  |                                  |      |      |      |      |      |      |  |  |  |  |  |  |  |  |  |  |  |  |
|:---------------------------------------------- |:---------------------------------------------- |:---------------------------------------------- | --------------------------------:|:--------------------------------:|:--------------------------------:|:--------------------------------:| --------------------------------:|:--------------------------------:|:--------------------------------:|:--------------------------------:| --------------------------------:|:--------------------------------:|:--------------------------------:|:--------------------------------:| --------------------------------:|:----:|:----:|:----:|:----:|:----:|:----:|:- |:- |:- |:- |:- |:- |:- |:- |:- |:- |:- |:- |
|                                                |                                                |                                                | Twelve Months Ended December 31, | Twelve Months Ended December 31, | Twelve Months Ended December 31, | Twelve Months Ended December 31, | Twelve Months Ended December 31, | Twelve Months Ended December 31, | Twelve Months Ended December 31, | Twelve Months Ended December 31, | Twelve Months Ended December 31, | Twelve Months Ended December 31, | Twelve Months Ended December 31, | Twelve Months Ended December 31, | Twelve Months Ended December 31, |      |      |      |      |      |      |  |  |  |  |  |  |  |  |  |  |  |  |
|                                                |                                                |                                                |                             2019 |               2019               |               2019               |               2019               |                             2019 |                                  |                                  |                                  |                                  |                                  |                                  |                                  |                             2018 | 2018 | 2018 | 2018 | 2018 | 2018 | 2018 |  |  |  |  |  |  |
| *(in millions, except for per gallon amounts)* | *(in millions, except for per gallon amounts)* | *(in millions, except for per gallon amounts)* |                          Dollars |                                  |                                  |                                  |                         Cost/Gal |                                  |                                  |                                  |                          Dollars |                                  |                                  |                                  |                         Cost/Gal |
| Raw or "into\-plane" fuel cost                 | Raw or "into\-plane" fuel cost                 | Raw or "into\-plane" fuel cost                 |                          $1,868  |                                  |                                  |                                  |                          $2\.17  |                                  |                                  |                                  |                          $1,938  |                                  |                                  |                                  |                          $2\.31  |
| (Gain)/loss on settled hedges                  | (Gain)/loss on settled hedges                  | (Gain)/loss on settled hedges                  |                              16  |                                  |                                  |                                  |                           0\.02  |                                  |                                  |                                  |                             (24) |                                  |                                  |                                  |                          (0\.03) |
| Consolidated economic fuel expense             | Consolidated economic fuel expense             | Consolidated economic fuel expense             |                          $1,884  |                                  |                                  |                                  |                          $2\.19  |                                  |                                  |                                  |                          $1,914  |                                  |                                  |                                  |                          $2\.28  |
| Mark\-to\-market fuel hedge adjustments        | Mark\-to\-market fuel hedge adjustments        | Mark\-to\-market fuel hedge adjustments        |                              (6) |                                  |                                  |                                  |                          (0\.01) |                                  |                                  |                                  |                              22  |                                  |                                  |                                  |                           0\.03  |
| GAAP fuel expense                              | GAAP fuel expense                              | GAAP fuel expense                              |                          $1,878  |                                  |                                  |                                  |                          $2\.18  |                                  |                                  |                                  |                          $1,936  |                                  |                                  |                                  |                          $2\.31  |
| Fuel gallons                                   | Fuel gallons                                   | Fuel gallons                                   |                             862  |                                  |                                  |                                  |                                  |                                  |                                  |                                  |                             839  |                                  |                                  |                                  |                                  |

Raw fuel expense per gallon decreased 6% due to lower West Coast jet fuel prices\. West Coast jet fuel prices are impacted by both the price of crude oil, as well as the refining costs associated with the conversion of crude oil to jet fuel\. The decrease in raw fuel price per gallon during 2019 was driven by a 12% decrease in crude oil prices, partially offset by a 9% increase in refining margins, as compared to the prior year\. Fuel gallons consumed increased by 23 million, or 3%, consistent with the increase in capacity of 2%, and a 3% increase in block hours\.

We also evaluate economic fuel expense, which we define as raw fuel expense adjusted for the cash we receive from 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 have on our business because it most closely approximates the net cash outflow associated with purchasing 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\.

Losses recognized for hedges that settled during the year were $16 million in 2019, compared to gains of $24 million in 2018\. These amounts represent cash paid for premium expense, offset by any cash received from those hedges at settlement\.

As of the date of this filing, we expect our economic fuel price per gallon to increase approximately 4% in the first quarter of 2020, as compared to the first quarter of 2019 due to increasing crude oil prices, offset by a slight decrease in refining margins\. As both oil prices and refining margins are volatile, we are unable to forecast the full\-year cost with any certainty\.

Wages and Benefits

Wages and benefits increased during 2019 by $180 million, or 8%, compared to 2018\. The primary components of wages and benefits are shown in the following table:

|                                  |                                  |                                  |                                  |                                  |                                  |                                  |                                  |                                  |                                  |                                  |                                  |                                  |  |  |  |  |  |  |  |  |  |  |  |  |
|:-------------------------------- |:-------------------------------- |:-------------------------------- | --------------------------------:|:--------------------------------:|:--------------------------------:|:--------------------------------:| --------------------------------:|:--------------------------------:|:--------------------------------:|:--------------------------------:| --------------------------------:| --------------------------------:|:- |:- |:- |:- |:- |:- |:- |:- |:- |:- |:- |:- |
|                                  |                                  |                                  | Twelve Months Ended December 31, | Twelve Months Ended December 31, | Twelve Months Ended December 31, | Twelve Months Ended December 31, | Twelve Months Ended December 31, | Twelve Months Ended December 31, | Twelve Months Ended December 31, | Twelve Months Ended December 31, | Twelve Months Ended December 31, | Twelve Months Ended December 31, |  |  |  |  |  |  |  |  |  |  |  |  |
| *(in millions)*                  | *(in millions)*                  | *(in millions)*                  |                             2019 |                                  |                                  |                                  |                             2018 |                                  |                                  |                                  |                         % Change |                         % Change |
| Wages                            | Wages                            | Wages                            |                          $1,760  |                                  |                                  |                                  |                          $1,658  |                                  |                                  |                                  |                           6\.2 % |                           6\.2 % |
| Pension \- Defined benefit plans | Pension \- Defined benefit plans | Pension \- Defined benefit plans |                              42  |                                  |                                  |                                  |                              48  |                                  |                                  |                                  |                         (12\.5)% |                         (12\.5)% |
| Defined contribution plans       | Defined contribution plans       | Defined contribution plans       |                             132  |                                  |                                  |                                  |                             126  |                                  |                                  |                                  |                           4\.8 % |                           4\.8 % |
| Medical and other benefits       | Medical and other benefits       | Medical and other benefits       |                             311  |                                  |                                  |                                  |                             245  |                                  |                                  |                                  |                          26\.9 % |                          26\.9 % |
| Payroll taxes                    | Payroll taxes                    | Payroll taxes                    |                             125  |                                  |                                  |                                  |                             113  |                                  |                                  |                                  |                          10\.6 % |                          10\.6 % |
| Total wages and benefits         | Total wages and benefits         | Total wages and benefits         |                          $2,370  |                                  |                                  |                                  |                          $2,190  |                                  |                                  |                                  |                           8\.2 % |                           8\.2 % |

Wages and payroll taxes increased by a combined $114 million on a 2\.2% increase in FTEs\. The increase in FTEs is attributable to the growth in our business\. Additionally, the increase in wages is driven by the recognition of approximately $24 million in one\-time costs following the ratification of the AMFA and IAM contracts in the third quarter, as well as the impact of increased wage rates for our labor groups as compared to the prior\-year period\.

38


Annual Report of ALASKA AIR GROUP, INC\. for year 2017

**RESULTS****OF OPERATIONS**

**ADJUSTED (NON\-GAAP) RESULTS AND****PER\-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 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 incentive plan, which covers the majority of Air Group employees\. |

|   |                                                                                |
| - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | 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\. |

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
| • | Although we disclose our passenger 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\.

**2017** **COMPARED WITH** **2016**

Our consolidated net income for 2017 was $1 billion, or $8\.35 per diluted share, compared to net income of $814 million, or $6\.54 per diluted share, in 2016\. As the acquisition of Virgin America closed on December 14, 2016, our 2016 financial results include Virgin America for the period of December 14, 2016 through December 31, 2016 and the impact of purchase accounting as of December 14, 2016\. Refer to the "Critical Accounting Estimates" section for further information regarding purchase accounting\.

Excluding the impact of merger\-related costs, mark\-to\-market fuel hedge adjustments and a special tax benefit as a result of tax reform, our adjusted consolidated net income for 2017 was $823 million, or $6\.64 per diluted share, compared to an adjusted consolidated net income of $911 million, or $7\.32 per share, in 2016\. The following table reconciles our adjusted net income and earnings per diluted share (EPS) during the full year 2017 and 2016 to amounts as reported in accordance with GAAP\.

 36


Annual Report of American Airlines Group Inc\. for year 2017

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC\.**

*Letters of Credit and Other*

American provides financial assurance, such as letters of credit, surety bonds or restricted cash and investments, to primarily support projected workers’ compensation obligations and airport commitments\. As of December 31, 2017, American had $448 million of letters of credit and surety bonds securing various obligations, of which $88 million is collateralized with its restricted cash\. The letters of credit and surety bonds that are subject to expiration will expire on various dates through 2022\.

***(e) Legal Proceedings***

*Chapter 11 Cases*\. On November 29, 2011, AMR, American, and certain of AMR’s other direct and indirect domestic subsidiaries (the Debtors) filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York (the Bankruptcy Court)\. On October 21, 2013, the Bankruptcy Court entered an order approving and confirming the Debtors’ fourth amended joint plan of reorganization (as amended, the Plan)\. On the Effective Date, December 9, 2013, the Debtors consummated their reorganization pursuant to the Plan and completed the Merger\.

Pursuant to rulings of the Bankruptcy Court, the Plan established the Disputed Claims Reserve to hold shares of AAG common stock reserved for issuance to disputed claimholders at the Effective Date that ultimately become holders of allowed claims\. As of December 31, 2017, there were approximately 24\.5 million shares of AAG common stock remaining in the Disputed Claims Reserve\. As disputed claims are resolved, the claimants will receive distributions of shares from the Disputed Claims Reserve on the same basis as if such distributions had been made on or about the Effective Date\. However, American is not required to distribute additional shares above the limits contemplated by the Plan, even if the shares remaining for distribution are not sufficient to fully pay any additional allowed unsecured claims\. To the extent that any of the reserved shares remain undistributed upon resolution of all remaining disputed claims, such shares will not be returned to American but rather will be distributed to former AMR stockholders\.

There is also pending in the Bankruptcy Court an adversary proceeding relating to an action brought by American to seek a determination that certain non\-pension, postemployment benefits are not vested benefits and thus may be modified or terminated without liability to American\. On April 18, 2014, the Bankruptcy Court granted American’s motion for summary judgment with respect to certain non\-union employees, concluding that their benefits were not vested and could be terminated\. The summary judgment motion was denied with respect to all other retirees\. The Bankruptcy Court has not yet scheduled a trial on the merits concerning whether those retirees’ benefits are vested, and American cannot predict whether it will receive relief from obligations to provide benefits to any of those retirees\. American’s financial statements presently reflect these retirement programs without giving effect to any modification or termination of benefits that may ultimately be implemented based upon the outcome of this proceeding\.

*DOJ Antitrust Civil Investigative Demand*\. In June 2015, American received a Civil Investigative Demand (CID) from the United States Department of Justice (DOJ) as part of an investigation into whether there have been illegal agreements or coordination of air passenger capacity\. The CID seeks documents and other information from American, and other airlines have announced that they have received similar requests\. American is cooperating fully with the DOJ investigation\.

*Private Party Antitrust Action*\. Subsequent to announcement of the delivery of CIDs by the DOJ, American, along with Delta Air Lines, Inc\., Southwest Airlines Co\., United Airlines, Inc\. and, in the case of litigation filed in Canada, Air Canada, have been named as defendants in approximately 100 putative class action lawsuits alleging unlawful agreements with respect to air passenger capacity, although Southwest has entered into a settlement with the plaintiffs that is pending approval by the court\. The U\.S\. lawsuits have been consolidated in the Federal District Court for the District of Columbia\. On October 28, 2016, the Court denied a motion by the airline defendants to dismiss all claims in the class actions\. These lawsuits are in their relatively early stages and American intends to defend these matters vigorously\.

*Private Party Antitrust Action Related to the Merger*\. On July 2, 2013, a lawsuit captioned Carolyn Fjord, et al\., v\. US Airways Group, Inc\., et al\., was filed in the United States District Court for the Northern District of California\. The complaint named as defendants US Airways Group and US Airways, Inc\., alleged that the effect of the Merger may be to create a monopoly in violation of Section 7 of the Clayton Antitrust Act, and sought injunctive relief and/or divestiture\. On August 6, 2013, the plaintiffs re\-filed their complaint in the Bankruptcy Court, adding AMR and American as defendants\. On November 27, 2013, the Bankruptcy Court denied plaintiffs’ motion to preliminarily enjoin the Merger\. On May 12, 2017, defendants filed a motion for summary judgment\. On June 23, 2017, plaintiffs filed an opposition to

163


Annual Report of American Airlines Group Inc\. for year 2018

This table presents our total passenger revenue and the year\-over\-year change in certain operating statistics:

|                   |                                  |                                                                |                                                                |                                                                |                                                                |                                                                |                                                                |
| ----------------- | -------------------------------- | -------------------------------------------------------------- | -------------------------------------------------------------- | -------------------------------------------------------------- | -------------------------------------------------------------- | -------------------------------------------------------------- | -------------------------------------------------------------- |
|                   |                                  | **Increase (Decrease)
vs\. Year Ended December 31, 2017** | **Increase (Decrease)
vs\. Year Ended December 31, 2017** | **Increase (Decrease)
vs\. Year Ended December 31, 2017** | **Increase (Decrease)
vs\. Year Ended December 31, 2017** | **Increase (Decrease)
vs\. Year Ended December 31, 2017** | **Increase (Decrease)
vs\. Year Ended December 31, 2017** |
|                   | **Year Ended December 31, 2018** | **Passenger**

**Revenue**                               | **RPMs**                                                       | **ASMs**                                                       | **Load**

**Factor**                                     | **Passenger**

**Yield**                                 | **PRASM**                                                      |
|                   | **(In millions)**                |                                                                |                                                                |                                                                |                                                                |                                                                |                                                                |
| Passenger revenue | $40,676                          | 3\.9%                                                          | 2\.1%                                                          | 2\.0%                                                          | 0\.1pts                                                        | 1\.8%                                                          | 1\.9%                                                          |

Passenger revenue increased $1\.5 billion, or 3\.9%, in 2018 from 2017 due to a 2\.1%year\-over\-year increase in RPMs and a1\.8% increase in yields driven by continued strong demand\. Domestic yield increased 0\.9% and international yields increased 4\.2%, led by a 5\.3% increase in yield in the Atlantic market\.

Cargo revenue increased $123 million, or 13\.8%, from 2017 driven primarily by increases in domestic and international freight yields and international freight volume\.

Other revenue increased $251 million, or 9\.7%, in 2018 from 2017 primarily driven by higher revenue associated with our loyalty program\. In 2018 and 2017, loyalty revenue included in other revenue was $2\.4 billion and $2\.1 billion, respectively\.

Total operating revenues in 2018increased $1\.9 billion, or 4\.5%, from 2017 driven principally by a 3\.9% increase in passenger revenue as described above\. Our TRASM was 15\.79 cents in 2018, a 2\.4% increase as compared to 15\.42 cents in 2017\.

*Operating Expenses*

|                                    |                                              |                                              |                                              |                                              |
| ---------------------------------- | -------------------------------------------- | -------------------------------------------- | -------------------------------------------- | -------------------------------------------- |
|                                    | **Year Ended December 31,**                  | **Year Ended December 31,**                  | **Increase
(Decrease)**                 | **Percent
Increase
(Decrease)**    |
|                                    | **2018**                                     | **2017**                                     | **Increase
(Decrease)**                 | **Percent
Increase
(Decrease)**    |
|                                    | **(In millions, except percentage changes)** | **(In millions, except percentage changes)** | **(In millions, except percentage changes)** | **(In millions, except percentage changes)** |
| Aircraft fuel and related taxes    | $8,053                                       | $6,128                                       | $1,925                                       | 31\.4                                        |
| Salaries, wages and benefits       | 12,251                                       | 11,954                                       | 297                                          | 2\.5                                         |
| Maintenance, materials and repairs | 2,050                                        | 1,959                                        | 91                                           | 4\.7                                         |
| Other rent and landing fees        | 1,900                                        | 1,806                                        | 94                                           | 5\.2                                         |
| Aircraft rent                      | 1,264                                        | 1,197                                        | 67                                           | 5\.6                                         |
| Selling expenses                   | 1,520                                        | 1,477                                        | 43                                           | 2\.9                                         |
| Depreciation and amortization      | 1,839                                        | 1,702                                        | 137                                          | 8\.1                                         |
| Special items, net                 | 787                                          | 712                                          | 75                                           | 10\.5                                        |
| Other                              | 5,088                                        | 4,910                                        | 178                                          | 3\.6                                         |
| Regional expenses:                 |                                              |                                              |                                              |                                              |
| Aircraft fuel and related taxes    | 1,843                                        | 1,382                                        | 461                                          | 33\.4                                        |
| Other                              | 5,290                                        | 5,164                                        | 126                                          | 2\.5                                         |
| Total operating expenses           | $41,885                                      | $38,391                                      | $3,494                                       | 9\.1                                         |

Total operating expenses increased $3\.5 billion, or 9\.1%, in 2018 from 2017\. The increase in operating expenses was primarily driven by an increase in fuel costs\. See detailed explanations below relating to changes in total CASM\.

*Total CASM*

We sometimes use financial measures that are derived from the consolidated financial statements but that are not presented in accordance with GAAP to understand and evaluate our current operating performance to allow for period\-to\-period comparisons\. We believe these non\-GAAP financial measures may also provide useful information to investors and others\. These non\-GAAP measures may not be comparable to similarly titled non\-GAAP measures of other companies, and should be considered in addition to, and not as a substitute for or superior to, any measure of performance, cash flow or liquidity prepared in accordance with GAAP\. We are providing a reconciliation of reported non\-GAAP financial measures to their comparable financial measures on a GAAP basis\.

52


Annual Report of Southwest Airlines Co\. for year 2019

table provides the fair values of fuel derivatives, amounts posted as collateral, and applicable collateral posting threshold amounts as of  December 31, 2019 , at which such postings are triggered:

|                                                                                |                           |                       |                               |                                |                       |                       |           |
| -------------------------------------------------------------------------------------------------------------------- | ------------------------- | --------------------- | ----------------------------- | ------------------------------ | --------------------- | --------------------- | --------- |
|                                                                                | **Counterparty (CP)**     | **Counterparty (CP)** | **Counterparty (CP)**         | **Counterparty (CP)**          | **Counterparty (CP)** | **Counterparty (CP)** |           |
| (in millions)                                                                                | **A**                     | **B**                 | **C**                         | **D**                          | **E**                 | **Other** (a)         | **Total** |
| Fair value of fuel derivatives                                                                                | $22                       | $16                   | $36                           | $12                            | $8                    | $16                   | $110      |
| Cash collateral held from CP                                                                                | 25                        | —                     | —                             | —                              | —                     | —                     | 25        |
| Aircraft collateral pledged to CP                                                                                | —                         | —                     | —                             | —                              | —                     | —                     | —         |
| Letters of credit (LC)                                                                                | —                         | —                     | —                             | —                              | —                     | —                     | —         |
| Option to substitute LC for aircraft                                                                                | (200) to (600)(b)         | N/A                   | (150) to (550)(c)             | (150) to (550)(c)              | N/A                   |                       |           |
| Option to substitute LC for cash                                                                                | N/A                       | N/A                   | (75) to (150) or >(550)(c) | (125) to (150) or >(550)(d) | (d)                   |                       |           |
| **If credit rating is investment**

**grade, fair value of fuel**

**derivative level at which:**      |                           |                       |                               |                                |                       |                       |           |
| Cash is provided to CP                                                                                | >(100)                 | >(50)              | (75) to (150) or >(550)(e) | (125) to (150) or >(550)(e) | >(40)              |                       |           |
| Cash is received from CP                                                                                | >0(e)                  | >150(e)            | >250(e)                    | >125(e)                     | >100(e)            |                       |           |
| Aircraft or cash can be pledged to

 CP as collateral                                                         | (200) to (600)(f)         | N/A                   | (150) to (550)(c)             | (150) to (550)(c)              | N/A                   |                       |           |
| **If credit rating is non\-investment**

**grade, fair value of fuel derivative**

**level at which:** |                           |                       |                               |                                |                       |                       |           |
| Cash is provided to CP                                                                                | (0) to (200) or >(600) | (g)                   | (0) to (150) or >(550)     | (0) to (150) or >(550)      | (g)                   |                       |           |
| Cash is received from CP                                                                                | (g)                       | (g)                   | (g)                           | (g)                            | (g)                   |                       |           |
| Aircraft or cash can be pledged to

 CP as collateral                                                         | (200) to (600)            | N/A                   | (150) to (550)                | (150) to (550)                 | N/A                   |                       |           |

(a) Individual counterparties with fair value of fuel derivatives <  $7 million \.

(b) The Company has the option of providing letters of credit in addition to aircraft collateral if the appraised value of the aircraft does not meet the collateral requirements\.

(c) The Company has the option of providing cash, letters of credit, or pledging aircraft as collateral\.

(d) The Company has the option to substitute letters of credit for   100 percent  of cash collateral requirement\.

(e) Thresholds may vary based on changes in credit ratings within investment grade\.

(f) The Company has the option of providing cash or pledging aircraft as collateral\.

(g) Cash collateral is provided at   100 percent  of fair value of fuel derivative contracts\.

11 \. FAIR VALUE MEASUREMENTS

Accounting standards pertaining to fair value measurements establish a three\-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value\. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions\.

As of  December 31, 2019 , the Company held certain items that are required to be measured at fair value on a recurring basis\. These included cash equivalents, short\-term investments (primarily treasury bills and certificates of deposit), interest rate derivative contracts, fuel derivative contracts, and available\-for\-sale securities\. The majority of the Company’s short\-term investments consist of instruments classified as Level 1\. However, the Company has certificates of deposit, commercial paper, and time deposits that are classified as Level 2, due to the fact that the fair value for

98


Annual Report of American Airlines Group Inc\. for year 2017

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC\.**

*Letters of Credit and Other*

We provide financial assurance, such as letters of credit, surety bonds or restricted cash and investments, to primarily support projected workers’ compensation obligations and airport commitments\. As of December 31, 2017, we had $448 million of letters of credit and surety bonds securing various obligations, of which $88 million is collateralized with our restricted cash\. The letters of credit and surety bonds that are subject to expiration will expire on various dates through 2022\.

***(e) Legal Proceedings***

*Chapter 11 Cases*\. On November 29, 2011, AMR, American, and certain of AMR’s other direct and indirect domestic subsidiaries (the Debtors) filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York (the Bankruptcy Court)\. On October 21, 2013, the Bankruptcy Court entered an order approving and confirming the Debtors’ fourth amended joint plan of reorganization (as amended, the Plan)\. On the Effective Date, December 9, 2013, the Debtors consummated their reorganization pursuant to the Plan and completed the Merger\.

Pursuant to rulings of the Bankruptcy Court, the Plan established the Disputed Claims Reserve to hold shares of AAG common stock reserved for issuance to disputed claimholders at the Effective Date that ultimately become holders of allowed claims\. As of December 31, 2017, there were approximately 24\.5 million shares of AAG common stock remaining in the Disputed Claims Reserve\. As disputed claims are resolved, the claimants will receive distributions of shares from the Disputed Claims Reserve on the same basis as if such distributions had been made on or about the Effective Date\. However, we are not required to distribute additional shares above the limits contemplated by the Plan, even if the shares remaining for distribution are not sufficient to fully pay any additional allowed unsecured claims\. To the extent that any of the reserved shares remain undistributed upon resolution of all remaining disputed claims, such shares will not be returned to us but rather will be distributed to former AMR stockholders\.

There is also pending in the Bankruptcy Court an adversary proceeding relating to an action brought by American to seek a determination that certain non\-pension, postemployment benefits are not vested benefits and thus may be modified or terminated without liability to American\. On April 18, 2014, the Bankruptcy Court granted American’s motion for summary judgment with respect to certain non\-union employees, concluding that their benefits were not vested and could be terminated\. The summary judgment motion was denied with respect to all other retirees\. The Bankruptcy Court has not yet scheduled a trial on the merits concerning whether those retirees’ benefits are vested, and American cannot predict whether it will receive relief from obligations to provide benefits to any of those retirees\. Our financial statements presently reflect these retirement programs without giving effect to any modification or termination of benefits that may ultimately be implemented based upon the outcome of this proceeding\.

*DOJ Antitrust Civil Investigative Demand*\. In June 2015, we received a Civil Investigative Demand (CID) from the United States Department of Justice (DOJ) as part of an investigation into whether there have been illegal agreements or coordination of air passenger capacity\. The CID seeks documents and other information from us, and other airlines have announced that they have received similar requests\. We are cooperating fully with the DOJ investigation\.

*Private Party Antitrust Action*\. Subsequent to announcement of the delivery of CIDs by the DOJ, we, along with Delta Air Lines, Inc\., Southwest Airlines Co\., United Airlines, Inc\. and, in the case of litigation filed in Canada, Air Canada, have been named as defendants in approximately 100 putative class action lawsuits alleging unlawful agreements with respect to air passenger capacity, although Southwest has entered into a settlement with the plaintiffs that is pending approval by the court\. The U\.S\. lawsuits have been consolidated in the Federal District Court for the District of Columbia\. On October 28, 2016, the Court denied a motion by the airline defendants to dismiss all claims in the class actions\. These lawsuits are in their relatively early stages and we intend to defend these matters vigorously\.

*Private Party Antitrust Action Related to the Merger*\. On July 2, 2013, a lawsuit captioned Carolyn Fjord, et al\., v\. US Airways Group, Inc\., et al\., was filed in the United States District Court for the Northern District of California\. The complaint named as defendants US Airways Group and US Airways, Inc\., alleged that the effect of the Merger may be to create a monopoly in violation of Section 7 of the Clayton Antitrust Act, and sought injunctive relief and/or divestiture\. On August 6, 2013, the plaintiffs re\-filed their complaint in the Bankruptcy Court, adding AMR and American as defendants\. On November 27, 2013, the Bankruptcy Court denied plaintiffs’ motion to preliminarily enjoin the Merger\. On May 12, 2017, defendants filed a motion for summary judgment\. On June 23, 2017, plaintiffs filed an opposition to defendants’ motion and cross\-motion for summary judgment\. Briefing of the parties’ respective motions concluded on

118


Annual Report of ALASKA AIR GROUP, INC\. for year 2017

Officer of both entities in 2014\. In December 2016, he was named Chief Financial Officer of Virgin America Inc\. He is a member of Air Group's Management Executive Committee\.

*Mr\. Harrison* joined Alaska Airlines in 2003 as the Managing Director of Internal Audit and was elected Vice President of Planning and Revenue Management in 2008\. He was elected Senior Vice President of Planning and Revenue Management in 2014\. He was elected Executive Vice President and Chief Revenue Officer in February 2015 and named Executive Vice President and Chief Commercial Officer in August 2015\. He is a member of Air Group's Management Executive Committee\.

*Mr\. Campbell* resigned as President and CEO of Horizon Air Industries, Inc\. effective January 5, 2018\. He joined Horizon Air in 2014 as President and Chief Operating Officer and was named President and Chief Executive Officer in May 2016\. Prior to joining Horizon Air, Mr\. Campbell served more than 25 years in maintenance and flight operations\. He was a member of Air Group's Management Executive Committee\.

*Mr\. Levine* was elected Vice President Legal and General Counsel of Alaska Air Group and Alaska Airlines in January 2016 and is a member of Air Group’s Management Executive Committee\. He was elected Corporate Secretary of Alaska Air Group and Alaska Airlines in August 2017\. Mr\. Levine joined Alaska Airlines in February 2006 as a Senior Attorney\. He also served as Associate General Counsel and Managing Director Commercial Law and General Litigation from July 2009 to February 2011 and, subsequently, as Deputy General Counsel and Managing Director of Legal at Alaska Airlines from February 2011 to January 2016\. He was appointed Assistant Corporate Secretary of Horizon Air in August 2017 and Virgin America in November 2017\.

*Mr\. Beck* was elected President and CEO of Horizon Air effective January 15, 2018 and is a member of Air Group’s Management Executive Committee\. Mr\. Beck previously served as Vice President, Flight Operations at Alaska Airlines, Inc\. until retiring in June 2015\. Since then, he has provided consulting services to Alaska Airlines, Inc\. in connection with the integration to a single operating certificate with Virgin America Inc\.

*Mr\. Hunt* was elected President and Chief Operating Officer of Virgin America Inc\. in December 2016, effective with the merger of Alaska Airlines, Inc\. and Virgin America Inc\. He became a member of Air Group’s Management Executive Committee in January 2017\. Mr\. Hunt previously served as Senior Vice President and Chief Financial Officer at Virgin America (2011 \- 2016)\. Prior to joining Virgin America, Mr\. Hunt was Vice President and CFO of Pinnacle Airlines Corp\. (2004\-2011)\.

*Mr\. Tackett* was elected Senior Vice President of Revenue and E\-commerce in August 2017 and became a member of Air Group’s Management Executive Committee at that time\. Mr\. Tackett previously served in a number of capacities since joining Alaska Airlines in 2000, including Managing Director Financial Planning and Analysis, (2008\-2010), Vice President Labor Relations (2010\-2015) and Vice President Revenue Management in 2016\.

*Ms\. Schneider* was elected Vice President of People at Alaska Airlines in August 2017 and became a member of Air Group’s Management Executive Committee at that time\. Ms\. Schneider was previously Vice President of Inflight Services at Alaska (2011\-2017), later also taking responsibility for Call Centers at Alaska (February 2017)\. She began her career at Alaska as Manager of Financial Accounting in 1989\. Since that time, she has held a number of positions, including Senior Vice President of People and Customer Services at Horizon Air Industries (2009\-2011)\.

*Ms\. Birkett Rakow* was elected Vice President of External Relations at Alaska Airlines in September 2017 and became a member of Air Group’s Management Executive Committee at that time\. She was previously Vice President of Public Affairs, Communications and Brand Management for Kaiser Permanente (2017)\. From 2006\-2017, Ms\. Birkett Rakow held a number of positions at Group Health Cooperative, including Executive Vice President, Marketing and Public Affairs (2014\-2017), Vice President Marketing and Public Affairs (2014) and Vice President Public Affairs (2013\-2014)\. From 2003\-2006, Ms\. Birkett Rakow was a member of the United States Senate Finance Committee as its Health Policy Advisor\.

**REGULATION**

**GENERAL**

The airline industry is highly regulated, most notably by the federal government\. The Department of Transportation (DOT), the Federal Aviation Administration (FAA) and the Transportation Security Administration (TSA) exercise significant regulatory authority over air carriers\.

 17


Annual Report of DELTA AIR LINES, INC\.  for year 2019

We defer the amount for award travel obligation as part of loyalty program deferred revenue and recognize loyalty travel awards in passenger revenue as the miles are used for travel\. Revenue allocated to services performed in conjunction with a passenger’s flight, such as baggage fee waivers, is recognized as travel\-related services in passenger revenue when the related service is performed\. Revenue allocated to access Delta Sky Club lounges is recognized as miscellaneous in other revenue as access is provided\. Revenue allocated to the remaining performance obligations, primarily brand value, is recorded as loyalty program in other revenue as miles are delivered\.

Current Activity of the Loyalty Program\.  Miles are combined in one homogeneous pool and are not separately identifiable\. As such, the revenue is comprised of miles that were part of the loyalty program deferred revenue balance at the beginning of the period as well as miles that were issued during the period\.

The table below presents the activity of the current and noncurrent loyalty program liability, and includes miles earned through travel and miles sold to participating companies, which are primarily through marketing agreements\.

|                            |                            |                            |         |         |
|:-------------------------- |:-------------------------- |:-------------------------- | -------:| -------:|
| (in millions)              | (in millions)              | (in millions)              |    2019 |    2018 |
| Balance at January 1       | Balance at January 1       | Balance at January 1       | $ 6,641 | $ 6,321 |
| Miles earned               | Miles earned               | Miles earned               |   3,156 |   3,142 |
| Travel miles redeemed      | Travel miles redeemed      | Travel miles redeemed      | (2,900) | (2,651) |
| Non\-travel miles redeemed | Non\-travel miles redeemed | Non\-travel miles redeemed |   (169) |   (171) |
| Balance at December 31     | Balance at December 31     | Balance at December 31     | $ 6,728 | $ 6,641 |

The timing of mile redemptions can vary widely; however, the majority of new miles are redeemed within two years\.

Revenue by Geographic Region

Operating revenue for the airline segment is recognized in a specific geographic region based on the origin, flight path and destination of each flight segment\. The majority of the revenues of the refinery, consisting of fuel sales to the airline, have been eliminated in the Consolidated Financial Statements\. The remaining operating revenue for the refinery segment is included in the domestic region\. Our passenger and operating revenue by geographic region is summarized in the following table:

|               |               |               |                         |                         |                         |  |  |  |          |          |                         |                         |                         |                         |                         |                         |                         |  |  |  |  |  |  |
|:------------- |:------------- |:------------- | -----------------------:| -----------------------:| -----------------------:|:- |:- |:- | --------:| --------:| -----------------------:|:-----------------------:|:-----------------------:|:-----------------------:|:-----------------------:|:-----------------------:|:-----------------------:|:- |:- |:- |:- |:- |:- |
|               |               |               |       Passenger Revenue |       Passenger Revenue |       Passenger Revenue |  |  |  |          |          |       Operating Revenue |    Operating Revenue    |    Operating Revenue    |    Operating Revenue    |    Operating Revenue    |    Operating Revenue    |    Operating Revenue    |  |  |  |  |  |  |
|               |               |               | Year Ended December 31, | Year Ended December 31, | Year Ended December 31, |  |  |  |          |          | Year Ended December 31, | Year Ended December 31, | Year Ended December 31, | Year Ended December 31, | Year Ended December 31, | Year Ended December 31, | Year Ended December 31, |  |  |  |  |  |  |
| (in millions) | (in millions) | (in millions) |                    2019 |                    2018 |                    2017 |  |  |  |     2019 |     2018 |                    2017 |
| Domestic      | Domestic      | Domestic      |                $ 30,367 |                $ 28,159 |                $ 26,079 |  |  |  | $ 33,284 | $ 31,233 |                $ 28,850 |
| Atlantic      | Atlantic      | Atlantic      |                   6,381 |                   6,165 |                   5,537 |  |  |  |    7,363 |    7,042 |                   6,297 |
| Latin America | Latin America | Latin America |                   3,002 |                   2,888 |                   2,862 |  |  |  |    3,343 |    3,181 |                   3,133 |
| Pacific       | Pacific       | Pacific       |                   2,527 |                   2,543 |                   2,469 |  |  |  |    3,017 |    2,982 |                   2,858 |
| Total         | Total         | Total         |                $ 42,277 |                $ 39,755 |                $ 36,947 |  |  |  | $ 47,007 | $ 44,438 |                $ 41,138 |

Cargo Revenue

Cargo revenue is recognized when we provide the transportation\.

Other Revenue

|                                   |                                   |                                   |                         |                         |                         |  |  |  |  |  |  |
|:--------------------------------- |:--------------------------------- |:--------------------------------- | -----------------------:| -----------------------:| -----------------------:|:- |:- |:- |:- |:- |:- |
|                                   |                                   |                                   | Year Ended December 31, | Year Ended December 31, | Year Ended December 31, |  |  |  |  |  |  |
| (in millions)                     | (in millions)                     | (in millions)                     |                    2019 |                    2018 |                    2017 |
| Loyalty program                   | Loyalty program                   | Loyalty program                   |                 $ 1,962 |                 $ 1,459 |                 $ 1,269 |
| Ancillary businesses and refinery | Ancillary businesses and refinery | Ancillary businesses and refinery |                   1,297 |                   1,801 |                   1,591 |
| Miscellaneous                     | Miscellaneous                     | Miscellaneous                     |                     718 |                     558 |                     587 |
| Total other revenue               | Total other revenue               | Total other revenue               |                 $ 3,977 |                 $ 3,818 |                 $ 3,447 |

Loyalty Program\.  Loyalty program revenues relate primarily to brand usage by third parties and include the redemption of miles for non\-travel awards\. These revenues are included within the total cash sales from marketing agreements, discussed above\.

65


Annual Report of American Airlines Group Inc\. for year 2017

|       |                                                                                |
| ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(h)^ | Includes minimum pension contributions based on actuarially determined estimates and is based on estimated payments through 2027\. The total expected pension contribution of $467 million in 2018 assumes a supplemental contribution of $425 million in addition to the $42 million minimum required contribution\. |

|       |                                                                                |
| ----- | --------------------------------------------------------------------------------------------------------------- |
| ^(i)^ | Includes purchase commitments for jet fuel, facility construction projects and information technology support\. |

**Capital Raising Activity and Other Possible Actions**

In light of our significant financial commitments related to, among other things, new aircraft, the servicing and amortization of existing debt and equipment leasing arrangements, and future pension funding obligations, we and our subsidiaries will regularly consider, and enter into negotiations related to, capital raising activity, which may include the entry into leasing transactions and future issuances of secured or unsecured debt obligations or additional equity securities in public or private offerings or otherwise\. The cash available from operations and these sources, however, may not be sufficient to cover cash contractual obligations because economic factors may reduce the amount of cash generated by operations or increase costs\. For instance, an economic downturn or general global instability caused by military actions, terrorism, disease outbreaks or natural disasters could reduce the demand for air travel, which would reduce the amount of cash generated by operations\. An increase in costs, either due to an increase in borrowing costs caused by a reduction in credit ratings or a general increase in interest rates, or due to an increase in the cost of fuel, maintenance, or aircraft, aircraft engines or parts, could decrease the amount of cash available to cover cash contractual obligations\. Moreover, certain of our financing arrangements contain significant minimum cash balance requirements\. As a result, we cannot use all of our available cash to fund operations, capital expenditures and cash obligations without violating these requirements\. See Note 5 to AAG’s Consolidated Financial Statements in Part II, Item 8A and Note 3 to American’s Consolidated Financial Statements in Part II, Item 8B for information regarding our financing arrangements\.

In the past, we have from time to time refinanced, redeemed or repurchased our debt and taken other steps to reduce or otherwise manage the aggregate amount and cost of our debt or lease obligations or otherwise improve our balance sheet\. Going forward, depending on market conditions, our cash position and other considerations, we may continue to take such actions\.

Our Board of Directors has from time to time authorized programs to repurchase shares of our common stock, one of which is currently in effect, and may authorize additional share repurchase programs in the future\.

**OTHER INFORMATION**

**Basis of Presentation**

See Note 1 to AAG’s Consolidated Financial Statements in Part II, Item 8A and Note 1 to American’s Consolidated Financial Statements in Part II, Item 8B for information regarding the basis of presentation\.

**Critical Accounting Policies and Estimates**

The preparation of financial statements in accordance with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities at the date of the financial statements\. We believe our estimates and assumptions are reasonable; however, actual results could differ from those estimates\. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties and could potentially result in materially different results under different assumptions and conditions\. We have identified the following critical accounting policies that impact the preparation of our consolidated financial statements\. See the “Basis of Presentation and Summary of Significant Accounting Policies” included in Note 1 to AAG’s Consolidated Financial Statements in Part II, Item 8A and Note 1 to American’s Consolidated Financial Statements in Part II, Item 8B for additional discussion of the application of these estimates and other accounting policies\.

***Passenger Revenue***

Passenger revenue is recognized when transportation is provided\. Ticket sales for transportation that has not yet been provided are initially deferred and recorded as air traffic liability on the consolidated balance sheets\. The air traffic liability represents tickets sold for future travel dates and estimated future refunds and exchanges of tickets sold for past travel dates\. The balance in the air traffic liability fluctuates throughout the year based on seasonal travel patterns\. Our air traffic liability was $4\.0 billion and $3\.9 billion as of December 31, 2017 and 2016, respectively\.

The majority of tickets sold are nonrefundable\. A small percentage of tickets, some of which are partially used tickets, expire unused\. Due to complex pricing structures, refund and exchange policies, and interline agreements with other airlines, certain amounts are recognized in passenger revenue using estimates regarding both the timing of the revenue recognition

72


Annual Report of Southwest Airlines Co\. for year 2019

|                      |                               |                                                 |
| -------------------- | ----------------------------- | ----------------------------------------------- |
|                      | **Maximum fuel hedged as of** |                                                 |
|                      | **December 31, 2019**         | **Derivative underlying commodity type as of**  |
| **Period (by year)** | **(gallons in millions) (a)** | **December 31, 2019**                           |
| 2020                 | 1,301                         | WTI crude oil, Brent crude oil, and Heating oil |
| 2021                 | 1,169                         | WTI crude and Brent crude oil                   |
| 2022                 | 603                           | WTI crude and Brent crude oil                   |
| Beyond 2022          | 32                            | WTI crude oil                                   |

(a) Due to the types of derivatives utilized by the Company and different price levels of those contracts, these volumes represent the maximum economic hedge in place and may vary significantly as market prices fluctuate\.

Upon proper qualification, the Company accounts for its fuel derivative instruments as cash flow hedges\. All periodic changes in fair value of the derivatives designated as hedges are recorded in AOCI until the underlying jet fuel is consumed\. See  Note 12 \.

The Company's results are subject to the possibility that the derivatives will no longer qualify for hedge accounting, in which case any change in the fair value of derivative instruments since the last reporting period would be recorded in Other (gains) losses, net, in the Consolidated Statement of Income in the period of the change; however, any amounts previously recorded to AOCI would remain there until such time as the original forecasted transaction occurs, at which time these amounts would be reclassified to Fuel and oil expense\. Factors that have and may continue to lead to the loss of hedge accounting include: significant fluctuation in energy prices, significant weather events affecting refinery capacity and the production of refined products, and the volatility of the different types of products the Company uses in hedging\. Increased volatility in these commodity markets for an extended period of time, especially if such volatility were to worsen, could cause the Company to lose hedge accounting altogether for the commodities used in its fuel hedging program, which would create further volatility in the Company’s GAAP financial results\. However, even though derivatives may not qualify for hedge accounting, the Company continues to hold the instruments as management believes derivative instruments continue to afford the Company the opportunity to stabilize jet fuel costs\. When the Company has sold derivative positions in order to effectively "close" or offset a derivative already held as part of its fuel derivative instrument portfolio, any subsequent changes in fair value of those positions are marked to market through earnings\. Likewise, any changes in fair value of those positions that were offset by entering into the sold positions and were de\-designated as hedges are concurrently marked to market through earnings\. However, any changes in value related to hedges that were deferred as part of AOCI while designated as a hedge would remain until the originally forecasted transaction occurs\. In a situation where it becomes probable that a fuel hedged forecasted transaction will not occur, any gains and/or losses that have been recorded to AOCI would be required to be immediately reclassified into earnings\. The Company did not have any such situations occur during  2019 ,  2018 , or  2017 \.

Accounting pronouncements pertaining to derivative instruments and hedging are complex with stringent requirements, including the documentation of a Company hedging strategy, statistical analysis to qualify a commodity for hedge accounting both on a historical and a prospective basis, and strict contemporaneous documentation that is required at the time each hedge is designated by the Company\. This statistical analysis involves utilizing regression analyses that compare changes in the price of jet fuel to changes in the prices of the commodities used for hedging purposes\.

All cash flows associated with purchasing and selling fuel derivatives are classified as Other operating cash flows in the Consolidated Statement of Cash Flows\. The following table presents the location of all assets and liabilities associated with the Company’s derivative instruments within the Consolidated Balance Sheet:

93


Annual Report of Southwest Airlines Co\. for year 2017

|        |                                                                                |
| ------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| 10\.14 | [Southwest Airlines Co\. Amended and Restated 2007 Equity Incentive Plan Form of Notice of Grant and Terms and Conditions for Restricted Stock Unit grants (incorporated by reference to Exhibit 10\.3 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended June 30, 2014 (File No\. 1\-7259))\.](http://www.sec.gov/Archives/edgar/data/92380/000009238014000117/luv-6302014xex103.htm)  (2) |

|           |                                                                                |
| --------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| 10\.15    | [$1,000,000,000 Revolving Credit Facility Agreement among the Company, the Banks party thereto, Barclays Bank PLC, as Syndication Agent, Bank of America, N\.A\., BNP Paribas, Goldman Sachs Bank USA, Morgan Stanley Senior Funding, Inc\., U\.S\. Bank National Association, and Wells Fargo Bank, N\.A\., as Documentation Agents, JPMorgan Chase Bank, N\.A\. and Citibank, N\.A\., as Co\-Administrative Agents, and JPMorgan Chase Bank, N\.A\., as Paying Agent, dated as of August 3, 2016 (incorporated by reference to Exhibit 10\.1 to the Company’s Current Report on Form 8\-K filed August 9, 2016 (File No\. 1\-7259))\.](http://www.sec.gov/Archives/edgar/data/92380/000119312516676282/d223237dex101.htm)                                                                                |
| 10\.16    | [Purchase Agreement No\. 3729 and Aircraft General Terms Agreement, dated December 13, 2011, between The Boeing Company and the Company (incorporated by reference to Exhibit 10\.28 to the Company’s Annual Report on Form 10\-K for the year ended December 31, 2011 (File No\. 1\-7259));](http://www.sec.gov/Archives/edgar/data/92380/000119312512049647/d293991dex1028.htm) [Supplemental Agreement No\. 1 (incorporated by reference to Exhibits 10\.3 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended June 30, 2013 (File No\. 1\-7259));](http://www.sec.gov/Archives/edgar/data/92380/000009238013000097/sa-1topa3729_redacted.htm) [Supplemental Agreement No\. 2 (incorporated by reference to Exhibit 10\.4 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended June 30, 2013 (File No\. 1\-7259));](http://www.sec.gov/Archives/edgar/data/92380/000009238013000097/sa-2topa3792_redacted.htm) [Supplemental Agreement No\. 3 (incorporated by reference to Exhibit 10\.27(a) to the Company’s Annual Report on Form 10\-K for the year ended December 31, 2013 (File No\. 1\-7259));](http://www.sec.gov/Archives/edgar/data/92380/000009238014000010/luv-12312013xex1027a.htm) [Supplemental Agreement No\. 4 (incorporated by reference to Exhibit 10\.18(a) to the Company’s Annual Report on Form 10\-K for the year ended December 31, 2015 (File No\. 1\-7259)); ](http://www.sec.gov/Archives/edgar/data/92380/000009238016000175/luv-12312015xex1018a.htm)[Supplemental Agreement No\. 5 (incorporated by reference to Exhibit 10\.2 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended June 30, 2016 (File No\. 1\-7259))](http://www.sec.gov/Archives/edgar/data/92380/000009238016000252/luv-6302016xex102.htm) ; [Supplemental Agreement No\. 6 (incorporated by reference to Exhibit 10\.2 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended September 30, 2017 (File No\. 1\-7259));](http://www.sec.gov/Archives/edgar/data/92380/000009238017000167/luv-9302017xex102.htm) [Supplemental Agreement No\. 7 (incorporated by reference to Exhibit 10\.3 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended September 30, 2017 (File No\. 1\-7259))](http://www.sec.gov/Archives/edgar/data/92380/000009238017000167/luv-9302017xex103.htm) ; [Supplemental Letter Agreement No\. 6\-1162\-KLK\-0059R3 (incorporated by reference to Exhibit 10\.4 to the Company's Quarterly Report on Form 10\-Q for the quarter ended September 30, 2017 (File No\. 1\-7259))\.](http://www.sec.gov/Archives/edgar/data/92380/000009238017000167/luv-9302017xex104.htm)  (1) |
| 10\.16(a) | [Supplemental Agreement No\. 8 to Purchase Agreement No\. 3729, dated December 13, 2011, between The Boeing Company and the Company\. ](https://www.example.com/luv-12312017xex101.htm) (1)                                                                                |
| 10\.17    | [Southwest Airlines Co\. Senior Executive Short Term Incentive Plan (incorporated by reference to Exhibit 99\.1 to the Company’s Current Report on Form 8\-K filed January 30, 2013 (File No\. 1\-7259))\.](http://www.sec.gov/Archives/edgar/data/92380/000119312513030183/d476691dex991.htm)  (2)                                                                                |
| 10\.18    | [Southwest Airlines Co\. Deferred Compensation Plan for Senior Leadership and Non\-Employee Members of the Southwest Airlines Co\. Board of Directors (as amended and restated, effective as of January 1, 2018) (incorporated by reference to Exhibit 10\.6 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended September 30, 2017 (File No\. 1\-7259))\.](http://www.sec.gov/Archives/edgar/data/92380/000009238017000167/luv-9302017ex106.htm)  (2)

                                                                                |
| 10\.19    | [Southwest Airlines Co\. Amended and Restated 2007 Equity Incentive Plan Form of Notice of Grant and Terms and Conditions for Performance\-Based Restricted Stock Unit grants (incorporated by reference to Exhibit 10\.4 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended June 30, 2014 (File No\. 1\-7259))\. ](http://www.sec.gov/Archives/edgar/data/92380/000009238014000117/luv-6302014xex104.htm) (2)

                                                                                |
| 10\.20    | [Consulting Agreement, dated as of June 30, 2017, by and between Arthur Jefferson Lamb III and Southwest Airlines Co\. (incorporated by reference to Exhibit 10\.1 to the Company's Current Report on Form 8–K filed July 3, 2017 (File No\. 1–7259))\.](http://www.sec.gov/Archives/edgar/data/92380/000119312517220944/d408249dex101.htm)  (2)                                                                                |

121


Annual Report of American Airlines Group Inc\. for year 2017

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC\.**

As of December 31, 2017, AAG had issued guarantees covering approximately $810 million principal amount of American’s special facility revenue bonds (and interest thereon) and $8\.5 billion principal amount of American’s secured debt (and interest thereon), including the Credit Facilities and certain EETC financings\.

***(g) Credit Card Processing Agreements***

We have agreements with companies that process customer credit card transactions for the sale of air travel and other services\. Our agreements allow these processing companies, under certain conditions, to hold an amount of our cash (referred to as a holdback) equal to a portion of advance ticket sales that have been processed by that company, but for which we have not yet provided the air transportation\. Additional holdback requirements in the event of material adverse changes in our financial condition will reduce our liquidity in the form of unrestricted cash by the amount of the holdbacks\. We are not currently required to maintain any holdbacks pursuant to these requirements\.

***(h) Labor Negotiations***

As of December 31, 2017, we employed approximately 126,600 active full\-time equivalent employees, of which 23,500 were employed by our regional operations\. Approximately 85% of employees are covered by collective bargaining agreements with various labor unions\. Negotiations for joint collective bargaining agreements covering our mainline maintenance, fleet service, stock clerks, maintenance control technicians and maintenance training instructors employees as well as for certain employee groups at our wholly\-owned regional subsidiaries are continuing\. There is no assurance that a successful or timely resolution of these labor negotiations will be achieved\.

***(i) Other***

As a result of the terrorist attacks of September 11, 2001 and the subsequent liability protections provided for by the Air Transportation Safety and System Stabilization Act (the Stabilization Act), we recorded a liability for these terrorist attacks claims equal to the related insurance receivable due to us\. The Stabilization Act provides that, notwithstanding any other provision of law, liability for all claims, whether compensatory or punitive, arising from these terrorist attacks, against any air carrier shall not exceed the liability coverage maintained by the air carrier\. As of December 31, 2017, claims relating to this matter have been substantially resolved and the remaining liability and the amount of the offsetting receivable are not material\.

**12\. Supplemental Cash Flow Information**

Supplemental disclosure of cash flow information and non\-cash investing and financing activities are as follows (in millions):

|                                               |                             |                             |                             |
| --------------------------------------------- | --------------------------- | --------------------------- | --------------------------- |
|                                               | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** |
|                                               | **2017**                    | **2016**                    | **2015**                    |
| Non\-cash investing and financing activities: |                             |                             |                             |
| Equity investment                             | $120                        | $—                          | $—                          |
| Settlement of bankruptcy obligations          | 15                          | 3                           | 63                          |
| Capital lease obligations                     | —                           | —                           | 5                           |
| Supplemental information:                     |                             |                             |                             |
| Interest paid, net                            | 1,040                       | 964                         | 873                         |
| Income taxes paid                             | 20                          | 16                          | 20                          |

**13\. Operating Segments and Related Disclosures**

We are managed as a single business unit that provides air transportation for passengers and cargo\. This allows us to benefit from an integrated revenue pricing and route network that includes American and our wholly\-owned and third\-party regional carriers that fly under capacity purchase agreements operating as American Eagle\. The flight equipment of all these carriers is combined to form one fleet that is deployed through a single route scheduling system\. Financial information and annual operational plans and forecasts are prepared and reviewed by the chief operating decision maker at the consolidated level\. When making operational decisions, the chief operating decision maker evaluates flight profitability data, which considers aircraft type and route economics, but is indifferent to the results of the individual wholly\-owned regional carriers\. The objective in making operational decisions is to maximize consolidated financial results, not the individual results of American or American Eagle\.

120