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

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

**2\. Special Items, Net**

Special items, net on the consolidated statements of operations consisted of the following (in millions):

|                                                                   |                             |                             |                             |
| ----------------------------------------------------------------- | --------------------------- | --------------------------- | --------------------------- |
|                                                                   | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** |
|                                                                   | **2017**                    | **2016**                    | **2015**                    |
| Merger integration expenses  ^(1)^                                | $273                        | $514                        | $826                        |
| Fleet restructuring expenses  ^(2)^                               | 232                         | 177                         | 210                         |
| Employee 2017 Tax Act bonus expense  ^(3)^                        | 123                         | —                           | —                           |
| Labor contract expenses  ^(4)^                                    | 46                          | —                           | —                           |
| Mark\-to\-market adjustments for bankruptcy obligations           | 27                          | 25                          | (53)                        |
| Other operating charges (credits), net                            | 11                          | (7)                         | 68                          |
| Mainline operating special items, net                             | 712                         | 709                         | 1,051                       |
| Regional operating special items, net                             | 3                           | 13                          | 18                          |
| Operating special items, net                                      | 715                         | 722                         | 1,069                       |
| Debt refinancing and extinguishment charges                       | 22                          | 49                          | 24                          |
| Venezuela foreign currency losses                                 | —                           | —                           | 592                         |
| Nonoperating special items, net                                   | 22                          | 49                          | 616                         |
| Impact of the 2017 Tax Act on deferred tax assets and liabilities | 93                          | —                           | —                           |
| Release of deferred tax valuation allowance                       | —                           | —                           | (3,493)                     |
| Other tax charges                                                 | —                           | —                           | 25                          |
| Income tax special items, net                                     | 93                          | —                           | (3,468)                     |

|       |                                                                                |
| ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(1)^ | Merger integration expenses included costs related to information technology, professional fees, re\-branding of aircraft and airport facilities and training, and in 2016, also included costs related to alignment of labor union contracts, the launch of re\-branded uniforms, relocation and severance, and in 2015, also included share\-based compensation related to awards granted in connection with the Merger that fully vested in December 2015\. |

|       |                                                                                |
| ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(2)^ | Fleet restructuring expenses, driven in part by the Merger, principally included the acceleration of depreciation, impairments, remaining lease payments and lease return costs for aircraft and related equipment grounded or expected to be grounded earlier than planned\. |

|       |                                                                                |
| ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
| ^(3)^ | Employee bonus expense included costs related to the  $1,000  cash bonus and associated payroll taxes granted to mainline employees as of December 31, 2017 in recognition of the 2017 Tax Act\. |

|       |                                                                                |
| ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(4)^ | Labor contract expenses primarily included one\-time charges to adjust the vacation accruals for pilots and flight attendants as a result of the mid\-contract pay rate adjustments effective in the second quarter of 2017\. |

139


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

Our network is supported by a fleet of over 1,000 aircraft that is varied in size and capabilities, giving us flexibility to adjust aircraft to the network\. We are currently refreshing our fleet, acquiring new, more fuel efficient aircraft with increased premium seating, to replace older aircraft\. We are also reducing our fleet complexity with fewer aircraft types\. The evolution from a legacy fleet to a more optimal fleet suited to the scale of our network will provide substantial efficiency benefits and further efforts to reduce our carbon footprint\.

Expanded Products and Services

Over the last decade we have fundamentally transformed our business\. We have invested in our people, our product and our reliability to alter the commodity\-like nature of air travel\. We have a retail oriented, merchandised approach to distribution with well\-defined and differentiated products for our customers\. Through improved product segmentation, we offer distinct travel experiences with clear value propositions that enable customer choice\. In 2019, approximately one\-third of our passenger revenues were from premium products, which include Delta One^®^ , Delta Premium Select, First Class and Delta Comfort\+^®^ \. Main Cabin products, including Basic Economy, represented approximately half of our revenue in 2019 and provide varying levels of pre\-travel flexibility as well as our exceptional service onboard the aircraft\.

Our tickets are sold through various distribution channels, with 52% of tickets sold through direct channels\. These include digital channels, such as delta\.com and the Fly Delta app, and our reservations specialists where we deliver more direct, personalized interactions with our customers at reduced distribution costs\. Indirect distribution channels include online travel agencies and traditional "brick and mortar" agencies\. We make fare and product information widely available across those channels, ensuring customers always receive the best information and service options\.

We are implementing merchandising initiatives across our distribution channels to allow customers to better understand our product offerings, make it easier to buy the products they desire and increase customer satisfaction\. This merchandising effort is most effective in Delta's digital channels where customers can compare all product options in a single, easy to understand display\.

Innovative Technology to Improve Service and Efficiency

Our objective is to make technology a strategic differentiator\. We continue to invest in technological improvements that support our operations and provide tools for our employees\. These investments include improvements to infrastructure and technology architecture to unify and improve access to data sources and continue innovations in customer facing applications\. This digital transformation is enhancing interactions with our customers and allows our people to deliver more personalized service, further enhancing the customer experience and strengthening our brand\.

Through the development of innovative new technologies, we can better serve customers and give our employees the best tools\. For our customers, we are making investments in the Fly Delta app, in the airport and onboard our aircraft\. We are evolving the Fly Delta app into a digital travel concierge for our customers to offer convenient services on the day of travel and deliver thoughtful notifications to make their travel journeys more seamless\. In the airport, we are investing to create a smoother, less stressful travel experience\. On board the aircraft, we continue to invest in in\-flight entertainment with the most seat\-back screens in the sky and free messaging\. For our employees, we are investing in applications that allow our people to have more meaningful interactions with our customers, as well as tools to make our employees safer and better able to do their jobs\.

Customer Loyalty Program

Our SkyMiles^®^  loyalty program is designed to grow customer loyalty by offering incentives to customers to increase travel on Delta\. As Delta's brand has strengthened, the SkyMiles^®^  program has seen an acceleration in membership growth\. We see opportunity to continue this momentum as we increase customer engagement and expand mileage redemption options and revamp our co\-brand card offerings\.

The loyalty program allows program members to earn mileage credit ("miles") for award redemptions such as flights and upgrades, by flying on Delta, our regional carriers and other participating airlines\. Miles may also be earned by using certain services offered by program participants, such as credit card companies, hotels, car rental agencies and ridesharing companies\. In addition, individuals may purchase miles\. Miles do not expire, but are subject to the program rules\. We reserve the right to terminate the program with six months advance notice, and to change the program's terms and conditions at any time without notice\.

3


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

Future benefits expected to be paid over the next ten years under the qualified defined\-benefit pension plans from the assets of those plans (in millions):

|            |            |            |        |
|:---------- |:---------- |:---------- | ------:|
|            |            |            | Total  |
| 2020       | 2020       | 2020       |  $ 115 |
| 2021       | 2021       | 2021       |    118 |
| 2022       | 2022       | 2022       |    134 |
| 2023       | 2023       | 2023       |    137 |
| 2024       | 2024       | 2024       |    137 |
| 2025– 2029 | 2025– 2029 | 2025– 2029 |    800 |

Nonqualified Defined\-Benefit Pension Plan

Alaska also maintains an unfunded, noncontributory defined\-benefit plan for certain elected officers\. This plan uses a December 31 measurement date\. The assumptions used to determine benefit obligations and the net period benefit cost for the nonqualified defined\-benefit pension plan are similar to those used to calculate the qualified defined\-benefit pension plan\. The plan's unfunded status, PBO and accumulated benefit obligation are immaterial\. The net pension expense in prior year and expected future expense is also immaterial\.

Post\-retirement Medical Benefits

The Company allows certain retirees to continue their medical, dental and vision benefits by paying all or a portion of the active employee plan premium until eligible for Medicare, currently age 65\. This results in a subsidy to retirees, because the premiums received by the Company are less than the actual cost of the retirees’ claims\. The accumulated post\-retirement benefit obligation for this subsidy is unfunded\. The accumulated post\-retirement benefit obligation was $129 million and $82 million at December 31, 2019 and 2018\. The net periodic benefit cost was not material in 2019 or 2018\.

Defined\-Contribution Plans

The seven defined\-contribution plans are deferred compensation plans under section 401(k) of the Internal Revenue Code\. All of these plans require Company contributions\. Total expense for the defined\-contribution plans was $132 million, $126 million and $103 million in 2019, 2018, and 2017\.

The Company also has a noncontributory, unfunded defined\-contribution plan for certain elected officers of the Company who are ineligible for the nonqualified defined\-benefit pension plan\. Amounts recorded as liabilities under the plan are not material to the consolidated balance sheets at December 31, 2019 and 2018\.

Pilot Long\-term Disability Benefits

Alaska maintains a long\-term disability plan for its pilots\. The long\-term disability plan does not have a service requirement\. Therefore, the liability is calculated based on estimated future benefit payments associated with pilots that were assumed to be disabled on a long\-term basis as of December 31, 2019 and does not include any assumptions for future disability\. The liability includes the discounted expected future benefit payments and medical costs\. The total liability was $45 million and $25 million, which was recorded net of a prefunded trust account of $6 million and $3 million, and included in long\-term other liabilities on the consolidated balance sheets as of December 31, 2019 and December 31, 2018\.

Employee Incentive\-Pay Plans

The Company has employee incentive plans that pay employees based on certain financial and operational metrics\. These metrics are set and approved annually by the Compensation Committee of the Board of Directors\. The aggregate expense under these plans in 2019, 2018 and 2017 was $163 million, $147 million and $135 million\. The incentive plans are summarized below\.

• Performance\-Based Pay  (PBP) is a program that rewards the majority of Alaska and Horizon employees\. The program is based on various metrics that adjust periodically, including those related to Air Group profitability, safety, Mileage Plan™ and credit card growth, achievement of unit\-cost goals and employee engagement as measured by brand strength\.

76


Annual Report of ALASKA AIR GROUP, INC\. for year 2018

***Horizon***

Horizon incurred a pretax loss of $8 million in 2017 compared to pretax profit of $10 million in 2016\. The change was primarily driven by $20 million higher non\-fuel operating 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\.

**LIQUIDITY AND CAPITAL RESOURCES**

Our primary sources of liquidity are:

|   |                                                                                |
| - | -------------------------------------------------------------------------------------------------------------- |
| • | Our existing cash and marketable securities balance of  $1\.2 billion , and our expected cash from operations; |

|   |                                                                                |
| - | --------------------------------------------------------------------------------------------------------------------------- |
| • | Our  104  unencumbered aircraft in the operating fleet as of  December 31, 2018 , that could be financed, if necessary; and |

|   |                                                                                |
| - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | Our combined bank line\-of\-credit facilities, with no outstanding borrowings, of  $400 million \. Information about these facilities can be found in  Note 6  to the consolidated financial statements\. |

In 2018, we took delivery of eight owned B737\-900ER and 16 owned E175 aircraft, made debt payments totaling $807 million, and secured $339 million of new borrowings\. We also continued to return capital to our shareholders by paying dividends totaling $158 million and repurchasing $50 million of our common stock\. Because of our strong balance sheet and financial performance, we are one of only three airlines in the U\.S\. with investment grade credit ratings\.

We believe that our current cash and marketable securities balance, combined with future cash flows from operations and other sources of liquidity, will be sufficient to fund our operations and meet our debt payment obligations for the foreseeable future\.

In our cash and marketable securities portfolio, we invest only in securities that meet our primary investment strategy of maintaining and securing investment principal\. The portfolio is managed by reputable firms that adhere to our investment policy that sets forth investment objectives, approved and prohibited investments, and duration and credit quality guidelines\. Our policy, and the portfolio managers, are continually reviewed to ensure that the investments are aligned with our strategy\.

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

|                                                                                |                       |                       |            |
| -------------------------------------------------------------------------------------------------------- | --------------------- | --------------------- | ---------- |
| ***(in millions, except per share and debt\-to\-capital amounts)***                                      | **December 31, 2018** | **December 31, 2017** | **Change** |
| Cash and marketable securities                                                                           | **$1,236**            | $1,621                | $(385)     |
| Cash, marketable securities and unused lines of credit as a percentage of trailing twelve months revenue | **20%**               | 26%                   | (6) pts    |
| Long\-term debt, net of current portion                                                                  | **$1,617**            | $2,262                | $(645)     |
| Shareholders’ equity                                                                                | **$3,751**            | $3,460                | $291       |
| Long\-term debt\-to\-capital including net present value of aircraft operating lease payments ^(a)^      | **47%**               | 53%                   | (6) pts    |

|     |                                                                                |
| --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (a) | Calculated using the present value of remaining aircraft lease payments for aircraft that are in our operating fleet as of the balance sheet date\. In 2019, following the adoption of the new lease accounting standard, this calculation will be performed utilizing the lease right\-of\-use asset as capitalized on our balance sheet\. It is not expected to significantly change the ratio\.  |

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

**ANALYSIS OF OUR CASH FLOWS**

***Cash Provided by Operating Activities***

Net cash provided by operating activities was $1\.2 billion in 2018 compared to $1\.6 billion in 2017\. The decrease of $395 million is primarily due to a decrease in our net income for reasons previously discussed\.

 48


Annual Report of ALASKA AIR GROUP, INC\. for year 2018

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Stockholders and Board of Directors

Alaska Air Group, Inc\.:

*Opinion on the Consolidated Financial Statements*

We have audited the accompanying consolidated balance sheets of Alaska Air Group, Inc\. and subsidiaries (the Company) as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive operations, shareholders’ equity, and cash flows for each of the years in the three\-year period ended December 31, 2018, and the related notes (collectively, the consolidated financial statements)\. In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three\-year period ended December 31, 2018, in conformity with U\.S\. generally accepted accounting principles\.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in *Internal Control \- Integrated Framework (2013)* issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 15, 2019 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting\.

*Change in Accounting Principle*

As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for revenue from contracts with customers in 2018 due to the adoption of Accounting Standards Codification Topic 606 \- *Revenue from Contracts with Customers*\.

*Basis for Opinion*

These consolidated financial statements are the responsibility of the Company’s management\. Our responsibility is to express an opinion on these consolidated financial statements based on our audits\. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U\.S\. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB\.

We conducted our audits in accordance with the standards of the PCAOB\. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud\. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks\. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements\. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements\. We believe that our audits provide a reasonable basis for our opinion\.

/s/ KPMG LLP

We have served as the Company’s auditor since 2004\.

Seattle*,* Washington

February 15, 2019

 54


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, American’s minimum fixed obligations under its capacity purchase agreements with third\-party regional carriers are as follows (approximately, in millions):

|                                                                                |          |          |          |          |          |                         |           |
| ------------------------------------------------------------------------------------------------------- | -------- | -------- | -------- | -------- | -------- | ----------------------- | --------- |
|                                                                                | **2018** | **2019** | **2020** | **2021** | **2022** | **2023 and Thereafter** | **Total** |
| Minimum fixed obligations under capacity purchase agreements with third\-party regional carriers  ^(1)^ | $1,457   | $1,311   | $1,063   | $866     | $699     | $2,073                  | $7,469    |

|       |                                                                                |
| ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(1)^ | Represents minimum payments under capacity purchase agreements with third\-party regional carriers\. These commitments are estimates of costs based on assumed minimum levels of flying under the capacity purchase agreements and American’s actual payments could differ materially\. These obligations also include the portion of American’s future obligations representing the lease of aircraft for accounting purposes in the amount of approximately  $377 million  in  2018 ,  $355 million  in  2019 ,  $320 million  in  2020 ,  $282 million  in  2021 ,  $239 million  in  2022  and  $699 million  in  2023 and thereafter \. |

***(d) Off\-Balance Sheet Arrangements***

*Aircraft*

American currently operates 387 owned aircraft and 113 leased aircraft which were financed with EETCs issued by pass\-through trusts\. These trusts are off\-balance sheet entities, the primary purpose of which is to finance the acquisition of flight equipment\. Rather than finance each aircraft separately when such aircraft is purchased, delivered or refinanced, these trusts allow American to raise the financing for a number of aircraft at one time and, if applicable, place such funds in escrow pending a future purchase, delivery or refinancing of the relevant aircraft\. The trusts were also structured to provide for certain credit enhancements, such as liquidity facilities to cover certain interest payments, that reduce the risks to the purchasers of the trust certificates and, as a result, reduce the cost of aircraft financing to American\.

Each trust covers a set number of aircraft scheduled to be delivered or refinanced upon the issuance of the EETC or within a specific period of time thereafter\. At the time of each covered aircraft financing, the relevant trust used the proceeds of the issuance of the EETC (which may have been available at the time of issuance thereof or held in escrow until financing of the applicable aircraft following its delivery) to purchase equipment notes relating to the financed aircraft\. The equipment notes are issued, at American’s election, in connection with a mortgage financing of the aircraft or, in certain cases, by a separate owner trust in connection with a leveraged lease financing of the aircraft\. In the case of a leveraged lease financing, the owner trust then leases the aircraft to American\. In both cases, the equipment notes are secured by a security interest in the aircraft\. The pass\-through trust certificates are not direct obligations of, nor are they guaranteed by, AAG or American\. However, in the case of mortgage financings, the equipment notes issued to the trusts are direct obligations of American and, in certain instances, have been guaranteed by AAG\. As of December 31, 2017, $11\.9 billion associated with these mortgage financings is reflected as debt in the accompanying consolidated balance sheet\.

With respect to leveraged leases, American evaluated whether the leases had characteristics of a variable interest entity\. American concluded the leasing entities met the criteria for variable interest entities\. American generally is not the primary beneficiary of the leasing entities if the lease terms are consistent with market terms at the inception of the lease and do not include a residual value guarantee, fixed\-price purchase option or similar feature that obligates American to absorb decreases in value or entitles American to participate in increases in the value of the aircraft\. American does not provide residual value guarantees to the bondholders or equity participants in the trusts\. Some leases have a fair market value or a fixed price purchase option that allows American to purchase the aircraft at or near the end of the lease term\. However, the option price approximates an estimate of the aircraft’s fair value at the option date\. Under this feature, American does not participate in any increases in the value of the aircraft\. American concluded it is not the primary beneficiary under these arrangements\. Therefore, American accounts for the majority of its EETC leveraged lease financings as operating leases\. American’s total future obligations to the trusts of each of the relevant EETCs under these leveraged lease financings are $572 million as of December 31, 2017, which are included in the future minimum lease payments table above\.

117


Annual Report of Southwest Airlines Co\. for year 2017

which can result in increased landing fees and other costs for the Company\. The Company is also reliant upon third party vendors and service providers, in particular with respect to its fleet and technology initiatives and performance, and the Company's low\-cost advantage is also dependent in part on its ability to obtain and maintain commercially reasonable terms with those parties\.

As discussed above under "Business \- Insurance," the Company carries insurance of types customary in the airline industry\. Although the Company has been able to purchase aviation, property, liability, and professional insurance via the commercial insurance marketplace, available commercial insurance could be more expensive in the future and/or have material differences in coverage than insurance that has historically been provided and may not be adequate to protect against the Company's risk of loss from future events, including acts of terrorism\. Further, available cyber\-security insurance with regards to data protection and business interruption could be more expensive in the future and/or have material differences in coverage than insurance that has historically been provided and may not be adequate to protect the Company's risk of loss\. In addition, an accident or other incident involving Southwest aircraft could result in costs in excess of its related insurance coverage, which costs could be substantial\. Any aircraft accident or other incident, even if fully insured, could also have a material adverse effect on the public's perception of the Company\.

The Company cannot guarantee it will be able to maintain or improve upon its current level of low\-cost advantage over many of its airline competitors\. ULCCs, which have increased capacity in the Company's markets, have surpassed the Company's cost advantage\. When competitors grow their fleets and expand their networks, they are potentially able to better control costs per available seat mile\. In addition, like Southwest, some competitors have added a significant number of new and different aircraft to their fleets, which could potentially decrease their operating costs through better fuel efficiencies and lower maintenance costs\.

***The Company is increasingly dependent on technology to operate its business and continues to implement substantial changes to its information systems; any failure, disruption, breach, or delay in implementation of the Company's information systems could materially adversely affect its operations\.***

The Company is increasingly dependent on the use of complex technology and systems to run its ongoing operations and support its strategic objectives\.

Implementation and integration of complex systems and technology presents significant challenges in terms of costs, human resources, and development of effective internal controls\. Implementation and integration require a balancing between the introduction of new capabilities and the managing of existing systems, and present the risk of operational or security inadequacy or interruption, which could materially affect the Company's ability to effectively operate its business and/or could negatively impact the Company's results of operations\. The Company is also reliant upon the performance of its third party vendors for timely and effective completion of many of its technology initiatives and for maintaining adequate information security measures\.

In the ordinary course of business, the Company's systems will continue to require modification and refinements to address growth and changing business requirements, including requirements related to international operations\. In addition, the Company's systems may require modification to enable the Company to comply with changing regulatory requirements\. Modifications and refinements to the Company's systems have been and are expected to continue to be expensive to implement and can divert management’s attention from other matters\. In addition, the Company's operations could be adversely affected, or it could face imposition of regulatory penalties, if it were unable to timely or effectively modify its systems as necessary or appropriately balance the introduction of new capabilities with the management of existing systems\.

The Company has experienced system interruptions and delays that make its websites and services unavailable or slow to respond, which can prevent the Company from efficiently processing Customer transactions or providing services, and these could continue to occur in the future\. These system interruptions and delays can reduce the Company's operating revenues and the attractiveness of its services, as well as increase the Company's costs\. The Company's computer and communications systems and operations could be damaged or interrupted by catastrophic events such as fires, floods, earthquakes, tornadoes and hurricanes, power loss, computer and telecommunications failures, acts of war or terrorism, computer viruses, security breaches, and similar events or disruptions\. Any of these events could cause system interruptions, delays, and loss of critical data, and could prevent the Company from processing Customer transactions or providing services, which could make the Company's business and services less attractive and subject the Company to liability\. Any of these events could damage the Company's reputation and be expensive to remedy\.

23


Annual Report of United Continental Holdings, Inc\. and United Airlines, Inc\. for year 2018

[Table of Contents](https://www.example.com#sCFFD9DA26B5659A3A528A4B51B718F87)

**UNITED CONTINENTAL HOLDINGS, INC\.**

**CONSOLIDATED BALANCE SHEETS**

**(In millions, except shares)**

|                                                                                |                     |                     |
| ------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------- | ------------------- |
|                                                                                | **At December 31,** | **At December 31,** |
| **LIABILITIES AND STOCKHOLDERS' EQUITY**                                                                                | **2018**            | **2017 (a)**        |
| Current liabilities:                                                                                |                     |                     |
| Advance ticket sales                                                                                | $4,381              | $3,940              |
| Frequent flyer deferred revenue                                                                                | 2,286               | 2,192               |
| Accounts payable                                                                                | 2,363               | 2,196               |
| Accrued salaries and benefits                                                                                | 2,184               | 2,166               |
| Current maturities of long\-term debt                                                                                | 1,230               | 1,565               |
| Current maturities of capital leases                                                                                | 149                 | 128                 |
| Other                                                                                | 619                 | 576                 |
| Total current liabilities                                                                                | 13,212              | 12,763              |
| Long\-term debt                                                                                | 12,215              | 11,703              |
| Long\-term obligations under capital leases                                                                                | 1,134               | 996                 |
| Other liabilities and deferred credits:                                                                                |                     |                     |
| Frequent flyer deferred revenue                                                                                | 2,719               | 2,591               |
| Postretirement benefit liability                                                                                | 1,295               | 1,602               |
| Pension liability                                                                                | 1,576               | 1,921               |
| Deferred income taxes                                                                                | 814                 | 204                 |
| Other                                                                                | 1,832               | 1,832               |
| Total other liabilities and deferred credits                                                                                | 8,236               | 8,150               |
| Commitments and contingencies                                                                                |
              |
              |
| Stockholders' equity:                                                                                |                     |                     |
| Preferred stock                                                                                | —                   | —                   |
| Common stock at par, $0\.01 par value; authorized 1,000,000,000 shares; outstanding 269,914,769 and 286,973,195 shares at December 31, 2018 and 2017, respectively | 3                   | 3                   |
| Additional capital invested                                                                                | 6,120               | 6,098               |
| Retained earnings                                                                                | 6,668               | 4,549               |
| Stock held in treasury, at cost                                                                                | (1,993)             | (769)               |
| Accumulated other comprehensive loss                                                                                | (803)               | (1,147)             |
| Total stockholders' equity                                                                                | 9,995               | 8,734               |
| Total liabilities and stockholders' equity                                                                                | $44,792             | $42,346             |

(a) Amounts adjusted due to the adoption of Accounting Standards Update No\. 2014\-09, *Revenue from Contracts with Customers (Topic 606)\.* See Note 1 to the financial statements contained in Part II, Item 8 of this report for additional information\.

The accompanying Combined Notes to Consolidated Financial Statements are an integral part of these statements\.

45


Annual Report of Southwest Airlines Co\. for year 2019

Item 9\.  Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

None\.

Item 9A\.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures\.  The Company maintains disclosure controls and procedures (as defined in Rule 13a\-15(e) of the Securities Exchange Act (the “Exchange Act”)) designed to provide reasonable assurance that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms\. These include controls and procedures designed to ensure that this information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure\. Management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of December 31, 2019\. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2019, at the reasonable assurance level\.

Management’s Annual Report on Internal Control over Financial Reporting\.  Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a\-15(f) of the Exchange Act)\. The Company’s internal control over financial reporting is a process, under the supervision of the Company’s Chief Executive Officer and Chief Financial Officer, 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\.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements\. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives\.

Management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019\. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control \- Integrated Framework (2013 Framework)\. Based on this evaluation, management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, concluded that, as of December 31, 2019, the Company’s internal control over financial reporting was effective\.

Ernst & Young, LLP, the independent registered public accounting firm who audited the Company’s Consolidated Financial Statements included in this Form 10\-K, has issued an attestation report on the Company’s internal control over financial reporting, which is included herein\.

Changes in Internal Control over Financial Reporting\.  There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a\-15(f) of the Exchange Act) during the quarter ended December 31, 2019, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting\.

115


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

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

American also sells loyalty program mileage credits to participating airline partners and non\-airline business partners, such as the Citi and Barclaycard US co\-branded credit cards\. Sales of mileage credits to non\-airline business partners is comprised of two components, transportation and marketing\. American accounts for mileage sales under its agreements with non\-airline business partners in accordance with ASU 2009\-13, “Revenue Recognition (Topic 605) — Multiple\-Deliverable Revenue Arrangements\.” In accordance with ASU 2009\-13, American allocates the consideration received from the sale of mileage credits based on the relative selling price of each product or service delivered\.

As a result of American’s co\-branded credit card program agreements with Citi and Barclaycard US that it entered into in 2016, American identified the following revenue elements in these co\-branded credit card agreements: the transportation component; and the use of the American brand including access to loyalty program member lists, advertising and other travel related benefits (collectively, the marketing component)\.

The transportation component represents the estimated selling price of future travel awards and is determined using historical transaction information, including information related to customer redemption patterns\. The transportation component is deferred based on its relative selling price and is amortized into passenger revenue on a straight\-line basis over the period in which the mileage credits are expected to be redeemed for travel\. As of December 31, 2017 and 2016, American had $2\.1 billion in deferred revenue from the sale of mileage credits recorded within loyalty program liability on its consolidated balance sheets\.

The services under the marketing component are provided periodically, but no less than monthly\. Accordingly, the marketing component is considered earned and recognized in other revenues in the period of the mileage sale\. For the years ended December 31, 2017, 2016 and 2015, the marketing component of mileage sales and other marketing related payments included in other revenues was approximately $2\.2 billion, $1\.9 billion and $1\.7 billion, respectively\.

Effective January 1, 2018, American is adopting ASU 2014\-09: Revenue from Contracts with Customers (Topic 606)\. See Recent Accounting Pronouncements in Note 1(r) below for further discussion\.

***(j) Revenue***

*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\. American’s 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 and the amount of revenue to be recognized\. These estimates are generally based on the analysis of American’s historical data\. American and other airline industry participants have consistently applied this accounting method to estimate revenue from forfeited tickets at the date of travel\. Estimated future refunds and exchanges included in the air traffic liability are routinely evaluated based on subsequent activity to validate the accuracy of American’s estimates\. Any adjustments resulting from periodic evaluations of the estimated air traffic liability are included in passenger revenue during the period in which the evaluations are completed\.

Regional carriers provide scheduled air transportation under the brand name American Eagle\. American classifies revenues generated from transportation on these carriers as regional passenger revenues\. Liabilities related to tickets sold by American for travel on these air carriers are also included in American’s air traffic liability and are subsequently recognized as revenue in the same manner as described above\.

*Passenger Taxes and Fees*

Various taxes and fees assessed on the sale of tickets to end customers are collected by American as an agent and remitted to taxing authorities\. These taxes and fees have been presented on a net basis in the accompanying consolidated statements of operations and recorded as a liability until remitted to the appropriate taxing authority\.

134


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

public perception of our airline\. Vendor bankruptcies, unionization, regulatory compliance issues or significant changes in the competitive marketplace among suppliers could adversely affect vendor services or force us to renegotiate existing agreements on less favorable terms\. These events could result in disruptions in our operations or increases in our cost structure\.

***INTEGRATION OF VIRGIN AMERICA***

***We may be unable to effectively integrate Virgin America’s business and realize the anticipated benefits of the acquisition\.***

We must devote significant management attention and resources to integrating the business practices and operations of Virgin America\. Potential difficulties we may encounter as part of the integration process include the following:

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
| • | the challenges associated with integrating Virgin America employees into Alaska's workforce, including seniority list integration, and negotiation of transition process agreements, while maintaining our focus on providing consistent, high quality customer service; |

|   |                                                                                |
| - | ---------------------------------------------------------------------------------------------------- |
| • | the inability to successfully attract and retain Virgin America guests upon integration with Alaska; |

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | the challenges associated with integrating complex systems, technology, aircraft fleets, networks, facilities and other assets in a seamless manner that minimizes any adverse impact on guests, suppliers, employees and other constituents; and |

|   |                                                                                |
| - | -------------------------------------------------------------------------------------------------------------------------------- |
| • | the challenges associated with operating aircraft types new to our operations, specifically the Airbus A319, A320, and A321neo\. |

Any of the foregoing factors could adversely affect our ability to maintain relationships with guests, suppliers, employees and other constituencies or our ability to achieve the anticipated benefits of the acquisition on a timely basis, or at all\. These factors could also reduce our earnings or otherwise adversely affect our business and financial results\. In addition, integration requirements have caused, and may continue to cause, a delay of other strategic initiatives\.

***The need to integrate Virgin America’s workforce into collective bargaining agreements with Alaska's workforce presents the potential for delay in achieving expected synergies and other benefits or labor disputes that could adversely affect our operations and costs\.***

The successful integration of Virgin America and achievement of the anticipated benefits of the acquisition depend significantly on integrating Virgin America’s employees into Alaska and on maintaining productive employee relations\. Failure to do so presents the potential for delays in achieving expected synergies and other benefits of integration or labor disputes that could adversely affect our operations and costs\. The process for integrating labor groups in an airline merger is governed by a combination of the Railway Labor Act, the McCaskill\-Bond Act, and where applicable, the existing provisions of our CBAs, in addition to internal union policies\.

As part of the transition agreement with the pilot workgroup, there is a temporary “fence” between Alaska and Virgin America pilots requiring that only Alaska pilots operate Boeing aircraft and only Virgin America pilots operate Airbus aircraft\. Through the implementation of the recent Joint Collective Bargaining Agreement that now applies to all pilots from both airlines, this fence will be removed when the two groups are combined into a single scheduling system later in 2018\.In addition, flight attendants, dispatchers, and mechanics cannot be fully integrated until transition agreements have been reached and single seniority lists have been provided to the Company by each workgroup\. Achievement of expected synergies and other benefits will be delayed until the time that operational integration is obtained\.

***We will need to launch certain branding or rebranding initiatives in connection with the integration that may take a significant amount of time and involve substantial costs and that may not be favorably received by our guests\.***

We may incur substantial costs as a result of rebranding Virgin America’s products and services, including updating the aircraft livery and configuration, and may not be able to achieve or maintain brand name recognition or status that is comparable to the recognition and status previously enjoyed by Virgin America in any of Virgin America’s markets\. The failure of any such rebranding initiatives could adversely affect our ability to attract and retain guests, which could cause us not to realize some or all of the anticipated benefits contemplated to result from the acquisition\.

 22


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

|                               |                                                                                |
| ----------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| **Exhibit**

**Number** | **Description**                                                                                |
| 10\.12                        | [Second Amendment to Amended and Restated Credit and Guaranty Agreement, dated as of March 14, 2017, amending the Amended and Restated Credit and Guaranty Agreement, dated as of May 21, 2015, among American Airlines, Inc\., American Airlines Group Inc\., the lenders from time to time party thereto, Deutsche Bank AG New York Branch, as administrative agent, and certain other parties thereto (incorporated by reference to Exhibit 10\.2 to AAG’s Quarterly Report on Form 10\-Q for the quarter ended March 31, 2017 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312517140927/d358913dex102.htm)                        |
| 10\.13                        | [Third Amendment to the Amended and Restated Credit And Guaranty Agreement, dated as of August 21, 2017, amending the Amended and Restated Credit and Guaranty Agreement, dated as of May 21, 2015, among American Airlines, Inc\., American Airlines Group Inc\., the lenders from time to time party thereto, Deutsche Bank AG New York Branch, as administrative agent, and certain other parties thereto (incorporated by reference to Exhibit 10\.11 to AAG’s Annual Report on Form 10\-K for the year ended December 31, 2017 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000000620118000009/ex101110k2017.htm) \*                   |
| 10\.14                        | [Fourth Amendment to Amended and Restated Credit and Guaranty Agreement, dated as of May 15, 2018, amending the Amended and Restated Credit and Guaranty Agreement, dated as of May 21, 2015, among American Airlines, Inc\., American Airlines Group Inc\., the lenders from time to time party thereto, Deutsche Bank AG New York Branch, as administrative agent, and Barclays Bank PLC, as designated replacement term lender (incorporated by reference to Exhibit 10\.3 to AAG’s Quarterly Report on Form 10\-Q for the quarter ended June 30, 2018 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000000620118000027/ex10310qq218.htm) |
| 10\.15                        | [Fifth Amendment to Amended and Restated Credit and Guaranty Agreement, dated as of December 10, 2018, amending the Amended and Restated Credit and Guaranty Agreement, dated as of May 21, 2015, among American Airlines, Inc\., American Airlines Group Inc\., the lenders from time to time party thereto, Deutsche Bank AG New York Branch, as administrative agent, and Barclays Bank PLC, as designated replacement term lender\.](https://americanairlines.gcs-web.com/email-alerts/ex101510k2018.htm) \*\*                                                                                |
| 10\.16                        | [Credit and Guaranty Agreement, dated as of April 29, 2016, among American Airlines, Inc\. as borrower, American Airlines Group Inc\., as parent and guarantor, certain other subsidiaries of American Airlines Group Inc\., as guarantors, the lenders party thereto, Barclays Bank PLC, as administrative agent and collateral agent, and certain other parties thereto (incorporated by reference to Exhibit 10\.2 to AAG’s Quarterly Report on Form 10\-Q filed on July 22, 2016 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000119312516654354/d204187dex102.htm)                                                                     |
| 10\.17                        | [First Amendment to Credit and Guaranty Agreement, dated as of October 31, 2016, amending the Credit and Guaranty Agreement, dated as of April 29, 2016, among American Airlines, Inc\. as borrower, American Airlines Group Inc\., as parent and guarantor, the lenders party thereto, Barclays Bank PLC, as administrative agent (incorporated by reference to Exhibit 10\.81 to AAG’s Annual Report on Form 10\-K for the year ended December 31, 2016 (Commission File No\. 1\-8400))\. ](http://www.sec.gov/Archives/edgar/data/4515/000119312517051216/d286458dex1081.htm)                                                                                |
| 10\.18                        | [Second Amendment to the Credit and Guaranty Agreement, dated as of August 21, 2017, amending the Credit and Guaranty Agreement, dated as of April 29, 2016, among American Airlines, Inc\., American Airlines Group Inc\., the lenders from time to time party thereto, Barclays Bank PLC, as administrative agent, and certain other parties thereto (incorporated by reference to Exhibit 10\.15 to AAG’s Annual Report on Form 10\-K for the year ended December 31, 2017 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000000620118000009/ex101510k2017.htm) \*                                                                         |
| 10\.19                        | [Third Amendment to Credit and Guaranty Agreement, dated as of November 1, 2017, amending the Credit and Guaranty Agreement, dated as of April 29, 2016, among American Airlines, Inc\. as borrower, American Airlines Group Inc\., as parent and guarantor, the lenders party thereto, Barclays Bank PLC, as administrative agent (incorporated by reference to Exhibit 10\.16 to AAG’s Annual Report on Form 10\-K for the year ended December 31, 2017 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000000620118000009/ex101610k2017.htm)                                                                                |
| 10\.20                        | [Fourth Amendment to Credit and Guaranty Agreement, dated as of December 10, 2018, amending the Credit and Guaranty Agreement, dated as of April 29, 2016, among American Airlines, Inc\. as borrower, American Airlines Group Inc\., as parent and guarantor, the lenders party thereto, Barclays Bank PLC, as administrative agent\.](https://americanairlines.gcs-web.com/email-alerts/ex102010k2018.htm) \*\*                                                                                |
| 10\.21                        | [Purchase Agreement No\. 3219, dated as of October 15, 2008, between American Airlines, Inc\. and The Boeing Company (incorporated by reference to Exhibit 10\.29 to American’s Annual Report on Form 10\-K for the year ended December 31, 2008 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000000451509000008/ex1029.htm) \*                                                                                |
| 10\.22                        | [Supplemental Agreement No\. 2, dated as of July 21, 2010, to Purchase Agreement No\. 3219 between American Airlines, Inc\. and The Boeing Company (incorporated by reference to Exhibit 10\.2 to AMR’s report on Form 10\-Q for the quarter ended June 30, 2010 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/6201/000095012310066894/d73384exv10w2.htm) \*                                                                                |
| 10\.23                        | [Supplemental Agreement No\. 3, dated as of February 1, 2013, to Purchase Agreement No\. 3219 between American Airlines, Inc\., and The Boeing Company (incorporated by reference to Exhibit 10\.2 to AMR’s Quarterly Report on Form 10\-Q for the quarter ended March 31, 2013 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/6201/000000620113000040/d516424dex102.htm) \*                                                                                |
| 10\.24                        | [Supplemental Agreement No\. 4, dated as of June 9, 2014, to Purchase Agreement No\. 3219 between The Boeing Company and American Airlines, Inc\. dated as of October 15, 2008, Relating to Boeing Model 787 Aircraft, as amended, restated, amended and restated, supplemented or otherwise modified (incorporated by reference to Exhibit 10\.6 to AAG’s Quarterly Report on Form 10\-Q for the quarter ended June 30, 2014 (Commission File No\. 1\-8400))\.](http://www.sec.gov/Archives/edgar/data/4515/000000620114000014/d759439dex106.htm) \*                                                                                |

194


Annual Report of Southwest Airlines Co\. for year 2017

***2017*** ***Compared with*** ***2016***

**Operating Revenues**

Passenger revenues for 2017increased by $547 million, or 2\.9 percent, compared with 2016\. Holding Load factor and Passenger yield constant, the increase was primarily attributable to a 3\.6 percentincrease in capacity, partially offset by approximately $100 million in reduced revenues as a result of the hurricanes and earthquakes during third quarter 2017\. On a unit basis, Passenger revenues decreased 0\.6 percent, year\-over\-year, largely driven by a 0\.5 percent decrease in Passenger revenue yield due to the industry's competitive domestic fare environment\. Load factor remained solid at 83\.9 percent\.

Freight revenues for 2017increased by $2 million, or 1\.2 percent, compared with 2016, primarily due to increased demand\. Based on current trends, the Company currently expects Freight revenues in first quarter 2018 to increase, compared with first quarter 2017\.

Other revenues for 2017increased by $197 million, or 11\.9 percent, compared with 2016\. Approximately 70 percent of the increase was due to an increase in revenue associated with cardholder spend on the Company's co\-branded Chase® Visa credit card, and the remainder of the increase was due to higher ancillary revenues primarily as a result of EarlyBird Check\-In revenues of $358 million in 2017, an increase of $29 million, or 8\.7 percent, compared with 2016\. The Company currently expects Other revenues in first quarter 2018 to increase, compared with first quarter 2017\. The Company currently expects EarlyBird Check\-in revenues to have a similar year\-over\-year growth rate in 2018, as compared with 2017\.

Based on revenue and booking trends thus far in first quarter 2018, the Company is currently expecting first quarter 2018 operating unit revenues to increase in the one to two percent range, compared with first quarter 2017\.

Accounting Standards Update ("ASU") No\. 2014\-09, Revenue from Contracts with Customers, is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017\. Therefore, the Company will adopt the standard as of January 1, 2018, utilizing the full retrospective method of adoption allowed by the standard, in order to provide for comparative results in all periods presented\. As such, in the Company's first quarter 2018 Form 10–Q, both first quarter 2018 results and first quarter 2017 results will be presented under the new standard\. On the Consolidated Statement of Income, the estimated impact of this ASU for full year 2017 and 2016 will be a decrease to Operating revenues of approximately $25 million and $135 million, respectively, and a decrease to Operating expenses of approximately $40 million in each year\. The ASU will also result in the reclassification of certain ancillary revenues from Other revenues to Passenger revenues for each period\. See Note 2 to the Consolidated Financial Statements for further information\.

**Operating Expenses**

Operating expenses for 2017increased by $991 million, or 5\.9 percent, compared with 2016, while capacity increased 3\.6 percent over the same period\. Historically, except for changes in the price of fuel, changes in Operating expenses for airlines have been largely driven by changes in capacity, or ASMs\. The following table presents the Company's Operating expenses per ASM for 2017 and 2016, followed by explanations of these changes on a per ASM basis and dollar basis:

41


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

**AMERICAN AIRLINES, INC\.**

**CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY**

**(In millions)**

|                                                                                |                             |                                                       |                                                                                |                                                       |           |
| ------------------------------------------------------------------------------------------------------------------- | --------------------------- | ----------------------------------------------------- | ---------------------------------------------------------------------------------- | ----------------------------------------------------- | --------- |
|                                                                                | **Common**

**Stock** | **Additional**

**Paid\-in**

**Capital** | **Accumulated**

**Other**

**Comprehensive**

**Income (Loss)** | **Retained**

**Earnings**

**(Deficit)** | **Total** |
| **Balance at December 31, 2014**                                                                                | $—                          | $16,174                                               | $(4,656)                                                                           | $(10,112)                                             | $1,406    |
| Net income                                                                                | —                           | —                                                     | —                                                                                | 8,120                                                 | 8,120     |
| Changes in pension, retiree medical and other postretirement benefits liability                                     | —                           | —                                                     | (160)                                                                              | —                                                     | (160)     |
| Net changes in fair value of derivative financial instruments                                                       | —                           | —                                                     | (9)                                                                                | —                                                     | (9)       |
| Share\-based compensation expense                                                                                | —                           | 284                                                   | —                                                                                | —                                                     | 284       |
| Intercompany equity transfer                                                                                | —                           | 63                                                    | —                                                                                | —                                                     | 63        |
| Change in unrealized loss on investments                                                                            | —                           | —                                                     | (6)                                                                                | —                                                     | (6)       |
| **Balance at December 31, 2015**                                                                                | —                           | 16,521                                                | (4,831)                                                                            | (1,992)                                               | 9,698     |
| Net income                                                                                | —                           | —                                                     | —                                                                                | 2,781                                                 | 2,781     |
| Changes in pension, retiree medical and other postretirement benefits liability                                     | —                           | —                                                     | (563)                                                                              | —                                                     | (563)     |
| Non\-cash tax benefit                                                                                | —                           | —                                                     | 203                                                                                | —                                                     | 203       |
| Share\-based compensation expense                                                                                | —                           | 100                                                   | —                                                                                | —                                                     | 100       |
| Impact of adoption of Accounting Standards Update (ASU) 2016\-09 related to share\-based compensation (See Note 12) | —                           | —                                                     | —                                                                                | 418                                                   | 418       |
| Intercompany equity transfer                                                                                | —                           | 3                                                     | —                                                                                | —                                                     | 3         |
| Change in unrealized loss on investments                                                                            | —                           | —                                                     | 9                                                                                | —                                                     | 9         |
| **Balance at December 31, 2016**                                                                                | —                           | 16,624                                                | (5,182)                                                                            | 1,207                                                 | 12,649    |
| Net income                                                                                | —                           | —                                                     | —                                                                                | 1,922                                                 | 1,922     |
| Changes in pension, retiree medical and other postretirement benefits liability                                     | —                           | —                                                     | (114)                                                                              | —                                                     | (114)     |
| Non\-cash tax benefit                                                                                | —                           | —                                                     | 46                                                                                | —                                                     | 46        |
| Share\-based compensation expense                                                                                | —                           | 90                                                    | —                                                                                | —                                                     | 90        |
| Intercompany equity transfer                                                                                | —                           | 2                                                     | —                                                                                | —                                                     | 2         |
| Change in unrealized loss on investments                                                                            | —                           | —                                                     | (1)                                                                                | —                                                     | (1)       |
| **Balance at December 31, 2017**                                                                                | $—                          | $16,716                                               | $(5,251)                                                                           | $3,129                                                | $14,594   |

See accompanying notes to consolidated financial statements\.

130


Annual Report of United Continental Holdings, Inc\. and United Airlines, Inc\. for year 2018

[Table of Contents](https://www.example.com#sCFFD9DA26B5659A3A528A4B51B718F87)

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Stockholders and Board of Directors of United Continental Holdings, Inc\.

**Opinion on Internal Control over Financial Reporting**

We have audited United Continental Holdings, Inc\.'s (the "Company") internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control\-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria)\. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria\.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the consolidated financial statements as of and for the year ended December 31, 2018 of the Company and our report dated February 28, 2019 expressed an unqualified opinion thereon\.

**Basis for Opinion**

The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management Report on Internal Control over Financial Reporting in Item 9A\. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit\. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U\.S\. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB\.

We conducted our audit in accordance with the standards of the PCAOB\. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects\.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances\. We believe that our audit provides a reasonable basis for our opinion\.

**Definition and Limitations of Internal Control Over Financial Reporting**

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles\. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements\.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements\. Also, 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 or procedures may deteriorate\.

/s/ Ernst & Young LLP

Chicago, Illinois

February 28, 2019

91


Annual Report of American Airlines Group Inc\. for year 2019

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

|        |                                                                                |
| ------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(10)^ | Impact of the 2017 Tax Act includes an   $823 million  non\-cash charge to income tax expense to reflect the impact of lower corporate income tax rates on our deferred tax asset and liabilities resulting from the 2017 Tax Act, which reduced the federal corporate income tax rate from 35% to 21%\. |

3\. Earnings Per Common Share

The following table sets forth the computation of basic and diluted earnings per common share (EPS) (in millions, except share and per share amounts):

|                                                                                |                             |                             |                             |
| -------------------------------------------------------------------------------------------------------------------------------- | --------------------------- | --------------------------- | --------------------------- |
|                                                                                | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** |
|                                                                                | **2019**                    | **2018**                    | **2017**                    |
| **Basic EPS:**                                                                                |                             |                             |                             |
| Net income                                                                                | $1,686                      | $1,412                      | $1,282                      |
| Weighted average common shares outstanding (in thousands)                                                                        | 443,363                     | 464,236                     | 489,164                     |
| Basic EPS                                                                                | $3\.80                      | $3\.04                      | $2\.62                      |
| **Diluted EPS:**                                                                                |                             |                             |                             |
| Net income for purposes of computing diluted EPS                                                                                | $1,686                      | $1,412                      | $1,282                      |
| Share computation for diluted EPS (in thousands):                                                                                |                             |                             |                             |
| Basic weighted average common shares outstanding                                                                                | 443,363                     | 464,236                     | 489,164                     |
| Dilutive effect of stock awards                                                                                | 906                         | 1,424                       | 2,528                       |
| Diluted weighted average common shares outstanding                                                                               | 444,269                     | 465,660                     | 491,692                     |
| Diluted EPS                                                                                | $3\.79                      | $3\.03                      | $2\.61                      |
| Restricted stock unit awards excluded from the calculation of diluted EPS because inclusion would be antidilutive (in thousands) | 2,520                       | 1,266                       | 328                         |

4\. Share Repurchase Programs and Dividends

In April 2018, we announced that our Board of Directors authorized a   $2\.0 billion  share repurchase program that will expire on December 31, 2020\. Since July 2014, our Board of Directors has approved   seven  share repurchase programs aggregating   $13\.0 billion  of authority\. As of  December 31, 2019 , there was   $565 million  of remaining authority to repurchase shares under our current   $2\.0 billion  share repurchase program\.  Share repurchases under our repurchase programs may be made through a variety of methods, which may include open market purchases, privately negotiated transactions, block trades or accelerated share repurchase transactions\. Any such repurchases that may be made from time to time will be subject to market and economic conditions, applicable legal requirements and other relevant factors\. We are not obligated to repurchase any specific number of shares and our repurchase of AAG common stock may be limited, suspended or discontinued at any time at our discretion and without prior notice\.

In  2019 , we repurchased   33\.8 million  shares of AAG common stock for   $1\.1 billion  at a weighted average cost per share of   $32\.09 \. In  2018 , we repurchased   16\.6 million  shares of AAG common stock for   $800 million  at a weighted average cost per share of   $48\.15 \. In  2017 , we repurchased   33\.9 million  shares of AAG common stock for   $1\.6 billion  at a weighted average cost per share of   $45\.68 \.  Since the inception of our share repurchase programs in July 2014 through December 31, 2019, we have repurchased   312\.7 million  shares of AAG common stock for   $12\.4 billion  at a weighted average cost per share of   $39\.76 \.

Our Board of Directors declared quarterly cash dividends of   $0\.10  per share totaling   $178 million ,   $186 million  and   $198 million  for  2019 ,  2018  and  2017 , respectively\.

86


Annual Report of American Airlines Group Inc\. for year 2019

We operate a global business with international operations that are subject to economic and political instability and have been, and in the future may continue to be, adversely affected by numerous events, circumstances or government actions beyond our control\.

We operate a global business with significant operations outside of the U\.S\. Our current international activities and prospects have been and in the future could be adversely affected by government policies, reversals or delays in the opening of foreign markets, increased competition in international markets, the performance of our alliance, joint business and codeshare partners in a given market, exchange controls or other restrictions on repatriation of funds, currency and political risks (including changes in exchange rates and currency devaluations), environmental regulation, increases in taxes and fees and changes in international government regulation of our operations, including the inability to obtain or retain needed route authorities and/or slots\. Fluctuations in foreign currencies, including devaluations, exchange controls and other restrictions on the repatriation of funds, have significantly affected and may continue to significantly affect our operating performance, liquidity and the value of any cash held outside the U\.S\. in local currency\. Such fluctuations in foreign currencies, including devaluations, cannot be predicted by us and can significantly affect the value of our assets located outside the United States\. These conditions, as well as any further delays, devaluations or imposition of more stringent repatriation restrictions, may materially adversely affect our business, results of operations and financial condition\.

More generally, our industry may be affected by any deterioration in global trade relations, including shifts in the trade policies of individual nations\. For example, much of the demand for international air travel is the result of business travel in support of global trade\. Should protectionist governmental policies, such as increased tariff or other trade barriers, travel limitations and other regulatory actions, have the effect of reducing global commercial activity, the result could be a material decrease in the demand for international air travel\. Additionally, certain of the products and services that we purchase, including certain of our aircraft and related parts, are sourced from suppliers located in foreign countries, and the imposition of new tariffs, or any increase in existing tariffs, by the U\.S\. government in respect of the importation of such products could materially increase the amounts we pay for them\. In particular, on October 2, 2019, the Office of the U\.S\. Trade Representative (USTR), as part of an ongoing dispute with the EU before the World Trade Organization (WTO) concerning, among other things, aircraft subsidies, was authorized by an arbitration tribunal of the WTO to impose up to $7\.5 billion per year in import tariffs on certain goods originating from the EU\. In October 2019, the USTR imposed tariffs on certain imports from the EU, including certain Airbus aircraft that we previously contracted to purchase, which were initially subject to an ad valorem duty of 10%\. On February 14, 2020, the USTR increased such duty to 15% effective March 18, 2020\. While the scope and rate of these tariffs are subject to change, if and to the extent these tariffs are imposed on us without any available means for us to mitigate or pass on the burden of these tariffs to Airbus, the effective cost of new Airbus aircraft required to implement our fleet plan would increase\.

Brexit occurred on January 31, 2020 under the terms of the Withdrawal Agreement\. There will now be a transition period during which the United Kingdom and the EU will seek to negotiate an agreement governing their future relationship, including in relation to air services\. Under the Withdrawal Agreement, this transition period is scheduled to end on December 31, 2020, with a potential extension of up to two years, although the United Kingdom government has passed legislation preventing any such extension of the transition period\. We face risks associated with Brexit, notably given the extent of our passenger and cargo traffic and that of our joint business partners that flows through LHR in the United Kingdom\. During the transition period, our current air services may continue as we currently conduct them\. The precise scope of traffic rights between the EU and the United Kingdom remains uncertain and therefore the continuation is not assured and could be subject to disruption\. During the transition period, the United Kingdom and the EU will seek to implement a new air services agreement\. We cannot predict the terms of any such successor air services agreement or whether changes in the relationship between the United Kingdom and the EU, including whether or not an agreement governing their future relationship is reached before the end of the transition period, could materially adversely affect our business, results of operations and financial condition\.

Moreover, Brexit could adversely affect European or worldwide economic or market conditions and could contribute to further instability in global financial markets\. In addition, Brexit has created uncertainty as to the future trade relationship between the EU and the United Kingdom, including air traffic services\. LHR is presently a very important element of our international network, however it may become less desirable as a destination or as a hub location after Brexit when compared to other airports in Europe\. Brexit could also lead to legal and regulatory uncertainty such as the identity of the relevant regulators, new regulatory action and/or potentially divergent treaties, laws and regulations as the United Kingdom determines which EU treaties, laws and regulations to replace or replicate, including those governing aviation, labor, environmental, data protection/privacy, competition and other matters applicable to the provision of air transportation services by us or our alliance, joint business or codeshare partners\. For example in October 2018, in anticipation of Brexit and the expiry of the EC commitments in July 2020, the CMA opened an investigation into the transatlantic JBA\. We continue to fully cooperate with the CMA\. The impact on our business of any treaties, laws and regulations that replace the existing EU counterparts, or other governmental or regulatory actions taken by the United Kingdom or the EU in

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