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

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

NOTE 2 \. FAIR VALUE MEASUREMENTS

Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants\. Fair value is a market\-based measurement that is determined based on assumptions that market participants would use in pricing an asset or liability\.

|   |                                                                          |
| - | ------------------------------------------------------------------------ |
| • | *Level 1\.*  Observable inputs such as quoted prices in active markets;  |

|   |                                                                                |
| - | ----------------------------------------------------------------------------------------------------------------------- |
| • | *Level 2* \. Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and |

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------------------------------------------------ |
| • | *Level 3* \. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions\. |

Assets and liabilities measured at fair value are based on the valuation techniques identified in the tables below\. The valuation techniques are as follows:

|     |                                                                                |
| --- | -------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (a) | *Market approach* \. Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities; and |

|     |                                                                                |
| --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (b) | *Income approach\.*  Techniques to convert future amounts to a single present value amount based on market expectations (including present value techniques and option\-pricing models)\. |

Assets (Liabilities) Measured at Fair Value on a Recurring Basis ^(1)^

|                                             |                       |                       |                       |                                    |
| ------------------------------------------- | --------------------- | --------------------- | --------------------- | ---------------------------------- |
|                                             | **December 31, 2017** | **December 31, 2017** | **December 31, 2017** | **Valuation**

**Technique** |
| **(in millions)**                           | **Total**             | **Level 1**           | **Level 2**           | **Valuation**

**Technique** |
| Cash equivalents                            | $1,357                | $1,357                | $—                    | (a)                                |
| Short\-term investments                     |                       |                       |
                |
                             |
| U\.S\. government and agency securities     | 93                    | 84                    | 9                     | (a)                                |
| Asset\- and mortgage\-backed securities     | 173                   | —                     | 173                   | (a)                                |
| Corporate obligations                       | 467                   | —                     | 467                   | (a)                                |
| Other fixed income securities               | 92                    | —                     | 92                    | (a)                                |
| Restricted cash equivalents and investments | 38                    | 38                    | —                     | (a)                                |
| Long\-term investments                      | 513                   | 485                   | 28                    | (a)                                |
| Hedge derivatives, net                      |                       |                       |                       |                                    |
| Fuel hedge contracts                        | (66

)          | (43

)          | (23

)          | (a)(b)                             |
| Foreign currency exchange contracts         | (17

)          | —                     | (17

)          | (a)                                |

|                                             |                       |                       |                       |                                    |
| ------------------------------------------- | --------------------- | --------------------- | --------------------- | ---------------------------------- |
|                                             | **December 31, 2016** | **December 31, 2016** | **December 31, 2016** | **Valuation**

**Technique** |
| **(in millions)**                           | **Total**             | **Level 1**           | **Level 2**           | **Valuation**

**Technique** |
| Cash equivalents                            | $2,279                | $2,279                | $—                    | (a)                                |
| Short\-term investments                     |
                |                       |
                |
                             |
| U\.S\. government securities                | 112                   | 86                    | 26                    | (a)                                |
| Asset\- and mortgage\-backed securities     | 68                    | —                     | 68                    | (a)                                |
| Corporate obligations                       | 295                   | —                     | 295                   | (a)                                |
| Other fixed income securities               | 12                    | —                     | 12                    | (a)                                |
| Restricted cash equivalents and investments | 61                    | 61                    | —                     | (a)                                |
| Long\-term investments                      | 139                   | 115                   | 24                    | (a)                                |
| Hedge derivatives, net                      |                       |                       |                       |                                    |
| Fuel hedge contracts                        | (324

)         | (26

)          | (298

)         | (a)(b)                             |
| Foreign currency exchange contracts         | 27                    | —                     | 27                    | (a)                                |

|       |                                                                                |
| ----- | ------------------------------------------------------------------------------- |
| ^(1)^ | See  Note 9 , "Employee Benefit Plans," for fair value of benefit plan assets\. |

 63


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

Management assessed the effectiveness of AAG’s and American’s internal control over financial reporting as of December 31, 2018\. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in its Internal Control – Integrated Framework (2013 Framework)\.

Based on our assessment and those criteria, AAG’s and American’s management concludes that AAG and American, respectively, maintained effective internal control over financial reporting as of December 31, 2018\.

AAG’s and American’s independent registered public accounting firm has issued an attestation report on the effectiveness of AAG’s and American’s internal control over financial reporting\. That report has been included herein\.

175


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

**SIGNATURES**

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

|                         |                                   |                                      |
| ----------------------- | --------------------------------- | ------------------------------------ |
|                         | **American Airlines Group Inc\.** | **American Airlines Group Inc\.**    |
| Date: February 21, 2018 | By:                               | /s/ W\. Douglas Parker               |
|                         |                                   | W\. Douglas Parker                   |
|                         |                                   | Chairman and Chief Executive Officer |
|                         |                                   | (Principal Executive Officer)        |

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

|                         |                              |                                      |
| ----------------------- | ---------------------------- | ------------------------------------ |
|                         | **American Airlines, Inc\.** | **American Airlines, Inc\.**         |
| Date: February 21, 2018 | By:                          | /s/ W\. Douglas Parker               |
|                         |                              | W\. Douglas Parker                   |
|                         |                              | Chairman and Chief Executive Officer |
|                         |                              | (Principal Executive Officer)        |

198


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

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

|                                                                                |                                                                                |                                                                                |                                                                                |                                                                                |                                                                                |
| --------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------- |
|                                                                                | **Increase (decrease) in 2017 from 2016 (a):**                                                            | **Increase (decrease) in 2017 from 2016 (a):**                                                            | **Increase (decrease) in 2017 from 2016 (a):**                                                            | **Increase (decrease) in 2017 from 2016 (a):**                                                            | **Increase (decrease) in 2017 from 2016 (a):**                                                            |
|                                                                                | **Domestic**                                                                                | **Atlantic**                                                                                | **Pacific**                                                                                | **Latin**                                                                                | **Total**                                                                                |
| Passenger revenue (in millions)                                                                           | $885                                                                                | $117                                                                                | $(144)                                                                                | $173                                                                                | $1,031                                                                                |
| Passenger revenue                                                                                | 4\.4 %                                                                                | 2\.0%                                                                                | (3\.2)%                                                                                | 5\.8%                                                                                | 3\.1 %                                                                                |
| Average fare per passenger                                                                                | 0\.2 %                                                                                | 1\.5%                                                                                | (0\.1)%                                                                                | 4\.0%                                                                                | (0\.3)%                                                                                |
| Yield                                                                                | (0\.3)%                                                                                | 1\.1%                                                                                | (2\.4)%                                                                                | 4\.1%                                                                                | 0\.2 %                                                                                |
| PRASM                                                                                | (0\.5)%                                                                                | 1\.6%                                                                                | (6\.0)%                                                                                | 3\.3%                                                                                | (0\.4)%                                                                                |
| Passengers                                                                                | 4\.2 %                                                                                | 0\.5%                                                                                | (3\.1)%                                                                                | 1\.7%                                                                                | 3\.4 %                                                                                |
| RPMs (traffic)                                                                                | 4\.7 %                                                                                | 0\.9%                                                                                | (0\.9)%                                                                                | 1\.6%                                                                                | 2\.8 %                                                                                |
| ASMs (capacity)                                                                                | 4\.9 %                                                                                | 0\.4%                                                                                | 2\.9 %                                                                                | 2\.4%                                                                                | 3\.5 %                                                                                |
| Passenger load factor (points)                                                                            | (0\.2)                                                                                | 0\.4                                                                                | (3\.0)                                                                                | (0\.7)                                                                                | (0\.5)                                                                                |
| (a) See Part II, Item 6, Selected Financial Data, of this report for the definition of these statistics\. | (a) See Part II, Item 6, Selected Financial Data, of this report for the definition of these statistics\. | (a) See Part II, Item 6, Selected Financial Data, of this report for the definition of these statistics\. | (a) See Part II, Item 6, Selected Financial Data, of this report for the definition of these statistics\. | (a) See Part II, Item 6, Selected Financial Data, of this report for the definition of these statistics\. | (a) See Part II, Item 6, Selected Financial Data, of this report for the definition of these statistics\. |

Passenger revenue increased $1\.0 billion, or 3\.1%, in 2017 as compared to 2016, primarily due to a 2\.8% increase in traffic\. PRASM decreased 0\.4% in 2017 as compared to 2016\. The decline in PRASM was driven by factors including more aggressive low\-cost carrier pricing in our hub markets, temporary share loss during roll\-out of our Basic Economy pricing, and softer demand in China and Guam\. Our revenue in 2017 was negatively impacted by severe storms during the third quarter\.

Cargo revenue increased $180 million, or 19\.3%, in 2017 as compared to 2016 due to higher year\-over\-year international freight volume and yield\.

***Operating Expense***

The table below includes data related to the Company's operating expense for the years ended December 31 (in millions, except percentage changes):

|                                                    |          |          |                         |              |
| -------------------------------------------------- | -------- | -------- | ----------------------- | ------------ |
|                                                    | **2017** | **2016** | **Increase (Decrease)** | **% Change** |
| Salaries and related costs                         | $10,941  | $10,176  | $765                    | 7\.5         |
| Aircraft fuel                                      | 6,913    | 5,813    | 1,100                   | 18\.9        |
| Landing fees and other rent                        | 2,240    | 2,165    | 75                      | 3\.5         |
| Regional capacity purchase                         | 2,232    | 2,197    | 35                      | 1\.6         |
| Depreciation and amortization                      | 2,149    | 1,977    | 172                     | 8\.7         |
| Aircraft maintenance materials and outside repairs | 1,856    | 1,749    | 107                     | 6\.1         |
| Distribution expenses                              | 1,435    | 1,395    | 40                      | 2\.9         |
| Aircraft rent                                      | 621      | 680      | (59)                    | (8\.7)       |
| Special charges                                    | 176      | 745      | (569)                   | NM           |
| Other operating expenses                           | 5,550    | 5,317    | 233                     | 4\.4         |
| Total operating expenses                           | $34,113  | $32,214  | $1,899                  | 5\.9         |

Salaries and related costs increased $765 million, or 7\.5%, in 2017 as compared to 2016, primarily due to higher pay rates and benefit expenses driven by collective bargaining agreements finalized in 2016, and a 2\.5% increase in average full\-time equivalent employees, partially offset by a decrease in profit sharing and other employee incentives\.

Aircraft fuel expense increased $1\.1 billion, or 18\.9%, in 2017 as compared to 2016, primarily due to increased fuel prices and a 3\.5% increase in capacity\. The table below presents the significant changes in aircraft fuel cost per gallon for the years ended December 31 (in millions, except percentage changes and per gallon data):

|                                                                |                   |                   |                         |                              |                              |                              |
| -------------------------------------------------------------- | ----------------- | ----------------- | ----------------------- | ---------------------------- | ---------------------------- | ---------------------------- |
|                                                                | **(In millions)** | **(In millions)** |                         | **Average price per gallon** | **Average price per gallon** | **Average price per gallon** |
|                                                                | **2017**          | **2016**          | **%**

**Change** | **2017**                     | **2016**                     | **%**

**Change**      |
| Total aircraft fuel purchase cost excluding fuel hedge impacts | $6,911            | $5,596            | 23\.5                   | $1\.74                       | $1\.43                       | 21\.7                        |
| Hedge losses reported in fuel expense                          | 2                 | 217               | NM                      | —                            | 0\.06                        | NM                           |
| Fuel expense                                                   | $6,913            | $5,813            | 18\.9                   | $1\.74                       | $1\.49                       | 16\.8                        |
| Total fuel consumption (gallons)                               | 3,978             | 3,904             | 1\.9                    |                              |                              |                              |

28


Annual Report of Southwest Airlines Co\. for year 2019

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on  February 3, 2020 , on behalf of the registrant and in the capacities indicated\.

|                            |                                                                                |
| -------------------------- | --------------------------------------------------------------------------------------------- |
| **Signature**              | **Title**                                                                                |
| /s/ GARY C\. KELLY         | Chairman of the Board & Chief Executive Officer (Principal Executive Officer)                 |
| **Gary C\. Kelly**         |                                                                                |
| /s/ TAMMY ROMO             | Executive Vice President & Chief Financial Officer (Principal Financial & Accounting Officer) |
| **Tammy Romo**             |                                                                                |
| /s/ RON RICKS              | Vice Chairman of the Board                                                                    |
| **Ron Ricks**              |                                                                                |
| /s/ DAVID W\. BIEGLER      | Director                                                                                |
| **David W\. Biegler**      |                                                                                |
| /s/ J\. VERONICA BIGGINS   | Director                                                                                |
| **J\. Veronica Biggins**   |                                                                                |
| /s/ DOUGLAS H\. BROOKS     | Director                                                                                |
| **Douglas H\. Brooks**     |                                                                                |
| /s/ WILLIAM H\. CUNNINGHAM | Director                                                                                |
| **William H\. Cunningham** |                                                                                |
| /s/ JOHN G\. DENISON       | Director                                                                                |
| **John G\. Denison**       |                                                                                |
| /s/ THOMAS W\. GILLIGAN    | Director                                                                                |
| **Thomas W\. Gilligan**    |                                                                                |
| /s/ GRACE D\. LIEBLEIN     | Director                                                                                |
| **Grace D\. Lieblein**     |                                                                                |
| /s/ NANCY B\. LOEFFLER     | Director                                                                                |
| **Nancy B\. Loeffler**     |                                                                                |
| /s/ JOHN T\. MONTFORD      | Director                                                                                |
| **John T\. Montford**      |                                                                                |

126


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

SEASONALITY AND OTHER FACTORS

Our results of operations for any interim period are not necessarily indicative of those for the entire year because our business is subject to seasonal fluctuations\. Our profitability is generally lowest during the first and fourth quarters due principally to fewer departures and passengers\. Profitability typically increases in the second quarter and then reaches its highest level during the third quarter as a result of vacation travel\. However, we have significantly moderated the impact of seasonality of our operations through continued growth from the West Coast to leisure destinations, like Hawaii and Costa Rica, and expansion to leisure and business destinations in the mid\-continental and eastern U\.S\.

In addition to passenger loads, factors that could cause our quarterly operating results to vary include:

• pricing initiatives by us or our competitors,

• changes in fuel costs,

• increases in competition at our primary airports,

• general economic conditions and resulting changes in passenger demand,

• increases or decreases in passenger and volume\-driven variable costs, and

• air space and Air Traffic Control delays, particularly in Seattle and San Francisco\.

Many of the markets we serve experience inclement weather conditions in the winter, causing increased costs associated with deicing aircraft, canceling flights and accommodating displaced passengers\. Due to our geographic area of operations, we can be more susceptible to adverse weather conditions, particularly in the state of Alaska and the Pacific Northwest, than some of our competitors who may be better able to spread the impact of weather\-related risks over larger route systems\.

No material part of our business, or that of our subsidiaries, is dependent upon a single customer, or upon a few high\-volume customers\.

EMPLOYEES

Our business is labor intensive\. As of December 31, 2019, we employed 24,134 (17,919 at Alaska, 4,301 at Horizon, and 1,914 at McGee Air Services) active full\-time and part\-time employees\. Wages and benefits, including variable incentive pay, represented approximately 43% of our total non\-fuel operating expenses in 2019 and 41% in 2018\.

Most major airlines, including Alaska and Horizon, have employee groups that are covered by collective bargaining agreements (CBAs)\. Airlines with unionized work forces generally have higher labor costs than carriers without unionized work forces, and they may not have the ability to adjust labor costs downward quickly enough to respond to new competition or slowing demand\.

As part of the integration, we have been working to bring represented work groups under single CBAs\. In 2019, our aircraft maintenance technicians, represented by the Aircraft Mechanics Fraternal Association (AMFA), ratified a two\-year contract extension, bringing Airbus and Boeing technicians under a single CBA\. Now all five of our unionized groups at Alaska are under joint collective agreements with integrated seniority lists in place\.

At December 31, 2019, labor unions represented 86% of Alaska’s, 43% of Horizon’s, and 87% of McGee Air Services' employees\.

Our relations with U\.S\. labor organizations are governed by the Railway Labor Act (RLA)\. Under the RLA, collective bargaining agreements do not expire, but instead become amendable as of a stated date\. If either party wishes to modify the terms of any such agreement, it must notify the other party in the manner prescribed by the RLA and/or described in the agreement\. After receipt of such notice, the parties must meet for direct negotiations, and if no agreement is reached, either party may request the National Mediation Board to initiate a process including mediation, arbitration, and a potential “cooling off” period that must be followed before either party may engage in self\-help\.

13


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

*Mainline Operating Expenses*

|                                    |                                              |                                              |                                              |                                                       |
| ---------------------------------- | -------------------------------------------- | -------------------------------------------- | -------------------------------------------- | ----------------------------------------------------- |
|                                    | **Year Ended**

**December 31,**       | **Year Ended**

**December 31,**       | **Increase**

**(Decrease)**           | **Percent**

**Increase**

**(Decrease)** |
|                                    | **2017**                                     | **2016**                                     | **Increase**

**(Decrease)**           | **Percent**

**Increase**

**(Decrease)** |
|                                    | **(In millions, except percentage changes)** | **(In millions, except percentage changes)** | **(In millions, except percentage changes)** | **(In millions, except percentage changes)**          |
| Aircraft fuel and related taxes    | $6,128                                       | $5,071                                       | $1,057                                       | 20\.8                                                 |
| Salaries, wages and benefits       | 11,804                                       | 10,881                                       | 923                                          | 8\.5                                                  |
| Maintenance, materials and repairs | 1,959                                        | 1,834                                        | 125                                          | 6\.8                                                  |
| Other rent and landing fees        | 1,806                                        | 1,772                                        | 34                                           | 1\.9                                                  |
| Aircraft rent                      | 1,197                                        | 1,203                                        | (6)                                          | (0\.4)                                                |
| Selling expenses                   | 1,477                                        | 1,323                                        | 154                                          | 11\.6                                                 |
| Depreciation and amortization      | 1,702                                        | 1,525                                        | 177                                          | 11\.6                                                 |
| Special items, net                 | 712                                          | 709                                          | 3                                            | 0\.5                                                  |
| Other                              | 4,806                                        | 4,532                                        | 274                                          | 6\.1                                                  |
| Total mainline operating expenses  | $31,591                                      | $28,850                                      | $2,741                                       | 9\.5                                                  |

Mainline operating expenses increased $2\.7 billion, or 9\.5%, in 2017 from 2016\. The increase in operating expenses was primarily driven by higher fuel costs and wage rates\.

Significant changes in the components of mainline operating expenses are as follows:

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
| • | Aircraft fuel and related taxes  increase d  20\.8 % primarily due to a  21\.4 %  increase  in the average price per gallon of fuel to  $1\.71  in  2017  from  $1\.41  in  2016 , offset in part by a  0\.5 % decrease in gallons of fuel consumed\. The decrease in fuel consumption was primarily driven by the operation of more fuel efficient aircraft during 2017 in connection with American’s fleet renewal program\. |

|   |                                                                                |
| - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | Salaries, wages and benefits  increase d  8\.5 % primarily due to mid\-contract pay rate increases for pilots and flight attendants effective in the second quarter of 2017, as well as rate increases for maintenance and fleet service work groups, which became effective in the third quarter of 2016\. |

|   |                                                                                |
| - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | Maintenance, materials and repairs  increase d  6\.8 % as compared to 2016 primarily due to a contract change that accelerated the timing of certain maintenance expenses incurred\. Certain flight equipment was transitioned to a new flight hour based contract (referred to as power by the hour) where expense is incurred and recognized based on actual hours flown\. Previously, this flight equipment was covered by a time and materials based contract where expense is incurred and recognized as maintenance is performed\. |

|   |                                                                                |
| - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | Selling expenses  increase d  11\.6 % due primarily to higher commissions driven by the overall increase in revenues as well as an increase in flown premium tickets, which are subject to higher commissions\. |

|   |                                                                                |
| - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | Depreciation and amortization  increase d  11\.6 % primarily due to depreciation related to aircraft purchased in connection with American’s fleet renewal program\. In 2017, American took delivery of 57 new mainline aircraft\. |

|   |                                                                                |
| - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | Other operating expenses  increase d  6\.1 % primarily due to expenses associated with improving our product offerings, customer experience and operational reliability, such as food and beverage costs and costs associated with team member training\. |

60


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

|       |                                                                                |
| ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(2)^ | Our union\-represented mainline employees are covered by agreements that are not currently amendable\. Joint collective bargaining agreements (JCBAs) have been reached with post\-Merger employee groups, except the maintenance, fleet service, stock clerks, maintenance control technicians and maintenance training instructors represented by the TWU\-IAM Association who are covered by separate CBAs that become amendable in the third quarter of 2018\. Until those agreements become amendable, negotiations for JCBAs will be conducted outside the traditional RLA bargaining process as described above, and, in the meantime, no self\-help will be permissible\. |

|       |                                                                                |
| ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(3)^ | Among our wholly\-owned regional subsidiaries, the PSA mechanics and flight attendants have agreements that are now amendable and are engaged in traditional RLA negotiations\. The Envoy passenger service employees are engaged in traditional RLA negotiations for an initial CBA\. The Piedmont fleet and passenger service employees have reached a tentative five\-year agreement which is subject to membership ratification\. |

For more discussion, see Part I, Item 1A\. Risk Factors – “*Union disputes, employee strikes and other labor\-related disruptions may adversely affect our operations*\.”

**Aircraft Fuel**

Our operations and financial results are significantly affected by the availability and price of jet fuel, which is our second largest expense\. Based on our 2018 forecasted mainline and regional fuel consumption, we estimate that a one cent per gallon increase in aviation fuel price would increase our 2018 annual fuel expense by $45 million\.

The following table shows annual aircraft fuel consumption and costs, including taxes, for our mainline and regional operations for 2017, 2016 and 2015 (gallons and aircraft fuel expense in millions)\.

|          |             |                                         |                                      |                                                    |
| -------- | ----------- | --------------------------------------- | ------------------------------------ | -------------------------------------------------- |
| **Year** | **Gallons** | **Average Price**

**per Gallon** | **Aircraft Fuel**

**Expense** | **Percent of Total**

**Operating Expenses** |
| 2017     | 4,352       | $1\.73                                  | $7,510                               | 19\.7%                                             |
| 2016     | 4,347       |  1\.42                                  |  6,180                               | 17\.7%                                             |
| 2015     | 4,323       |  1\.72                                  |  7,456                               | 21\.4%                                             |

As of December 31, 2017, we did not have any fuel hedging contracts outstanding to hedge our fuel consumption\. As such, and assuming we do not enter into any future transactions to hedge our fuel consumption, we will continue to be fully exposed to fluctuations in fuel prices\. Our current policy is not to enter into transactions to hedge our fuel consumption, although we review that policy from time to time based on market conditions and other factors\.

Fuel prices have fluctuated substantially over the past several years\. We cannot predict the future availability, price volatility or cost of aircraft fuel\. Natural disasters (including hurricanes or similar events in the U\.S\. Southeast and on the Gulf Coast where a significant portion of domestic refining capacity is located), political disruptions or wars involving oil\-producing countries, changes in fuel\-related governmental policy, the strength of the U\.S\. dollar against foreign currencies, changes in access to petroleum product pipelines and terminals, speculation in the energy futures markets, changes in aircraft fuel production capacity, environmental concerns and other unpredictable events may result in fuel supply shortages, distribution challenges, additional fuel price volatility and cost increases in the future\. See Part I, Item 1A\. Risk Factors – “*Our business is very dependent on the price and availability of aircraft fuel\. Continued periods of high volatility in fuel costs, increased fuel prices or significant disruptions in the supply of aircraft fuel could have a significant negative impact on our operating results and liquidity*\.”

**Seasonality and Other Factors**

Due to the greater demand for air travel during the summer months, revenues in the airline industry in the second and third quarters of the year tend to be greater than revenues in the first and fourth quarters of the year\. General economic conditions, fears of terrorism or war, fare initiatives, fluctuations in fuel prices, labor actions, weather, natural disasters, outbreaks of disease and other factors could impact this seasonal pattern\. Therefore, our quarterly results of operations are not necessarily indicative of operating results for the entire year, and historical operating results in a quarterly or annual period are not necessarily indicative of future operating results\.

10


Annual Report of Southwest Airlines Co\. for year 2018

**DISCLOSURE REGARDING FORWARD\-LOOKING INFORMATION**

This Form 10\-K contains "forward\-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934\. Forward\-looking statements are based on, and include statements about, the Company’s estimates, expectations, beliefs, intentions, and strategies for the future, and the assumptions underlying these forward\-looking statements\. Specific forward\-looking statements can be identified by the fact that they do not relate strictly to historical or current facts and include, without limitation, words such as "anticipates," "believes," "estimates," "expects," "intends," "may," "will," "would," "could," "should," "projects," "plans," "goal," and similar expressions\. Although management believes these forward\-looking statements are reasonable as and when made, forward\-looking statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict\. Therefore, actual results may differ materially from what is expressed in or indicated by the Company's forward\-looking statements or from historical experience or the Company's present expectations\. Known material risk factors that could cause these differences are set forth below under "Risk Factors\." Additional risks or uncertainties (i) that are not currently known to the Company, (ii) that the Company currently deems to be immaterial, or (iii) that could apply to any company, could also materially adversely affect the Company's business, financial condition, or future results\.

Caution should be taken not to place undue reliance on the Company's forward\-looking statements, which represent the Company's views only as of the date this Form 10\-K is filed\. The Company undertakes no obligation to update publicly or revise any forward\-looking statement, whether as a result of new information, future events, or otherwise\.

**Item 1A\.*****Risk Factors***

***The airline industry is particularly sensitive to changes in economic conditions; in the event of unfavorable economic conditions or economic uncertainty, the Company's results of operations could be negatively affected, which could require the Company to adjust its business strategies\.***

The airline industry, which is subject to relatively high fixed costs and highly variable and unpredictable demand, is particularly sensitive to changes in economic conditions\. Historically, unfavorable U\.S\. economic conditions have driven changes in travel patterns and have resulted in reduced spending for both leisure and business travel\. For some consumers, leisure travel is a discretionary expense, and short\-haul travelers, in particular, have the option to replace air travel with surface travel\. Businesses are able to forego air travel by using communication alternatives such as videoconferencing and the Internet or may be more likely to purchase less expensive tickets to reduce costs, which can result in a decrease in average revenue per seat\. Unfavorable economic conditions, when low fares are often used to stimulate traffic, have also historically hampered the ability of airlines to raise fares to counteract any increases in fuel, labor, and other costs\. Although the U\.S\. economy has experienced modest growth over the course of the past several years, any continuing or future U\.S\. or global economic uncertainty could negatively affect the Company's results of operations and could cause the Company to adjust its business strategies\. Further, because expenses of a flight do not vary significantly with the number of passengers carried, a relatively small change in the number of passengers can have a disproportionate effect on an airline’s operating and financial results\. Therefore, any general reduction in airline passenger traffic could adversely affect the Company's results of operations\.

***The Company's business can be significantly impacted by high and/or volatile fuel prices, and the Company's operations are subject to disruption in the event of any delayed supply of fuel; therefore, the Company's strategic plans and future profitability are likely to be impacted by the Company's ability to effectively address fuel price increases and fuel price volatility and availability\.***

Airlines are inherently dependent upon energy to operate, and jet fuel and oil represented approximately 25 percent of the Company's operating expenses for 2018\. As discussed above under "Business \- Cost Structure," the cost of fuel can be extremely volatile and unpredictable, and even a small change in market fuel prices can significantly affect profitability\. Furthermore, volatility in fuel prices can be due to many external factors that are beyond the Company's control\. For example, fuel prices can be impacted by political and economic factors, such as (i) dependency on foreign imports of crude oil and the potential for hostilities or other conflicts in oil producing areas; (ii) limited domestic refining or pipeline capacity due to weather, natural disasters, or other factors; (iii) worldwide demand for fuel, particularly in developing countries, which can result in inflated energy prices; (iv) changes in U\.S\. governmental policies on fuel production, transportation, taxes, and marketing; and (v) changes in currency exchange rates\.

21


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

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

|           |                 |                                                                                |
| --------- | --------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
|  ^10\.85  | UAL
United | [Supplemental Agreement No\. 40 to Purchase Agreement No\. 1951, dated December 5, 2006 (filed as Exhibit 10\.23(ao) to Continental's Form 10\-K for the year ended December 31, 2006, Commission file number 1\-10323, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/319687/000031968707000009/f200610kexh1023ao.htm)       |
|  ^10\.86  | UAL
United | [Supplemental Agreement No\. 41 to Purchase Agreement No\. 1951, dated June 1, 2007 (filed as Exhibit 10\.1 to Continental's Form 10\-Q for the quarter ended June 30, 2007, Commission file number 1\-10323, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/319687/000031968707000040/fexhibit101.htm)                       |
|  ^10\.87  | UAL
United | [Supplemental Agreement No\. 42 to Purchase Agreement No\. 1951, dated June 12, 2007 (filed as Exhibit 10\.2 to Continental's Form 10\-Q for the quarter ended June 30, 2007, Commission file number 1\-10323, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/319687/000031968707000040/fexhibit102.htm)                      |
|  ^10\.88  | UAL
United | [Supplemental Agreement No\. 43 to Purchase Agreement No\. 1951, dated July 18, 2007 (filed as Exhibit 10\.1 to Continental's Form 10\-Q for the quarter ended September 30, 2007, Commission file number 1\-10323, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/319687/000031968707000049/f3rd10qfileexh101.htm)           |
|  ^10\.89  | UAL
United | [Supplemental Agreement No\. 44 to Purchase Agreement No\. 1951, dated December 7, 2007 (filed as Exhibit 10\.21(as) to Continental's Form 10\-K for the year ended December 31, 2007, Commission file number 1\-10323, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/319687/000031968708000009/f200710kexh1021as.htm)       |
|  ^10\.90  | UAL
United | [Supplemental Agreement No\. 45 to Purchase Agreement No\. 1951, dated February 20, 2008 (filed as Exhibit 10\.2 to Continental's Form 10\-Q for the quarter ended March 31, 2008, Commission file number 1\-10323, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/319687/000031968708000020/f1st10qfileexh102.htm)           |
|  ^10\.91  | UAL
United | [Supplemental Agreement No\. 46 to Purchase Agreement No\. 1951, dated June 25, 2008 (filed as Exhibit 10\.5 to Continental's Form 10\-Q for the quarter ended June 30, 2008, Commission file number 1\-10323, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/319687/000031968708000040/f2nd10qfileexh105.htm)                |
|  ^10\.92  | UAL
United | [Supplemental Agreement No\. 47 to Purchase Agreement No\. 1951, dated October 30, 2008 (filed as Exhibit 10\.21(av) to Continental's Form 10\-K for the year ended December 31, 2008, Commission file number 1\-10323, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/319687/000031968709000008/f123108form10kexh1021av.htm) |
|  ^10\.93  | UAL
United | [Supplemental Agreement No\. 48 to Purchase Agreement No\. 1951, dated January 29, 2009 (filed as Exhibit 10\.3 to Continental's Form 10\-Q for the quarter ended June 30, 2009, Commission file number 1\-10323, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/319687/000031968709000038/exhibit103.htm)                    |
|  ^10\.94  | UAL
United | [Supplemental Agreement No\. 49 to Purchase Agreement No\. 1951, dated May 1, 2009 (filed as Exhibit 10\.4 to Continental's Form 10\-Q for the quarter ended June 30, 2009, Commission file number 1\-10323, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/319687/000031968709000038/exhibit104.htm)                         |
|  ^10\.95  | UAL
United | [Supplemental Agreement No\. 50 to Purchase Agreement No\. 1951, dated July 23, 2009 (filed as Exhibit 10\.2 to Continental's Form 10\-Q for the quarter ended September 30, 2009, Commission file number 1\-10323, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/319687/000031968709000050/fexhibit102.htm)                 |
|  ^10\.96  | UAL
United | [Supplemental Agreement No\. 51 to Purchase Agreement No\. 1951, dated August 5, 2009 (filed as Exhibit 10\.3 to Continental's Form 10\-Q for the quarter ended September 30, 2009, Commission file number 1\-10323, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/319687/000031968709000050/fexhibit103.htm)                |
|  ^10\.97  | UAL
United | [Supplemental Agreement No\. 52 to Purchase Agreement No\. 1951, dated August 31, 2009 (filed as Exhibit 10\.4 to Continental's Form 10\-Q for the quarter ended September 30, 2009, Commission file number 1\-10323, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/319687/000031968709000050/fexhibit104.htm)               |
|  ^10\.98  | UAL
United | [Supplemental Agreement No\. 53 to Purchase Agreement No\. 1951, dated December 23, 2009 (filed as Exhibit 10\.22(bb) to Continental's Form 10\-K for the year ended December 31, 2009, Commission file number 1\-10323, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/319687/000031968710000011/fexhibit1022bb.htm)         |
|  ^10\.99  | UAL
United | [Supplemental Agreement No\. 54 to Purchase Agreement No\. 1951, dated March 2, 2010 (filed as Exhibit 10\.2 to Continental's Form 10\-Q for the quarter ended March 31, 2010, Commission file number 1\-10323, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/319687/000031968710000020/exhibit102.htm)                      |
|  ^10\.100 | UAL
United | [Supplemental Agreement No\. 55 to Purchase Agreement No\. 1951, dated March 31, 2010 (filed as Exhibit 10\.3 to Continental's Form 10\-Q for the quarter ended March 31, 2010, Commission file number 1\-10323, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/319687/000031968710000020/exhibit103.htm)                     |
|  ^10\.101 | UAL
United | [Supplemental Agreement No\. 56 to Purchase Agreement No\. 1951, dated August 12, 2010 (filed as Exhibit 10\.4 to Continental's Form 10\-Q for the quarter ended September 30, 2010, Commission File Number 1\-10323, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/319687/000031968710000067/exhibit104.htm)                |
|  ^10\.102 | UAL
United | [Supplemental Agreement No\. 57 to Purchase Agreement No\. 1951, dated March 2, 2011 (filed as Exhibit 10\.1 to UAL's Form 10\-Q for the quarter ended March 31, 2011, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000119312511105320/dex101.htm)                                   |

103


Annual Report of United Continental Holdings, Inc\. and United Airlines, Inc\. for year 2019

[Table of Contents](https://www.example.com#s1B306C2BC5705F95B83EC9EC687675EF)

(carrier costs) for operating these flights plus a variable rate adjustment based on agreed performance metrics, subject to annual adjustments\. The fees are based on specific rates multiplied by specific operating statistics (e\.g\., block hours, departures), as well as fixed monthly amounts\. Under these CPAs, the Company is also responsible for all fuel costs incurred, as well as landing fees and other costs, which are either passed through by the regional carrier to the Company without any markup or directly incurred by the Company\. In some cases, the Company owns some or all of the aircraft subject to the CPA and leases such aircraft to the regional carrier\.  In return, the regional carriers operate the capacity of the aircraft included within the scope of such CPA exclusively for United, on schedules determined by the Company\. The Company also determines pricing and revenue management, assumes the inventory and distribution risk for the available seats and permits mileage accrual and redemption for regional flights through its MileagePlus loyalty program\.

Alliances\.  United is a member of Star Alliance, a global integrated airline network and the largest and most comprehensive airline alliance in the world\. As of January 1,  2020 , Star Alliance carriers served nearly 1,300 airports in 195 countries with more than 19,000 daily departures\. Star Alliance members, in addition to United, are Aegean Airlines, Air Canada, Air China, Air India, Air New Zealand, All Nippon Airways ("ANA"), Asiana Airlines, Austrian Airlines, Aerovías del Continente Americano S\.A\. ("Avianca"), Brussels Airlines, Copa Airlines ("Copa"), Croatia Airlines, EGYPTAIR, Ethiopian Airlines, EVA Air, LOT Polish Airlines, Lufthansa, SAS Scandinavian Airlines, Shenzhen Airlines, Singapore Airlines, South African Airways, SWISS, TAP Air Portugal, THAI Airways International and Turkish Airlines\. In addition to its members, Star Alliance includes Shanghai\-based Juneyao Airlines as a connecting partner\.

United has a variety of bilateral commercial alliance agreements and obligations with Star Alliance members, addressing, among other things, reciprocal earning and redemption of frequent flyer miles, access to airport lounges and, with certain Star Alliance  members, codesharing of flight operations (whereby one carrier's selected flights can be marketed under the brand name of another carrier)\. In addition to the alliance agreements with Star Alliance members, United currently maintains independent marketing alliance agreements with other air carriers, including Aeromar, Aer Lingus, Air Dolomiti, Azul Linhas Aéreas Brasileiras S\.A\. ("Azul"), Boutique Air, Cape Air, Edelweiss, Eurowings, Hawaiian Airlines, Olympic Air, Silver Airways and Vistara\. In addition to the marketing alliance agreements with air partners, United also offers a train\-to\-plane codeshare and frequent flyer alliance with Amtrak from Newark on select city pairs in the northeastern United States\.

United also participates in four passenger joint business arrangements ("JBAs"): one with Air Canada and the Lufthansa Group (which includes Lufthansa and its affiliates Austrian Airlines, Brussels Airlines, Eurowings and SWISS) covering transatlantic routes, one with ANA covering certain transpacific routes, one with Air New Zealand covering certain routes between the United States and New Zealand and one with Avianca and Copa Airlines, which, upon receipt of regulatory approvals will cover routes between the United States and Central and South America, excluding Brazil\. These passenger JBAs enable the participating carriers to integrate the services they provide in the respective regions, capturing revenue synergies and delivering enhanced customer benefits, such as highly competitive flight schedules, fares and services\. United also participates in cargo JBAs with ANA for transpacific cargo services and with Lufthansa for transatlantic cargo services\. These cargo JBAs offer expanded and more seamless access to cargo space across the carriers' respective combined networks\.

Loyalty Program\.  United's MileagePlus loyalty program builds customer loyalty by offering awards, benefits and services to program participants\. Members in this program earn miles for flights on United, United Express, Star Alliance members and certain other airlines that participate in the program\. Members can also earn miles by purchasing goods and services from our network of non\-airline partners, such as domestic and international credit card issuers, retail merchants, hotels and car rental companies\. Members can redeem miles for free (other than taxes and government\-imposed fees), discounted or upgraded travel and non\-travel awards\.

United has an agreement with JPMorgan Chase Bank, N\.A\. ("Chase"), pursuant to which members of United's MileagePlus loyalty program who are residents of the United States can earn miles for making purchases using a MileagePlus credit card issued by Chase (the "Co\-Brand Agreement")\. The Co\-Brand Agreement also provides for joint marketing and other support for the MileagePlus credit card and provides Chase with other benefits such as permission to market to the Company's customer database\.

In  2019 , approximately 6\.1 million MileagePlus flight awards were used on United and United Express\. These awards represented 7\.2% of United's total revenue passenger miles\. Total miles redeemed for flights on United and United Express, including class\-of\-service upgrades, represented approximately 87% of the total miles redeemed\. In addition, excluding miles redeemed for flights on United and United Express, MileagePlus members redeemed miles for approximately 2\.2 million other awards\. These awards include United Club memberships, car and hotel awards, merchandise and flights on other air carriers\.

4


Annual Report of Southwest Airlines Co\. for year 2017

Southwest's No Show Policy applies if a Customer does not change or cancel a flight segment at least ten minutes prior to scheduled departure and the Customer does not travel on the scheduled flight\. In such event, subject to certain exceptions, all segments associated with the reservation will be canceled, and (i) with respect to a "Wanna Get Away" fare, unused funds will be forfeited; and (ii) with respect to an "Anytime" or "Business Select" fare, unused funds will be held as travel credit for future travel by the Customer on Southwest\.

***Ancillary Services***

The Company offers ancillary services such as Southwest's EarlyBird Check\-In® and transportation of pets and unaccompanied minors, in accordance with Southwest's respective policies\. EarlyBird Check\-In provides Customers with automatic check\-in and an assigned boarding position before general boarding positions become available, thereby improving Customers' seat selection options (priority boarding privileges are already a benefit of being an "A\-List" tier member under the Company's Rapid Rewards Frequent Flyer Program)\. Southwest’s Pet Policy provides Customers an opportunity to bring a small cat or dog into the aircraft cabin\. Southwest also has an unaccompanied minor travel policy to address the administrative costs and the extra care necessary to safely transport these Customers\.

When available, Southwest also sells Upgraded Boarding at the airport\. These are open priority boarding positions in the first 15 positions in its "A" boarding group\.

Southwest has inflight satellite\-based WiFi equipped on all of its aircraft\. During 2017, Southwest upgraded its WiFi product to increase onboard bandwidth and refreshed its inflight entertainment portal and television options\. Southwest's onboard entertainment options on WiFi\-enabled aircraft for viewing on Customers' personal wireless devices include free access to Southwest's live and on\-demand television product (although free live TV may not be available onboard international flights due to licensing restrictions)\. The refreshed television product currently consists of nearly 20 live channels and up to 75 on\-demand recorded episodes from popular television series\. Southwest also provides movies\-on\-demand and offers a Messaging\-only option, including all WiFi\-enabled stops and connections\. The Messaging service allows access to iMessage and pre\-downloaded apps for Viber and WhatsApp\. Customers do not have to purchase WiFi to access television offerings, movies\-on\-demand, or the Messaging\-only service\.

**Rapid Rewards Frequent Flyer Program**

Southwest's Rapid Rewards frequent flyer program enables program members ("Members") to earn points for every dollar spent on Southwest fares\. The amount of points earned under the program is based on the fare and fare class purchased, with higher fare products (e\.g\., Business Select) earning more points than lower fare products (e\.g\., Wanna Get Away)\. Each fare class is associated with a points earning multiplier, and points for flights are calculated by multiplying the fare for the flight by the fare class multiplier\. Likewise, the amount of points required to be redeemed for a flight is based on the fare and fare class purchased\. Under the program (i) Members are able to redeem their points for every available seat, every day, on every flight, with no blackout dates; and (ii) points do not expire so long as the Member has points\-earning activity during the most recent 24 months\.

Under the program, Members continue to accumulate points until the time they decide to redeem them\. As a result, the program provides Members significant flexibility and options for earning and redeeming rewards\. For example, Members can earn more points (and/or achieve tiered status such as A\-List and Companion Pass faster) by purchasing higher fare tickets\. Members also have significant flexibility in redeeming points, such as the opportunity to book in advance to take advantage of a lower fare (including many fare sales) ticket by redeeming fewer points or by being able to redeem more points and book at the last minute if seats are still available for sale\. Members can also earn points through qualifying purchases with Rapid Rewards Partners (which include, for example, car rental agencies, hotels, restaurants, and retailers), as well as by using Southwest's co\-branded Chase® Visa credit card\. In addition, holders of Southwest's co\-branded Chase Visa credit card are able to redeem their points for items other than travel on Southwest, such as international flights on other airlines, cruises, hotel stays, rental cars, gift cards, event tickets, and more\. In addition to earning points for revenue flights and qualifying purchases with Rapid Rewards Partners, Members also have the ability to purchase, gift, and transfer points, as well as the ability to donate points to selected charities\.

Southwest's Rapid Rewards frequent flyer program features tier and Companion Pass programs for the most active Members, including "A\-List" and "A\-List Preferred" status\. Both A\-List and A\-List Preferred Members enjoy benefits such as "Fly By®" priority check\-in and security lane access, where available, as well as dedicated phone lines, standby priority, and an earnings bonus on eligible revenue flights (25 percent for A\-List and 100 percent for A\-List Preferred)\.

8


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

***Property, Equipment and Depreciation***

Property and equipment are recorded at cost and depreciated using the straight\-line method over their estimated useful lives less an estimated salvage value, which are as follows:

|                                                |                                                                 |                             |
| ---------------------------------------------- | --------------------------------------------------------------- | --------------------------- |
|                                                | **Estimated Useful Life**                                       | **Estimated Salvage Value** |
| Aircraft and other flight equipment:           |                                                                 |                             |
| Boeing 737, Airbus A319/320, and E175 aircraft | 20\-25 years                                                    | 10%                         |
| Bombardier Q400 aircraft                       | 15 years                                                        | 10%                         |
| Buildings                                      | 25 \- 30 years                                                  | —%                          |
| Minor building and land improvements           | 10 years                                                        | —%                          |
| Capitalized leases and leasehold improvements  | Generally shorter of lease term or

estimated useful life | 0\-10%                      |
| Computer hardware and software                 | 3\-10 years                                                     | —%                          |
| Other furniture and equipment                  | 5\-10 years                                                     | —%                          |

Near the end of an asset's estimated useful life, management updates the salvage value estimates based on current market conditions and expected use of the asset\. Repairable and rotable aircraft parts are included in Aircraft and other flight equipment, and are depreciated over the associated fleet life\.

In 2016, the Company changed its accounting estimate for the expected useful life of the B737 NextGen aircraft, which includes the B737\-700, \-800, \-900, \-900ER aircraft and the related parts, from 20 years to 25 years\. The change in estimate was precipitated by management's annual accounting policy review, which considered market studies, asset performance and intended use, as well as industry benchmarking\. The change in estimate was applied prospectively effective October 1, 2016\.

Capitalized interest, based on the Company’s weighted\-average borrowing rate, is added to the cost of the related asset, and is depreciated over the estimated useful life of the asset\.

Maintenance and repairs, other than engine maintenance on B737\-800 engines, are expensed when incurred\. Major modifications that extend the life or improve the usefulness of aircraft are capitalized and depreciated over their estimated period of use\. Maintenance on B737\-800 engines is covered under a power\-by\-the\-hour agreement with a third party beginning in the fourth quarter of 2017, whereby the Company pays a determinable amount, and transfers risk, to a third party\. The Company expenses the contract amounts based on engine usage\.

The Company evaluates long\-lived assets to be held and used for impairment whenever events or changes in circumstances indicate that the total carrying amount of an asset or asset group may not be recoverable\. The Company groups assets for purposes of such reviews at the lowest level, at which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities\. An impairment loss is considered when estimated future undiscounted cash flows expected to result from the use of the asset or asset group and its eventual disposition are less than its carrying amount\. If the asset or asset group is not considered recoverable, a write\-down equal to the excess of the carrying amount over the fair value will be recorded\.

***Goodwill***

Goodwill represents the excess of purchase price over the fair value of the related net assets acquired in the Company's acquisition of Virgin America and is not amortized\. As of December 31, 2017 the goodwill balance was $1\.9 billion, and is associated with the Mainline reporting unit\. The Company reviews goodwill for impairment annually in Q4, or more frequently if events or circumstances indicate than an impairment may exist\. If fair value of the reporting unit does not exceed the carrying amount, an impairment charge may be recorded\. In 2017, the fair value of the reporting unit with goodwill substantially exceeded its carrying value\.

***Intangible Assets***

Intangible assets recorded in conjunction with the acquisition of Virgin America consist primarily of indefinite\-lived airport slots, finite\-lived airport gates and finite\-lived customer relationships\. Finite\-lived intangibles are amortized over their estimated useful lives\. Indefinite\-lived intangibles are not amortized but are tested at least annually for impairment using a similar methodology to property, equipment and goodwill as described above\.

 69


Annual Report of Southwest Airlines Co\. for year 2018

|        |                                                                                |
| ------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
|        | [Supplemental Agreement No\. 98 (incorporated by reference to Exhibit 10\.1(a) to the Company’s Annual Report on Form 10\-K for the year ended December 31, 2016 (File No\. 1\-7259));](http://www.sec.gov/Archives/edgar/data/92380/000009238017000029/luv-12312016xex101a.htm) [Supplemental Agreement No\. 99 (incorporated by reference to Exhibit 10\.1(b) to the Company’s Annual Report on Form 10\-K for the year ended December 31, 2016 (File No\. 1\-7259));](http://www.sec.gov/Archives/edgar/data/92380/000009238017000029/luv-12312016xex101b.htm) [Supplemental Agreement No\. 100 (incorporated by reference to Exhibit 10\.1 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended March 31, 2017 (File No\. 1\-7259));](http://www.sec.gov/Archives/edgar/data/92380/000009238017000078/luv-3312017xex101.htm) [Supplemental Agreement No\. 101 (incorporated by reference to Exhibit 10\.2 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended March 31, 2017 (File No\. 1\-7259));](http://www.sec.gov/Archives/edgar/data/92380/000009238017000078/luv-3312017xex102.htm) [Supplemental Agreement No\. 102 (incorporated by reference to Exhibit 10\.1 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended June 30, 2017 (File No\. 1\-7259))](http://www.sec.gov/Archives/edgar/data/92380/000009238017000146/luv-6302017xex101.htm) ; [Supplemental Agreement No\. 103 (incorporated by reference to Exhibit 10\.1 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended September 30, 2017 (File No\. 1\-7259))](http://www.sec.gov/Archives/edgar/data/92380/000009238017000167/luv-9302017xex101.htm) ; [Supplemental Letter Agreement No\. 6\-1162\-KLK\-0059R3 (incorporated by reference to Exhibit 10\.4 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended September 30, 2017 (File No\. 1\-7259))](http://www.sec.gov/Archives/edgar/data/92380/000009238017000167/luv-9302017xex104.htm) ; [Supplemental Agreement No\. 104 (incorporated by reference to Exhibit 10\.1 to the Company's Quarterly Report on Form 10\-Q for the quarter ended March 31, 2018 (File No\. 1\-7259))\. ](http://www.sec.gov/Archives/edgar/data/92380/000009238018000073/luv-3312018xex101.htm) (1)

 |
| 10\.2  | [Form of Amended and Restated Executive Service Recognition Plan Executive Employment Agreement between the Company and certain Officers of the Company (incorporated by reference to Exhibit 10\.2 to the Company’s Annual Report on Form 10\-K for the year ended December 31, 2008 (File No\. 1\-7259))\.](http://www.sec.gov/Archives/edgar/data/92380/000119312509015591/dex102.htm)  (2)                                                                                |
| 10\.3  | [Letter Agreement between Southwest Airlines Co\. and Gary C\. Kelly, effective as of February 1, 2011 (incorporated by reference to Exhibit 99\.1 to the Company’s Current Report on Form 8\-K filed February 1, 2011 (File No\. 1\-7259))\.](http://www.sec.gov/Archives/edgar/data/92380/000119312511019263/dex991.htm)  (2)

                                                                                |
| 10\.4  | [Southwest Airlines Co\. Amended and Restated Severance Plan for Directors (as amended and restated effective May 19, 2009) (incorporated by reference to Exhibit 10\.1 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended June 30, 2009 (File No\. 1\-7259))\.](http://www.sec.gov/Archives/edgar/data/92380/000009238009000027/ex10_1.htm)

                                                                                |
| 10\.5  | [Southwest Airlines Co\. Outside Director Incentive Plan (as amended and restated effective May 16, 2007) (incorporated by reference to Exhibit 10\.2 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended June 30, 2007 (File No\. 1\-7259))\.](http://www.sec.gov/Archives/edgar/data/92380/000009238007000024/ex10_2.htm)

                                                                                |
| 10\.6  | [Southwest Airlines Co\. 2002 SWAPIA Non\-Qualified Stock Option Plan (incorporated by reference to Exhibit 4\.1 to the Company’s Registration Statement on Form S\-8 filed October 30, 2002 (File No\. 333\-100862))\.](http://www.sec.gov/Archives/edgar/data/92380/000095013402013128/d00561exv4w1.txt)                                                                                |
| 10\.7  | [Southwest Airlines Co\. Amended and Restated 2007 Equity Incentive Plan (incorporated by reference to Exhibit 99\.1 to the Company’s Current Report on Form 8\-K filed May 18, 2015(File No\. 1\-7259))\.](http://www.sec.gov/Archives/edgar/data/92380/000119312515191553/d927261dex991.htm)  (2)                                                                                |
| 10\.8  | [Southwest Airlines Co\. 2007 Equity Incentive Plan Form of Notice of Grant and Terms and Conditions for Stock Option Grant (incorporated by reference to Exhibit 10\.31 to the Company’s Annual Report on Form 10\-K for the year ended December 31, 2007 (File No\. 1\-7259))\. ](http://www.sec.gov/Archives/edgar/data/92380/000095013408001572/d53331exv10w31.htm) (2)                                                                                |
| 10\.9  | [Southwest Airlines Co\. Excess Benefit Plan (incorporated by reference to Exhibit 10\.32 to the Company’s Annual Report on Form 10\-K for the year ended December 31, 2008 (File No\. 1\-7259))\.](http://www.sec.gov/Archives/edgar/data/92380/000119312509015591/dex1032.htm)  (2)                                                                                |
| 10\.10 | [Amendment No\. 1 to the Southwest Airlines Co\. Excess Benefit Plan (incorporated by reference to Exhibit 10\.33 to the Company’s Annual Report on Form 10\-K for the year ended December 31, 2008 (File No\. 1\-7259))\. ](http://www.sec.gov/Archives/edgar/data/92380/000119312509015591/dex1033.htm) (2)                                                                                |
| 10\.11 | [Amendment No\. 2 to the Southwest Airlines Co\. Excess Benefit Plan (incorporated by reference to Exhibit 10\.34 to the Company’s Annual Report on Form 10\-K for the year ended December 31, 2008 (File No\. 1\-7259))\.](http://www.sec.gov/Archives/edgar/data/92380/000119312509015591/dex1034.htm)  (2)                                                                                |
| 10\.12 | [Amended and Restated Southwest Airlines Co\. 2005 Excess Benefit Plan (as amended and restated, effective as of January 1, 2018) (incorporated by reference to Exhibit 10\.5 to the Company’s Quarterly Report on Form 10\-Q for the quarter ended September 30, 2017 (File No\. 1\-7259))\.](http://www.sec.gov/Archives/edgar/data/92380/000009238017000167/luv-9302017ex105.htm)  (2)                                                                                |
| 10\.13 | [Form of Indemnification Agreement between the Company and its Directors (incorporated by reference to Exhibit 10\.1 to the Company’s Current Report on Form 8\-K filed January 22, 2009 (File No\. 1\-7259))\.](http://www.sec.gov/Archives/edgar/data/92380/000119312509009729/dex101.htm)                                                                                |

126


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

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

|               |                                                                  |
| ------------- | ---------------------------------------------------------------- |
| **ITEM 7A\.** | **QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK\.** |

**Interest Rates\.** Our net income is affected by fluctuations in interest rates (e\.g\. interest expense on variable rate debt and interest income earned on short\-term investments)\. The Company's policy is to manage interest rate risk through a combination of fixed and variable rate debt\. The following table summarizes information related to the Company's interest rate market risk at December 31 (in millions):

|                                                                                |          |          |
| --------------------------------------------------------------------------------------- | -------- | -------- |
|                                                                                | **2018** | **2017** |
| **Variable rate debt**                                                                  |          |          |
| Carrying value of variable rate debt at December 31                                     | $3,500   | $3,342   |
| Impact of 100 basis point increase on projected interest expense for the following year | 35       | 33       |
| **Fixed rate debt**                                                                     |          |          |
| Carrying value of fixed rate debt at December 31                                        | 9,945    | 9,926    |
| Fair value of fixed rate debt at December 31                                            | 9,901    | 10,349   |
| Impact of 100 basis point increase in market rates on fair value                        | (378)    | (403)    |

A change in market interest rates would also impact interest income earned on our cash, cash equivalents and short\-term investments\. Assuming our cash, cash equivalents and short\-term investments remain at their average 2018 levels, a 100 basis point increase in interest rates would result in a corresponding increase in the Company's interest income of approximately $45 million during 2019\.

***Commodity Price Risk (Aircraft Fuel)\.*** The price level of aircraft fuel can significantly affect the Company's operations, results of operations, financial position and liquidity\.

Our operational and financial results can be significantly impacted by changes in the price and availability of aircraft fuel\. To provide adequate supplies of fuel, the Company routinely enters into purchase contracts that are customarily indexed to market prices for aircraft fuel, and the Company generally has some ability to cover short\-term fuel supply and infrastructure disruptions at some major demand locations\. The Company's current strategy is to not enter into transactions to hedge fuel price volatility, although the Company regularly reviews its policy based on market conditions and other factors\. The Company's 2019 forecasted fuel consumption is presently approximately 4\.3 billion gallons, and based on this forecast, a one\-dollar change in the price of a barrel of crude oil would change the Company's annual fuel expense by approximately $104 million\.

***Foreign Currency\.*** The Company generates revenues and incurs expenses in numerous foreign currencies\. Changes in foreign currency exchange rates impact the Company's results of operations through changes in the dollar value of foreign currency\-denominated operating revenues and expenses\. Some of the Company's more significant foreign currency exposures include the Canadian dollar, Chinese renminbi, European euro, British pound and Japanese yen\. The Company's current strategy is to not enter into transactions to hedge its foreign currency sales, although the Company regularly reviews its policy based on market conditions and other factors\.

The result of a uniform 1% strengthening in the value of the U\.S\. dollar from December 31, 2018 levels relative to each of the currencies in which the Company has foreign currency exposure would result in a decrease in pre\-tax income of approximately $24 million for the year ending December 31, 2019\. This sensitivity analysis was prepared based upon projected 2019 foreign currency\-denominated revenues and expenses as of December 31, 2018\.

39


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

**PART III**

**ITEM 10\. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE**

Except as stated below, the information required by this Item will be set forth in the Proxy Statement under the captions “Proposal 1 – Election of Directors,” “Executive Officers,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Board Composition” and “Information About the Board of Directors and Corporate Governance” and is incorporated by reference into this Annual Report on Form 10\-K\.

American Airlines Group and American have adopted Standards of Business Conduct (the Ethics Standards) within the meaning of Item 406(b) of Regulation S\-K\. The Ethics Standards apply to all officers and employees of American Airlines Group Inc\. and its subsidiaries, including American\. The Ethics Standards are available on our website at *www\.aa\.com*\. If we make substantive amendments to the Ethics Standards or grant any waiver, including any implicit waiver, to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, we will disclose the nature of such amendment or waiver on our website or in a Current Report on Form 8\-K in accordance with applicable rules and regulations\.

**ITEM 11\. EXECUTIVE COMPENSATION**

The information required by this Item will be set forth in the Proxy Statement under the captions “Information About the Board of Directors and Corporate Governance \- Risk Assessment with Respect to Compensation Practices,” “Director Compensation,” “Compensation Discussion and Analysis,” “Executive Compensation” and “Compensation Committee Report” and is incorporated by reference into this Annual Report on Form 10\-K\.

**ITEM 12\. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS**

The information required by this Item will be set forth in the Proxy Statement under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” and is incorporated by reference into this Annual Report on Form 10\-K\.

**ITEM 13\. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE**

The information required by this Item will be set forth in the Proxy Statement under the captions “Certain Relationships and Related Party Transactions” and “Information About the Board of Directors and Corporate Governance” and is incorporated by reference into this Annual Report on Form 10\-K\.

**ITEM 14\. PRINCIPAL ACCOUNTANT FEES AND SERVICES**

The information required by this Item will be set forth in the Proxy Statement under the caption “Proposal 2 – Ratification of Appointment of Independent Registered Public Accounting Firm” and is incorporated by reference into this Annual Report on Form 10\-K\.

178


Annual Report of Southwest Airlines Co\. for year 2018

**Item 7**\. ***Management's Discussion and Analysis of Financial Condition and Results of Operations***

**YEAR IN REVIEW**

For the 46^th^ consecutive year, the Company was profitable, recording GAAP and non\-GAAP results for 2018 and 2017 as noted in the following tables\. See Note Regarding Use of Non\-GAAP Financial Measures and the Reconciliation of Reported Amounts to Non\-GAAP Financial Measures for additional detail regarding non\-GAAP financial measures\.

The fiscal years ended December 31, 2017 and 2016 reflect recast financial information related to the Company's January 1, 2018, adoption of the New Revenue Standard, the New Retirement Standard, and the New Hedging Standard, as detailed in Note 2 to the Consolidated Financial Statements\.

|                                         |                  |                  |                    |
| --------------------------------------- | ---------------- | ---------------- | ------------------ |
|                                         | **Year ended**   | **Year ended**   |                    |
|                                         | **December 31,** | **December 31,** |                    |
| (in millions, except per share amounts) | **2018**         | **2017**         | **Percent Change** |
| GAAP                                    |                  | **As Recast**    | **Percent Change** |
| Operating income                        | $3,206           | $3,407           | (5\.9)             |
| Net income                              | $2,465           | $3,357           | (26\.6)            |
| Net income per share, diluted           | $4\.29           | $5\.57           | (23\.0)            |
| Non\-GAAP                               |                  |                  |                    |
| Operating income                        | $3,167           | $3,347           | (5\.4)             |
| Net income                              | $2,435           | $2,116           | 15\.1              |
| Net income per share, diluted           | $4\.24           | $3\.51           | 20\.8              |

Net income for the year ended December 31, 2018, was $2\.47 billion, a 26\.6 percentdecrease year\-over\-year, as compared to the 2017 record Net income of $3\.36 billion\. Diluted earnings per share for 2018 was $4\.29, as compared to the 2017 record diluted earnings per share of $5\.57\. Non\-GAAP Net income was a record of $2\.44 billion, a 15\.1 percentincrease year\-over\-year\. Non\-GAAP diluted earnings per share for 2018 was a record of $4\.24\. The decrease in GAAP Net income was primarily driven by a prior year $1\.3 billion adjustment to reduce the Company's Provision for income taxes related to the Tax Cuts and Jobs Act legislation enacted in December 2017 ("Tax Reform"), which resulted in a re\-measurement of the Company's deferred tax assets and liabilities at the new federal corporate tax rate of 21 percent\. This non\-cash item is excluded from the Company's non\-GAAP results\. Operating income for the year ended December 31, 2018, was $3\.2 billion, a decrease of 5\.9 percent year\-over\-year, and non\-GAAP Operating income was also $3\.2 billion\. The decrease in Operating income was primarily driven by higher market jet fuel prices\. These factors were partially offset by a 3\.5 percentincrease in Passenger revenues driven by a 3\.9 percentincrease in capacity, as strong demand enabled the Company to fill the majority of the additional seats offered\.

For the twelve months ended December 31, 2018, the Company's earnings performance, combined with its actions to manage invested capital, produced a 23\.6 percent pre\-tax non\-GAAP return on invested capital ("ROIC"), or 18\.4 percent on an after\-tax basis, compared with the Company's pre\-tax ROIC of 27\.6 percent, or 17\.6 percent on an after\-tax basis, for the twelve months ended December 31, 2017\. The cause of the year\-over\-year decline in pre\-tax ROIC was the decrease in Operating income for the twelve months ended December 31, 2018, compared with the twelve months ended December 31, 2017, as well as the increase in Equity, driven by the impacts of Tax Reform\. The increase in after\-tax ROIC was primarily due to the reduction in the federal corporate tax rate in 2018\. See the Company's calculation of ROIC in the accompanying reconciliation tables as well as the Note Regarding Use of Non\-GAAP Financial Measures\.

During 2018, the Company continued to return value to its Shareholders\. The Company returned $2\.3 billion to Shareholders through $332 million in dividend payments and $2\.0 billion through four separate accelerated share repurchase programs\. During October 2018, the Company launched the Fourth Quarter 2018 ASR Program by advancing $500 million to a financial institution in a privately negotiated transaction\. The Company received 9\.8

39


Annual Report of Southwest Airlines Co\. for year 2018

|                                                                        |                             |                             |
| ---------------------------------------------------------------------- | --------------------------- | --------------------------- |
|                                                                        | **Year ended December 31,** | **Year ended December 31,** |
| (in millions)                                                          | **2017**                    | **2016**                    |
|                                                                        | **As Recast**               | **As Recast**               |
| Mark\-to\-market impact from fuel contracts settling in future periods | $69                         | $9                          |
| Ineffectiveness from fuel hedges settling in future periods (a)        | 31                          | (11)                        |
| Realized ineffectiveness and mark\-to\-market (gains) or losses (a)    | 6                           | 5                           |
| Other (b)                                                              | 6                           | 18                          |
|                                                                        | $112                        | $21                         |

(a) With the adoption of the New Hedging Standard, the separate measurement and recording of ineffectiveness has been eliminated for all cash flow hedges in a hedging relationship effective January 1, 2018\. See Note 2 to the Consolidated Financial Statements for further information\.

(b) Includes $14 million for 2017 and $12 million for 2016 reclassified from Salaries, wages, and benefits to Other (gains) losses, net, as a result of the New Retirement Standard\. See Note 2 to the Consolidated Financial Statements for further information\.

**Income Taxes**

The Company's effective tax rate was a 2\.8 percent benefit for 2017, compared with 36\.7 percent for 2016\. The decrease in rate was driven by a $1\.3 billion reduction in Provision for income taxes related to the Tax Cuts and Jobs Act legislation enacted in December 2017, which resulted in a re\-measurement of the Company's deferred tax assets and liabilities at the new federal corporate tax rate of 21 percent\.

49