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

Maturities for marketable securities (in millions):

|                                       |                                       |                                       |            |  |  |  |            |
|:------------------------------------- |:------------------------------------- |:------------------------------------- | ----------:|:- |:- |:- | ----------:|
| December 31, 2019                     | December 31, 2019                     | December 31, 2019                     | Cost Basis |  |  |  | Fair Value |
| Due in one year or less               | Due in one year or less               | Due in one year or less               |      $ 164 |  |  |  |      $ 165 |
| Due after one year through five years | Due after one year through five years | Due after one year through five years |      1,102 |  |  |  |      1,114 |
| Due after five years through 10 years | Due after five years through 10 years | Due after five years through 10 years |         16 |  |  |  |         16 |
| Total                                 | Total                                 | Total                                 |    $ 1,282 |  |  |  |    $ 1,295 |

Fair Value of Other Financial Instruments

The Company used the following methods and assumptions to determine the fair value of financial instruments that are not recognized at fair value on the consolidated balance sheets\.

Cash and Cash Equivalents : Carried at amortized costs which approximate fair value\.

Debt : Debt assumed in the acquisition of Virgin America was subject to a non\-recurring fair valuation adjustment as part of purchase price accounting\. The adjustment is amortized over the life of the associated debt\. All other fixed\-rate debt is carried at cost\. To estimate the fair value of all fixed\-rate debt as of December 31, 2019, the Company uses the income approach by discounting cash flows using borrowing rates for comparable debt over the weighted life of the outstanding debt\. The estimated fair value of the fixed\-rate debt is Level 3 as certain inputs used are unobservable\.

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

|                                                                |                                                                |                                                                |                   |  |  |  |                   |
|:-------------------------------------------------------------- |:-------------------------------------------------------------- |:-------------------------------------------------------------- | -----------------:|:- |:- |:- | -----------------:|
|                                                                |                                                                |                                                                | December 31, 2019 |  |  |  | December 31, 2018 |
| Fixed rate debt at cost                                        | Fixed rate debt at cost                                        | Fixed rate debt at cost                                        |             $ 473 |  |  |  |             $ 639 |
| Non\-recurring purchase price accounting fair value adjustment | Non\-recurring purchase price accounting fair value adjustment | Non\-recurring purchase price accounting fair value adjustment |                 2 |  |  |  |                 3 |
| Total fixed rate debt                                          | Total fixed rate debt                                          | Total fixed rate debt                                          |             $ 475 |  |  |  |             $ 642 |
| Estimated fair value                                           | Estimated fair value                                           | Estimated fair value                                           |             $ 483 |  |  |  |             $ 641 |

NOTE 5\. LONG\-TERM DEBT

Long\-term debt obligations (in millions):

|                                               |                                               |                                               |         |  |  |  |         |
|:--------------------------------------------- |:--------------------------------------------- |:--------------------------------------------- | -------:|:- |:- |:- | -------:|
|                                               |                                               |                                               |    2019 |  |  |  |    2018 |
| Fixed\-rate notes payable due through 2029    | Fixed\-rate notes payable due through 2029    | Fixed\-rate notes payable due through 2029    |   $ 475 |  |  |  |   $ 642 |
| Variable\-rate notes payable due through 2029 | Variable\-rate notes payable due through 2029 | Variable\-rate notes payable due through 2029 |   1,032 |  |  |  |   1,473 |
| Less debt issuance costs                      | Less debt issuance costs                      | Less debt issuance costs                      |     (8) |  |  |  |    (12) |
| Total debt                                    | Total debt                                    | Total debt                                    |   1,499 |  |  |  |   2,103 |
| Less current portion                          | Less current portion                          | Less current portion                          |     235 |  |  |  |     486 |
| Long\-term debt, less current portion         | Long\-term debt, less current portion         | Long\-term debt, less current portion         | $ 1,264 |  |  |  | $ 1,617 |
| Weighted\-average fixed\-interest rate        | Weighted\-average fixed\-interest rate        | Weighted\-average fixed\-interest rate        |  3\.3 % |  |  |  |  4\.1 % |
| Weighted\-average variable\-interest rate     | Weighted\-average variable\-interest rate     | Weighted\-average variable\-interest rate     |  2\.9 % |  |  |  |  3\.9 % |

Approximately $717 million of the Company's total variable\-rate notes payable are effectively fixed via interest rate swaps at December 31, 2019, bringing the weighted\-average interest rate for the full debt portfolio to 3%\.

During 2019, the Company's total debt decreased $604 million, primarily due to payments of $1\.1 billion, including the prepayment of $779 million of debt\. These reductions in debt were offset by the addition of secured debt financing from multiple lenders of $450 million\. All outstanding debt is secured by aircraft\.

The Company's variable\-rate debt bears interest at a floating rate per annum equal to a margin plus the three or six\-month LIBOR in effect at the commencement of each three or six\-month period, as applicable\. As of December 31, 2019, none of the Company's borrowings were restricted by financial covenants\.

66


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

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

|       |                                                                                |
| ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(d)^ | Includes approximately   77%  investments in corporate debt with a S&P rating lower than A and   23%  investments in corporate debt with a S&P rating A or higher\. Holdings include   85%  U\.S\. companies,   12%  international companies and   3%  emerging market companies\. |

|       |                                                                                |
| ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(e)^ | Includes approximately   32%  investments in U\.S\. domestic government securities,   37%  in emerging market government securities and   31%  in international government securities\. There are no significant foreign currency risks within this classification\. |

|       |                                                                                |
| ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(f)^ | Includes limited partnerships that invest primarily in U\.S\. (  94% ) and European (  6% ) buyout opportunities of a range of privately held companies\. The pension plan’s master trust does not have the right to redeem its limited partnership investment at its net asset value, but rather receives distributions as the underlying assets are liquidated\. It is estimated that the underlying assets of these funds will be gradually liquidated over the next  one  to   ten years \. Additionally, the pension plan’s master trust has future funding commitments of approximately   $1\.0 billion  over the next   ten years \. |

|       |                                                                                |
| ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
| ^(g)^ | Certain investments that are measured using net asset value per share (or its equivalent) as a practical expedient for fair value have not been classified in the fair value hierarchy\. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the notes to the consolidated financial statements\. |

|       |                                                                                |
| ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(h)^ | Investment includes   45%  in an emerging market 103\-12 Investment Trust with investments in emerging country equity securities,   37%  in a collective interest trust investing primarily in short\-term securities,   12%  in Canadian segregated balanced value, income growth and diversified pooled funds and   6%  in a common/collective trust investing in securities of smaller companies located outside the U\.S\., including developing markets\. For some trusts, requests for withdrawals must meet specific requirements with advance notice of redemption preferred\. |

Changes in fair value measurements of Level 3 investments during the year ended  December 31, 2019 , were as follows (in millions):

|                                        |                                 |                                                  |
| -------------------------------------- | ------------------------------- | ------------------------------------------------ |
|                                        | **Private Market Partnerships** | **Insurance Group**

**Annuity Contracts** |
| Beginning balance at December 31, 2018 | $7                              | $2                                               |
| Purchases                              | 3                               | —                                                |
| Ending balance at December 31, 2019    | $10                             | $2                                               |

Changes in fair value measurements of Level 3 investments during the year ended  December 31, 2018 , were as follows (in millions):

|                                                     |                                            |                                                  |
| --------------------------------------------------- | ------------------------------------------ | ------------------------------------------------ |
|                                                     | **Private Market**

**Partnerships** | **Insurance Group**

**Annuity Contracts** |
| Beginning balance at December 31, 2017              | $14                                        | $2                                               |
| Actual loss on plan assets:                         |                                            |                                                  |
| Relating to assets still held at the reporting date | (2

)                                | —                                                |
| Purchases                                           | 1                                          | —                                                |
| Sales                                               | (6

)                                | —                                                |
| Ending balance at December 31, 2018                 | $7                                         | $2                                               |

105


Annual Report of Southwest Airlines Co\. for year 2017

the increase on a dollar basis was primarily due to increased personnel expenses due to higher travel expenses for Flight Crews and higher hotel rates, as well as new Heart\-themed uniforms for the Company's operations personnel\. The Company currently expects Other operating expenses per ASM for first quarter 2018 to increase slightly, compared with first quarter 2017\.

**Other**

Other expenses (income) include interest expense, capitalized interest, interest income, and other gains and losses\.

Interest expense for 2017decreased by $8 million, or 6\.6 percent, compared with 2016, primarily due to the timing of debt activity\. The Company had three debt facilities mature during or since 2016 with higher interest expense than the four debt facilities issued during or since 2016\. The three debt facilities that matured during or since 2016 included the Company's remaining 5\.25% convertible senior notes in October 2016, $300 million of 5\.75% senior unsecured notes in December 2016, and $300 million of 5\.125% senior unsecured notes in March 2017\. The four debt facilities issued during or since 2016 included a $215 million floating rate term loan in October 2016, $300 million of 3\.00% senior unsecured notes in November 2016, $300 million of 2\.75% senior unsecured notes in November 2017, and $300 million of 3\.45% senior unsecured notes in November 2017\.

Capitalized interest for 2017increased by $2 million, or 4\.3 percent, compared with 2016, primarily due to interest on facility construction projects\.

Interest income for 2017increased by $11 million, or 45\.8 percent, compared with 2016, primarily due to higher interest rates\.

Other (gains) losses, net, primarily includes amounts recorded as a result of the Company's hedging activities\. See Note 10 to the Consolidated Financial Statements for further information on the Company's hedging activities\. The following table displays the components of Other (gains) losses, net, for the years ended December 31, 2017, and 2016:

|                                                                        |                             |                             |
| ---------------------------------------------------------------------- | --------------------------- | --------------------------- |
|                                                                        | **Year ended December 31,** | **Year ended December 31,** |
| (in millions)                                                          | **2017**                    | **2016**                    |
| Mark\-to\-market impact from fuel contracts settling in future periods | $69                         | $9                          |
| Ineffectiveness from fuel hedges settling in future periods            | 31                          | (11)                        |
| Realized ineffectiveness and mark\-to\-market (gains) or losses        | 6                           | 5                           |
| Premium cost of fuel contracts                                         | 135                         | 153                         |
| Other                                                                  | (7)                         | 6                           |
|                                                                        | $234                        | $162                        |

**Income Taxes**

The Company's effective tax rate was (7\.3) percent for 2017, compared with 36\.8 percent for 2016\. The decrease in rate was driven by a $1\.4 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\. The Company currently projects a full year 2018 effective tax rate to be in the 23 to 23\.5 percent range, as a result of a lower federal corporate tax rate, and including the estimated impact of state taxes\.

***2016 Compared with 2015***

**Operating Revenues**

Passenger revenues for 2016 increased by $295 million, or 1\.6 percent, compared with 2015\. Holding Load factor and Passenger yield constant, the increase was primarily attributable to a 5\.7 percent increase in capacity as strong

46


Annual Report of United Continental Holdings, Inc\. and United Airlines, Inc\. for year 2017

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

|           |                 |                                                                                |
| ---------:|:--------------- |:---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| \*^10\.86 | UAL
United | [Amended and Restated Letter Agreement No\. 7 to the Airbus A350\-900XWB Purchase Agreement, dated June 19, 2013 (filed as Exhibit 10\.14 to UAL’s Form  10\-Q for the quarter ended June 30, 2013, Commission file number  1\-6033, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000119312513302696/d552832dex1014.htm)                                                                  |
| \*^10\.87 | UAL
United | [Amended and Restated Letter Agreement No\. 10 to the Airbus A350\-900XWB Purchase Agreement, dated June 19, 2013 (filed as Exhibit 10\.15 to UAL’s Form  10\-Q for the quarter ended June 30, 2013, Commission file number  1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000119312513302696/d552832dex1015.htm)                                                                  |
| \*^10\.88 | UAL
United | [Amended and Restated Letter Agreement No\. 12 to the Airbus A350\-900XWB Purchase Agreement, dated June 19, 2013 (filed as Exhibit 10\.16 to UAL’s Form  10\-Q for the quarter ended June 30, 2013, Commission file number  1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000119312513302696/d552832dex1016.htm)                                                                  |
| \*^10\.89 | UAL
United | [Letter Agreement No\. 14 to the Airbus A350\-900XWB Purchase Agreement, dated May 6, 2016, between Airbus S\.A\.S\. and United Airlines, Inc\. (filed as Exhibit 10\.6 to UAL’s Form  10\-Q for the quarter ended June 30, 2016, Commission file number  1\-6033, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000119312516651221/d188420dex106.htm)                                     |
| \*^10\.90 | UAL
United | [Amendment No\. 3, dated March 14, 2017, to Airbus A350\-900XWB Purchase Agreement, dated March 5, 2010, between Airbus S\.A\.S\. and United Airlines, Inc\. (filed as Exhibit 10\.1 to UAL’s Form  10\-Q for the quarter ended March 31, 2017, Commission file number  1\-6033, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000119312517127429/d334701dex101.htm)                       |
| \*^10\.91 | UAL
United | [Amended and  Restated A350\-900 Purchase Agreement, dated September 1, 2017, including letter agreements related thereto, between Airbus S\.A\.S\. and United Airlines, Inc\. (filed as Exhibit 10\.1 to UAL’s Form  10\-Q for the quarter ended September 30, 2017, Commission file number  1\-6033, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000119312517313831/d437791dex101.htm) |
| \*^10\.92 | UAL
United | [Purchase Agreement No\. 1951, including exhibits and side letters thereto, dated July 23, 1996, by and among Continental and Boeing (filed as Exhibit 10\.8 to Continental’s Form  10\-Q for the quarter ended June 30, 1996, Commission file number  1\-10323, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/319687/0000319687-96-000025.txt)                                                   |
| \*^10\.93 | UAL
United | [Supplemental Agreement No\. 1 to Purchase Agreement No\. 1951, dated October 10, 1996 (filed as Exhibit 10\.14(a) to Continental’s Form  10\-K for the year ended December 31, 1996, Commission file number  1\-10323, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/319687/0000319687-97-000002.txt)                                                                                |
| \*^10\.94 | UAL
United | [Supplemental Agreement No\. 2 to Purchase Agreement No\. 1951, dated March 5, 1997 (filed as Exhibit 10\.3 to Continental’s Form  10\-Q for the quarter ended March 31, 1997, Commission file number  1\-10323 and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/319687/0000319687-97-000019.txt)                                                                                |
| \*^10\.95 | UAL
United | [Supplemental Agreement No\. 3, including exhibit and side letter, to Purchase Agreement No\. 1951, dated July 17, 1997 (filed as Exhibit 10\.14(c) to Continental’s Form  10\-K for the year ended December 31, 1997, Commission file number  1\-10323, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/319687/0000319687-98-000003.txt)                                                           |
| \*^10\.96 | UAL
United | [Supplemental Agreement No\. 4, including exhibits and side letters, to Purchase Agreement No\. 1951, dated October 10, 1997 (filed as Exhibit 10\.14(d) to Continental’s Form  10\-K for the year ended December 31, 1997, Commission file number  1\-10323, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/319687/0000319687-98-000003.txt)                                                      |
| \*^10\.97 | UAL
United | [Supplemental Agreement No\. 5, including exhibits and side letters, to Purchase Agreement No\. 1951, dated October 10, 1997 (filed as Exhibit 10\.1 to Continental’s Form  10\-Q for the quarter ended June 30, 1998, Commission file number  1\-10323, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/319687/0000319687-98-000010.txt)                                                           |

119


Annual Report of Southwest Airlines Co\. for year 2018

**Report of Independent Registered Public Accounting Firm**

To the Shareholders and the Board of Directors of Southwest Airlines Co\.

**Opinion on Internal Control over Financial Reporting**

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

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of Southwest Airlines Co\. as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes (collectively referred to as the “financial statements”) of the Company and our report dated February 5, 2019 expressed an unqualified opinion thereon\.

**Basis for Opinion**

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

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

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

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

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

116


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

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

**15\. Valuation and Qualifying Accounts (in millions)**

|                                               |                                  |                                                         |                                                 |                                      |                            |
| --------------------------------------------- | -------------------------------- | ------------------------------------------------------- | ----------------------------------------------- | ------------------------------------ | -------------------------- |
|                                               | **Balance at Beginning of Year** | **Changes Charged to Statement of Operations Accounts** | **Write\-offs**

**(Net of Recoveries)** | **Sales, Retirements and Transfers** | **Balance at End of Year** |
| **Allowance for obsolescence of spare parts** |                                  |                                                         |                                                 |                                      |                            |
| Year ended December 31, 2017                  | $765                             | $29                                                     | $(4)                                            | $(21)                                | $769                       |
| Year ended December 31, 2016                  | 728                              | 37                                                      | (3)                                             | 3                                    | 765                        |
| Year ended December 31, 2015                  | 673                              | 50                                                      | (4)                                             | 9                                    | 728                        |
| **Allowance for uncollectible accounts**      |                                  |                                                         |                                                 |                                      |                            |
| Year ended December 31, 2017                  | $36                              | $43                                                     | $(55)                                           | $—                                   | $24                        |
| Year ended December 31, 2016                  | 41                               | 47                                                      | (52)                                            | —                                    | 36                         |
| Year ended December 31, 2015                  | 17                               | 46                                                      | (22)                                            | —                                    | 41                         |

**16\. Quarterly Financial Data (Unaudited)**

Unaudited summarized financial data by quarter for 2017 and 2016 (in millions, except share and per share amounts):

|                                             |                              |                               |                              |                               |
| ------------------------------------------- | ---------------------------- | ----------------------------- | ---------------------------- | ----------------------------- |
|                                             | **First**

**Quarter** | **Second**

**Quarter** | **Third**

**Quarter** | **Fourth**

**Quarter** |
| **2017**                                    |                              |                               |                              |                               |
| Operating revenues                          | $9,624                       | $11,105                       | $10,878                      | $10,600                       |
| Operating expenses                          | 9,023                        | 9,570                         | 9,646                        | 9,910                         |
| Operating income                            | 601                          | 1,535                         | 1,232                        | 690                           |
| Net income                                  | 234                          | 803                           | 624                          | 258                           |
| Earnings per share:                         |                              |                               |                              |                               |
| Basic                                       | $0\.46                       | $1\.64                        | $1\.29                       | $0\.54                        |
| Diluted                                     | $0\.46                       | $1\.63                        | $1\.28                       | $0\.54                        |
| Shares used for computation (in thousands): |                              |                               |                              |                               |
| Basic                                       | 503,902                      | 490,818                       | 484,772                      | 477,165                       |
| Diluted                                     | 507,797                      | 492,965                       | 486,625                      | 479,382                       |
| **2016**                                    |                              |                               |                              |                               |
| Operating revenues                          | $9,435                       | $10,363                       | $10,594                      | $9,789                        |
| Operating expenses                          | 8,100                        | 8,612                         | 9,163                        | 9,022                         |
| Operating income                            | 1,335                        | 1,751                         | 1,431                        | 767                           |
| Net income                                  | 700                          | 950                           | 737                          | 289                           |
| Earnings per share:                         |                              |                               |                              |                               |
| Basic                                       | $1\.15                       | $1\.69                        | $1\.40                       | $0\.56                        |
| Diluted                                     | $1\.14                       | $1\.68                        | $1\.40                       | $0\.56                        |
| Shares used for computation (in thousands): |                              |                               |                              |                               |
| Basic                                       | 606,245                      | 563,000                       | 525,415                      | 514,571                       |
| Diluted                                     | 611,488                      | 566,040                       | 528,510                      | 518,358                       |

Our fourth quarter 2017 results include $307 million of total net special items that principally included a $149 million charge for the $1,000 cash bonus and associated payroll taxes granted to our employees as of December 31, 2017 in recognition of the 2017 Tax Act, $81 million of Merger integration expenses, $58 million of fleet restructuring expenses, a $20 million net charge resulting from fair value adjustments to bankruptcy obligations and a $7 million special non\-cash benefit to income tax expense to reflect the impact on our deferred tax assets and liabilities resulting from the 2017 Tax Act\.

123


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

AAG’s Results of Operations

For a comparison of the  2018  to  2017  reporting periods, see Part II, Item 7\. Management’s Discussion and Analysis of Financial Condition and Results of Operations – “ AAG’s Results of Operations  –  2018 Compared to 2017”  of our 2018 Form 10\-K\.

Operating Statistics

The table below sets forth selected operating data for the years ended December 31,  2019  and  2018 \.

|                                                                          |                             |                             |                          |
| ------------------------------------------------------------------------ | --------------------------- | --------------------------- | ------------------------ |
|                                                                          | **Year Ended December 31,** | **Year Ended December 31,** | **Increase (Decrease)**  |
|                                                                          | **2019**                    | **2018**                    | **Increase (Decrease)**  |
| Revenue passenger miles (millions)  ^(a)^                                | 241,252                     | 231,160                     | 4\.4%                    |
| Available seat miles (millions)  ^(b)^                                   | 285,088                     | 282,054                     | 1\.1%                    |
| Passenger load factor (percent)  ^(c)^                                   | 84\.6                       | 82\.0                       | 2\.6pts                  |
| Yield (cents)  ^(d)^                                                     | 17\.41                      | 17\.60                      | (1\.0)%                  |
| Passenger revenue per available seat mile (cents)  ^(e)^                 | 14\.74                      | 14\.42                      | 2\.2%                    |
| Total revenue per available seat mile (cents)  ^(f)^                     | 16\.05                      | 15\.79                      | 1\.7%                    |
| Aircraft at end of period  ^(g)^                                         | 1,547                       | 1,551                       | (0\.3)%                  |
| Fuel consumption (gallons in millions)                                   | 4,537                       | 4,447                       | 2\.0%                    |
| Average aircraft fuel price including related taxes (dollars per gallon) | 2\.07                       | 2\.23                       | (6\.9)%                  |
| Full\-time equivalent employees at end of period                         | 133,700                     | 128,900                     | 3\.7%                    |
| Operating cost per available seat mile (cents)  ^(h)^                    | 14\.98                      | 14\.85                      | 0\.9%                    |

|       |                                                                                |
| ----- | ------------------------------------------------------------------------------------------------------------------ |
| ^(a)^ | Revenue passenger mile (RPM) – A basic measure of sales volume\. One RPM represents one passenger flown one mile\. |

|       |                                                                                |
| ----- | -------------------------------------------------------------------------------------------------------- |
| ^(b)^ | Available seat mile (ASM) – A basic measure of production\. One ASM represents one seat flown one mile\. |

|       |                                                                                |
| ----- | --------------------------------------------------------------------------------------------------- |
| ^(c)^ | Passenger load factor – The percentage of available seats that are filled with revenue passengers\. |

|       |                                                                                |
| ----- | ------------------------------------------------------------------------------------ |
| ^(d)^ | Yield – A measure of airline revenue derived by dividing passenger revenue by RPMs\. |

|       |                                                                                |
| ----- | --------------------------------------------------------------------------------------- |
| ^(e)^ | Passenger revenue per available seat mile (PRASM) – Passenger revenue divided by ASMs\. |

|       |                                                                                |
| ----- | -------------------------------------------------------------------------------- |
| ^(f)^ | Total revenue per available seat mile (TRASM) – Total revenues divided by ASMs\. |

|       |                                                                                |
| ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(g)^ | Includes aircraft owned and leased by American as well as aircraft operated by third\-party regional carriers under capacity purchase agreements\. Excludes 12 Embraer E140 regional aircraft that are in temporary storage\. |

|       |                                                                                |
| ----- | ------------------------------------------------------------------------------------ |
| ^(h)^ | Operating cost per available seat mile (CASM) – Operating expenses divided by ASMs\. |

Results of Operations –  2019  Compared to  2018

Operating Revenues

|                          |                                              |                                              |                                              |                                                       |
| ------------------------ | -------------------------------------------- | -------------------------------------------- | -------------------------------------------- | ----------------------------------------------------- |
|                          | **Year Ended December 31,**                  | **Year Ended December 31,**                  | **Increase**

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

**Increase**

**(Decrease)** |
|                          | **2019**                                     | **2018**                                     | **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)**          |
| Passenger                | $42,010                                      | $40,676                                      | $1,334                                       | 3\.3                                                  |
| Cargo                    | 863                                          | 1,013                                        | (150)                                        | (14\.8)                                               |
| Other                    | 2,895                                        | 2,852                                        | 43                                           | 1\.5                                                  |
| Total operating revenues | $45,768                                      | $44,541                                      | $1,227                                       | 2\.8                                                  |

52


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

Issuer Purchases of Equity Securities

The following table presents information with respect to purchases of common stock we made during the December 2019 quarter\. The total number of shares purchased includes shares repurchased pursuant to our $5 billion share repurchase program, which was publicly announced on May 11, 2017 and will terminate no later than December 31, 2020\. Some purchases made in the December 2019 quarter were made pursuant to a trading plan meeting the requirements of Rule 10b5\-1 under the Securities Exchange Act of 1934\.

In addition, the table includes shares withheld from employees to satisfy certain tax obligations due in connection with grants of stock under the Delta Air Lines, Inc\. Performance Compensation Plan (the "Plan")\. The Plan provides for the withholding of shares to satisfy tax obligations\. It does not specify a maximum number of shares that can be withheld for this purpose\. The shares of common stock withheld to satisfy tax withholding obligations may be deemed to be "issuer purchases" of shares that are required to be disclosed pursuant to this Item\.

|               |               |               |                                  |                                  |                              |                                                                                |                                                                                |                                                                                |                                                                                |                                                                                |                                                                                |  |  |  |
|:------------- |:------------- |:------------- | --------------------------------:| --------------------------------:| ----------------------------:| --------------------------------------------------------------------------------:| --------------------------------------------------------------------------------:|:-----------------------------------------------------------------------------------------------------:|:-----------------------------------------------------------------------------------------------------:|:-----------------------------------------------------------------------------------------------------:| -----------------------------------------------------------------------------------------------------:|:- |:- |:- |
| Period        | Period        | Period        | Total Number of Shares Purchased | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value (in millions) of Shares That May Yet Be Purchased Under the Plan or Programs | Approximate Dollar Value (in millions) of Shares That May Yet Be Purchased Under the Plan or Programs | Approximate Dollar Value (in millions) of Shares That May Yet Be Purchased Under the Plan or Programs | Approximate Dollar Value (in millions) of Shares That May Yet Be Purchased Under the Plan or Programs |  |  |  |
| October 2019  | October 2019  | October 2019  |                       1,601,569  |                       1,601,569  |                     $54\.35  |                                                                       1,601,569  |                                                                       1,601,569  |                                                                                |                                                                                |                                                                                |                                                                                $1,210  |
| November 2019 | November 2019 | November 2019 |                       1,280,509  |                       1,280,509  |                     $56\.64  |                                                                       1,280,509  |                                                                       1,280,509  |                                                                                |                                                                                |                                                                                |                                                                                $1,135  |
| December 2019 | December 2019 | December 2019 |                       1,149,975  |                       1,149,975  |                     $57\.35  |                                                                       1,149,975  |                                                                       1,149,975  |                                                                                |                                                                                |                                                                                |                                                                                $1,070  |
| Total         | Total         | Total         |                       4,032,053  |                       4,032,053  |                              |                                                                       4,032,053  |                                                                       4,032,053  |                                                                                |                                                                                |                                                                                |                                                                                |

26


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

CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS

|                                                                                |                                                                                |       |  |  |  |       |  |  |  |       |
|:----------------------------------------------------------------------------------------------------- |:----------------------------------------------------------------------------------------------------- | -----:|:- |:- |:- | -----:|:- |:- |:- | -----:|
| Year Ended December 31  *(in millions)*                                                               | Year Ended December 31  *(in millions)*                                                               |  2019 |  |  |  |  2018 |  |  |  |  2017 |
| Net Income                                                                                | Net Income                                                                                | $ 769 |  |  |  | $ 437 |  |  |  | $ 960 |
| Other Comprehensive Income (Loss):                                                                    | Other Comprehensive Income (Loss):                                                                    |       |  |  |  |       |  |  |  |       |
| Related to marketable securities:                                                                     | Related to marketable securities:                                                                     |       |  |  |  |       |  |  |  |       |
| Unrealized holding gains (losses) arising during the period                                           | Unrealized holding gains (losses) arising during the period                                           |    31 |  |  |  |  (14) |  |  |  |   (4) |
| Reclassification of (gains) losses into Other\-net non\-operating income (expense)                    | Reclassification of (gains) losses into Other\-net non\-operating income (expense)                    |   (5) |  |  |  |     8 |  |  |  |     1 |
| Income tax benefit (expense)                                                                          | Income tax benefit (expense)                                                                          |   (6) |  |  |  |     2 |  |  |  |     1 |
| Total                                                                                | Total                                                                                |    20 |  |  |  |   (4) |  |  |  |   (2) |
| Related to employee benefit plans:                                                                    | Related to employee benefit plans:                                                                    |       |  |  |  |       |  |  |  |       |
| Actuarial losses related to pension and other postretirement benefit plans                            | Actuarial losses related to pension and other postretirement benefit plans                            |  (71) |  |  |  |  (34) |  |  |  | (123) |
| Reclassification of net pension expense into Wages and benefits and Other\-net non\-operating income  | Reclassification of net pension expense into Wages and benefits and Other\-net non\-operating income  |    32 |  |  |  |    28 |  |  |  |    22 |
| Income tax benefit (expense)                                                                          | Income tax benefit (expense)                                                                          |    10 |  |  |  |     2 |  |  |  |    24 |
| Total                                                                                | Total                                                                                |  (29) |  |  |  |   (4) |  |  |  |  (77) |
| Related to interest rate derivative instruments:                                                      | Related to interest rate derivative instruments:                                                      |       |  |  |  |       |  |  |  |       |
| Unrealized holding gains (losses) arising during the period                                           | Unrealized holding gains (losses) arising during the period                                           |  (13) |  |  |  |     — |  |  |  |     1 |
| Reclassification of losses into Aircraft rent                                                         | Reclassification of losses into Aircraft rent                                                         |     3 |  |  |  |     3 |  |  |  |     5 |
| Income tax benefit (expense)                                                                          | Income tax benefit (expense)                                                                          |     2 |  |  |  |   (1) |  |  |  |   (2) |
| Total                                                                                | Total                                                                                |   (8) |  |  |  |     2 |  |  |  |     4 |
| Other Comprehensive Loss                                                                              | Other Comprehensive Loss                                                                              |  (17) |  |  |  |   (6) |  |  |  |  (75) |
| Comprehensive Income                                                                                | Comprehensive Income                                                                                | $ 752 |  |  |  | $ 431 |  |  |  | $ 885 |

See accompanying notes to consolidated financial statements\.

53


Annual Report of United Continental Holdings, Inc\. and United Airlines, Inc\. for year 2017

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

|                                                |                                       |                                       |
|:---------------------------------------------- | -------------------------------------:| -------------------------------------:|
|                                                |     **Other Postretirement Benefits** |     **Other Postretirement Benefits** |
|                                                | **Year Ended
December 31, 2017** | **Year Ended
December 31, 2016** |
| Change in benefit obligation:                  |                                       |                                       |
| Benefit obligation at beginning of year        |                               $1,687  |                               $2,002  |
| Service cost                                   |                                   13  |                                   19  |
| Interest cost                                  |                                   66  |                                   86  |
| Plan participants’ contributions               |                                   68  |                                   69  |
| Benefits paid                                  |                                 (178) |                                 (191) |
| Actuarial loss (gain)                          |                                   40  |                                 (165) |
| Plan amendments                                |                                    —  |                                 (138) |
| Other                                          |                                   14  |                                    5  |
| Benefit obligation at end of year              |                               $1,710  |                               $1,687  |
| Change in plan assets:                         |                                       |                                       |
| Fair value of plan assets at beginning of year |                                  $55  |                                  $56  |
| Actual return on plan assets                   |                                    1  |                                    2  |
| Employer contributions                         |                                  108  |                                  119  |
| Plan participants’ contributions               |                                   68  |                                   69  |
| Benefits paid                                  |                                 (178) |                                 (191) |
| Fair value of plan assets at end of year       |                                   54  |                                   55  |
| Funded status—Net amount recognized            |                              $(1,656) |                              $(1,632) |

|                                                                          |                                   |                                   |
|:------------------------------------------------------------------------ | ---------------------------------:| ---------------------------------:|
|                                                                          | **Other Postretirement Benefits** | **Other Postretirement Benefits** |
|                                                                          |             **December 31, 2017** |             **December 31, 2016** |
| Amounts recognized in the consolidated balance sheets consist of:        |                                   |                                   |
| Current liability                                                        |                             $(54) |                             $(51) |
| Noncurrent liability                                                     |                           (1,602) |                           (1,581) |
| Total liability                                                          |                          $(1,656) |                          $(1,632) |
| Amounts recognized in accumulated other comprehensive income consist of: |                                   |                                   |
| Net actuarial gain                                                       |                             $301  |                             $384  |
| Prior service credit                                                     |                              208  |                              245  |
| Total accumulated other comprehensive income                             |                             $509  |                             $629  |

The following information relates to all pension plans with an accumulated benefit obligation and a projected benefit obligation in excess of plan assets at December 31 (in millions):

|                                |            |            |
|:------------------------------ | ----------:| ----------:|
|                                |  **2017**  |  **2016**  |
| Projected benefit obligation   |    $5,637  |    $5,025  |
| Accumulated benefit obligation |     4,567  |     3,985  |
| Fair value of plan assets      |     3,709  |     3,164  |

79


Annual Report of Southwest Airlines Co\. for year 2017

**Item 2\.** ***Properties***

**Aircraft**

Southwest operated a total of 706 Boeing 737 aircraft as of December 31, 2017, of which 53 and 69 were under operating and capital leases, respectively\. The following table details information on the 706 aircraft as of December 31, 2017:

|           |           |                                             |                                   |                                 |                              |
| --------- | --------- | ------------------------------------------- | --------------------------------- | ------------------------------- | ---------------------------- |
| **Type**  | **Seats** | **Average**

**Age**

**(Yrs)** | **Number of**

**Aircraft** | **Number**

**Owned (a)** | **Number**

**Leased** |
| 737\-700  | 143       | 14                                          | 512                               | 397                             | 115                          |
| 737\-800  | 175       | 3                                           | 181                               | 174                             | 7                            |
| 737 MAX 8 | 175       | —                                           | 13                                | 13                              | —                            |
| Totals    |           | 11                                          | 706                               | 584                             | 122                          |

|     |                                                                                |
| --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (a) | As discussed further in Note  6  to the Consolidated Financial Statements,  203  of the Company's aircraft were pledged as collateral as of  December 31, 2017 , for secured borrowings and/or in the case that the Company has obligations related to its fuel derivative instruments with counterparties that exceed certain thresholds\. |

As of December 31, 2017, the Company had firm deliveries and options for Boeing 737\-700, 737\-800, 737 MAX 7, and 737 MAX 8 aircraft as follows:

|      |                        |                        |                        |                        |                        |                       |         |           |
| ---- | ---------------------- | ---------------------- | ---------------------- | ---------------------- | ---------------------- | --------------------- | ------- | --------- |
|      | **The Boeing Company** | **The Boeing Company** | **The Boeing Company** | **The Boeing Company** | **The Boeing Company** |                       |         |           |
|      | **\-800 Firm Orders**  | **MAX 7 Firm Orders**  | **MAX 8 Firm Orders**  |                        | **MAX 8 Options**      | **Additional \-700s** |         | **Total** |
| 2018 | 26                     | —                      | 14                     |                        | —                      | 4                     |         | 44        |
| 2019 | —                      | 7                      | 15                     |                        | —                      | —                     |         | 22        |
| 2020 | —                      | —                      | 25                     |                        | —                      | —                     |         | 25        |
| 2021 | —                      | —                      | 34                     |                        | —                      | —                     |         | 34        |
| 2022 | —                      | —                      | 17                     |                        | 14                     | —                     |         | 31        |
| 2023 | —                      | 12                     | 22                     |                        | 23                     | —                     |         | 57        |
| 2024 | —                      | 11                     | 30                     |                        | 23                     | —                     |         | 64        |
| 2025 | —                      | —                      | 40                     |                        | 36                     | —                     |         | 76        |
| 2026 | —                      | —                      | —                      |                        | 36                     | —                     |         | 36        |
| 2027 | —                      | —                      | —                      |                        | 23                     | —                     |         | 23        |
|      | 26                     | 30                     | 197                    | **(a)**                | 155                    | 4                     | **(b)** | 412       |

(a) The Company has flexibility to substitute 737 MAX 7 in lieu of 737 MAX 8 firm orders beginning in 2019\.

(b) To be acquired in leases from various third parties\.

**Ground Facilities and Services**

Southwest either leases or pays a usage fee for terminal passenger service facilities at each of the airports it serves, to which various leasehold improvements have been made\. The Company leases the land and/or structures on a long\-term basis for its aircraft maintenance centers (located at Dallas Love Field, Houston Hobby, Phoenix Sky Harbor, Chicago Midway, Hartsfield\-Jackson Atlanta International Airport, and Orlando International Airport) and its main corporate headquarters building, also located near Dallas Love Field\. The Company also leases a warehouse and engine repair facility in Atlanta\.

The Company has commitments associated with various airport improvement projects, including ongoing construction at Los Angeles International Airport\. These projects include the construction of new facilities and the rebuilding or modernization of existing facilities\. Additional information regarding these projects is provided below under "Management’s Discussion and Analysis of Financial Condition and Results of Operations" and in Note 4 to the Consolidated Financial Statements\.

28


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

***Availability of SEC Reports***

A copy of this Annual Report on Form 10\-K, Quarterly Reports on Form 10\-Q, Current Reports on Form 8\-K and amendments to those reports are available free of charge on our website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC\. The SEC also maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at *www\.sec\.gov*\.

15


Annual Report of Southwest Airlines Co\. for year 2018

**Item 8\.*****Financial Statements and Supplementary Data***

**Southwest Airlines Co\.**

**Consolidated Balance Sheet**

(in millions, except share data)

|                                                                                |                       |                       |
| -------------------------------------------------------------------------------------------------------------------- | --------------------- | --------------------- |
|                                                                                | **December 31, 2018** | **December 31, 2017** |
|                                                                                |                       | **As Recast**         |
| **ASSETS**                                                                                |                       |                       |
| Current assets:                                                                                |                       |                       |
| Cash and cash equivalents                                                                                | $1,854                | $1,495                |
| Short\-term investments                                                                                | 1,835                 | 1,778                 |
| Accounts and other receivables                                                                                | 568                   | 662                   |
| Inventories of parts and supplies, at cost                                                                           | 461                   | 420                   |
| Prepaid expenses and other current assets                                                                            | 310                   | 460                   |
| Total current assets                                                                                | 5,028                 | 4,815                 |
| Property and equipment, at cost:                                                                                |                       |                       |
| Flight equipment                                                                                | 21,753                | 21,368                |
| Ground property and equipment                                                                                | 4,960                 | 4,399                 |
| Deposits on flight equipment purchase contracts                                                                      | 775                   | 919                   |
| Assets constructed for others                                                                                | 1,768                 | 1,543                 |
|                                                                                | 29,256                | 28,229                |
| Less allowance for depreciation and amortization                                                                     | 9,731                 | 9,690                 |
|                                                                                | 19,525                | 18,539                |
| Goodwill                                                                                | 970                   | 970                   |
| Other assets                                                                                | 720                   | 786                   |
|                                                                                | $26,243               | $25,110               |
| **LIABILITIES AND STOCKHOLDERS' EQUITY**                                                                             |                       |                       |
| Current liabilities:                                                                                |                       |                       |
| Accounts payable                                                                                | $1,416                | $1,320                |
| Accrued liabilities                                                                                | 1,749                 | 1,700                 |
| Air traffic liability                                                                                | 4,134                 | 3,495                 |
| Current maturities of long\-term debt                                                                                | 606                   | 348                   |
| Total current liabilities                                                                                | 7,905                 | 6,863                 |
| Long\-term debt less current maturities                                                                              | 2,771                 | 3,320                 |
| Air traffic liability \- noncurrent                                                                                | 936                   | 1,070                 |
| Deferred income taxes                                                                                | 2,427                 | 2,119                 |
| Construction obligation                                                                                | 1,701                 | 1,390                 |
| Other noncurrent liabilities                                                                                | 650                   | 707                   |
| Stockholders' equity:                                                                                |                       |                       |
| Common stock, $1\.00 par value: 2,000,000,000 shares authorized;

 807,611,634 shares issued in 2018 and 2017 | 808                   | 808                   |
| Capital in excess of par value                                                                                | 1,510                 | 1,451                 |
| Retained earnings                                                                                | 15,967                | 13,832                |
| Accumulated other comprehensive income                                                                               | 20                    | 12                    |
| Treasury stock, at cost: 255,008,275 and 219,060,856 shares

 in 2018 and 2017 respectively                    | (8,452)               | (6,462)               |
| Total stockholders' equity                                                                                | 9,853                 | 9,641                 |
|                                                                                | $26,243               | $25,110               |

See accompanying notes\.

67


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

ITEM 1A\. RISK FACTORS

Below are certain risk factors that may affect our business, results of operations and financial condition, or the trading price of our common stock or other securities\. We caution the reader that these risk factors may not be exhaustive\. We operate in a continually changing business environment, and new risks and uncertainties emerge from time to time\. Management cannot predict such new risks and uncertainties, nor can it assess the extent to which any of the risk factors below or any such new risks and uncertainties, or any combination thereof, may impact our business\.

The airline industry is intensely competitive and dynamic\.

Our competitors include other major domestic airlines and foreign, regional and new entrant airlines, as well as joint ventures formed by some of these airlines, many of which have more financial or other resources and/or lower cost structures than ours, as well as other forms of transportation, including rail and private automobiles\. In many of our markets we compete with at least one low\-cost carrier (including so\-called ultra\-low cost carriers)\. Our revenues are sensitive to the actions of other carriers in many areas including pricing, scheduling, capacity, amenities, loyalty benefits and promotions, which can have a substantial adverse impact not only on our revenues, but on overall industry revenues\. These factors may become even more significant in periods when the industry experiences large losses, as airlines under financial stress, or in bankruptcy, may institute pricing structures intended to achieve near\-term survival rather than long\-term viability\.

Low\-cost carriers (including so\-called ultra\-low\-cost carriers) have a profound impact on industry revenues\. Using the advantage of low unit costs, these carriers offer lower fares in order to shift demand from larger, more established airlines, and represent significant competitors, particularly for customers who fly infrequently, are price sensitive and therefore tend not to be loyal to any one particular carrier\. A number of these low\-cost carriers have announced growth strategies including commitments to acquire significant numbers of new aircraft for delivery in the next few years\. These low\-cost carriers are attempting to continue to increase their market share through growth and, potentially, consolidation, and are expected to continue to have an impact on our revenues and overall performance\. We and several other large network carriers have implemented “Basic Economy” fares designed to more effectively compete against low\-cost carriers ,  but we cannot predict whether these initiatives will be successful\. While historically these carriers have provided competition in domestic markets, we have recently experienced new competition from low\-cost carriers on international routes, including low\-cost airlines executing international long\-haul expansion strategies\. The actions of existing or future low\-cost carriers, including those described above, could have a material adverse effect on our operations and financial performance\.

We provide air travel internationally, directly as well as through joint business, alliance, codeshare and similar arrangements to which we are a party\. While our network is comprehensive, compared to some of our key global competitors, we generally have somewhat greater relative exposure to certain regions (for example, Latin America) and somewhat lower relative exposures to others (for example, China)\. Our financial performance relative to our key competitors will therefore be influenced significantly by macro\-economic conditions in particular regions around the world and the relative exposure of our network to the markets in those regions\.

In providing international air transportation, we compete to provide scheduled passenger and cargo service between the U\.S\. and various overseas locations with U\.S\. airlines, foreign investor\-owned airlines and foreign state\-owned or state\-affiliated airlines\. Competition is increasing from foreign state\-owned and state\-affiliated airlines in the Gulf region, including Emirates, Etihad Airways and Qatar Airways\. These carriers have large numbers of international widebody aircraft in service and on order and are increasing service to the U\.S\. from locations both in and outside the Middle East\. Service to and from locations outside of the Middle East is provided by some of these carriers under so\-called “fifth freedom” rights permitted under international treaties which allow service to and from stopover points between an airline’s home country and the ultimate destination\. Such flights, such as a stopover in Europe on flights to the United States, allow the carrier to sell tickets for travel between the stopover point and the United States in competition with service provided by us\. We believe these state\-owned and state\-affiliated carriers in the Gulf region, including their affiliated carriers, benefit from significant government subsidies, which have allowed them to grow quickly, reinvest in their product and expand their global presence\.

Our international service exposes us to foreign economies and the potential for reduced demand when any foreign country we serve suffers adverse local economic conditions\. In addition, open skies agreements, which are now in place with a substantial number of countries around the world, provide international airlines with open access to U\.S\. markets, potentially subjecting us to increased competition on our international routes\. See also  “Our business is subject to extensive government regulation, which may result in increases in our costs, disruptions to our operations, limits on our operating flexibility, reductions in the demand for air travel, and competitive disadvantages\.”

16


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

***Non\-fuel Expense and Non\-special items***

The table below provides the reconciliation of the impact of Virgin America on the comparative results for each of our operating expense line items, excluding fuel and special items\.

|                                                  |                                      |                                      |                                          |                                      |                |                |
| ------------------------------------------------ | ------------------------------------ | ------------------------------------ | ---------------------------------------- | ------------------------------------ | -------------- | -------------- |
|                                                  | **Twelve Months Ended December 31,** | **Twelve Months Ended December 31,** | **Twelve Months Ended December 31,**     | **Twelve Months Ended December 31,** | **Change**     | **Change**     |
| ***(in millions)***                              | **2017**                             | **2016 as Reported**                 | **2016 Pre\-acquisition Virgin America** | **2016 Combined**                    | **$ Combined** | **% Combined** |
| Wages and benefits                               | **$1,924**                           | $1,382                               | 284                                      | 1,666                                | 258            | 15\.5 %        |
| Variable incentive pay                           | **135**                              | 127                                  | 32                                       | 159                                  | (24)           | (15\.1)%       |
| Aircraft maintenance                             | **391**                              | 270                                  | 80                                       | 350                                  | 41             | 11\.7 %        |
| Aircraft rent                                    | **274**                              | 114                                  | 170                                      | 284                                  | (10)           | (3\.5)%        |
| Landing fees and other rentals                   | **460**                              | 320                                  | 107                                      | 427                                  | 33             | 7\.7 %         |
| Contracted services                              | **314**                              | 247                                  | 60                                       | 307                                  | 7              | 2\.3 %         |
| Selling expenses                                 | **357**                              | 225                                  | 123                                      | 348                                  | 9              | 2\.6 %         |
| Depreciation and amortization                    | **372**                              | 363                                  | 37                                       | 400                                  | (28)           | (7\.0)%        |
| Food and beverage service                        | **195**                              | 126                                  | 49                                       | 175                                  | 20             | 11\.4 %        |
| Third\-party regional carrier expense            | **121**                              | 95                                   | —                                        | 95                                   | 26             | 27\.4 %        |
| Other                                            | **565**                              | 365                                  | 86                                       | 451                                  | 114            | 25\.3 %        |
| Total non\-fuel, non\-special operating expenses | **$5,108**                           | $3,634                               | $1,028                                   | $4,662                               | $446           | 9\.6 %         |

***Wages and Benefits***

Wages and benefits increased during 2017 by $542 million, or 39%, compared to 2016\. On a Combined Comparative basis, total wages and benefits increased by $258 million or 15%\. The primary components of wages and benefits, including a reconciliation of 2016 on a Combined Comparative basis, are shown in the following table:

|                               |                                      |                                      |                                          |                                      |                |                |
| ----------------------------- | ------------------------------------ | ------------------------------------ | ---------------------------------------- | ------------------------------------ | -------------- | -------------- |
|                               | **Twelve Months Ended December 31,** | **Twelve Months Ended December 31,** | **Twelve Months Ended December 31,**     | **Twelve Months Ended December 31,** | **Change**     | **Change**     |
| ***(in millions)***           | **2017**                             | **2016 as Reported**                 | **2016 Pre\-acquisition Virgin America** | **2016 Combined**                    | **$ Combined** | **% Combined** |
| Wages                         | $1,468                               | $1,022                               | $224                                     | $1,246                               | $222           | 17\.8%         |
| Medical and other benefits    | 216                                  | 192                                  | 23                                       | 215                                  | 1              | 0\.5%          |
| Defined contribution plans    | 103                                  | 67                                   | 22                                       | 89                                   | 14             | 15\.7%         |
| Pension—Defined benefit plans | 32                                   | 25                                   | —                                        | 25                                   | 7              | 28\.0%         |
| Payroll taxes                 | 105                                  | 76                                   | 15                                       | 91                                   | 14             | 15\.4%         |
| Total wages and benefits      | $1,924                               | $1,382                               | $284                                     | $1,666                               | $258           | 15\.5%         |

On a Combined Comparative basis, wages increased$222 million with a 16% increase in FTEs\. The increase in FTEs is attributable to the growth in our business and the growth in McGee Air Services, which has brought certain airport ground service positions in\-house that were previously reflected in Contracted Services expense\. Additionally, wage rates for pilots at Alaska and Virgin America increased significantly in November 2017 as a result of new contract rates stemming from a decision reached by a third\-party arbitration panel during the fourth quarter of 2017\.

Costs associated with our defined contribution plans increased$14 million, or 16%, on a Combined Comparative basis, due to FTE growth and increased participation throughout all labor groups\. Additionally, due to the arbitration decision reached in the fourth quarter of 2017, pilots at Alaska and Virgin America began receiving contributions at a higher rate\.

 43


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

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

|                               |                       |
| ----------------------------- | --------------------- |
|                               | **2012\-2C(R) EETCs** |
|                               | **Series C(R)**       |
| Aggregate principal issued    | $100 million          |
| Fixed interest rate per annum | 4\.70%                |
| Maturity date                 | June 2021             |

***(c) Equipment Loans and Other Notes Payable Issued in*** ***2018***

In 2018, American entered into agreements under which it borrowed $1\.5 billion in connection with the financing of certain aircraft and certain pre\-delivery purchase deposits\. Debt incurred under these agreements matures in 2021 through 2030 and bears interest at fixed and variable rates of LIBOR plus an applicable margin averaging 4\.28% at December 31, 2018\.

***Guarantees***

As of December 31, 2018, American had issued guarantees covering AAG’s $750 million aggregate principal amount of 5\.50% senior notes due 2019 and $500 million aggregate principal amount of 4\.625% senior notes due 2020\.

***Collateral\-Related Covenants***

Certain of American’s debt financing agreements contain loan to value (LTV) ratio covenants and require American to annually appraise the related collateral\. Pursuant to such agreements, if the LTV ratio exceeds a specified threshold, American is required, as applicable, to pledge additional qualifying collateral (which in some cases may include cash collateral), or pay down such financing, in whole or in part\.

Specifically, American is required to meet certain collateral coverage tests on an annual basis for its Credit Facilities, as described below:

|                                                        |                                                                                |                                                                                |                                                                       |                                                                                |
| ------------------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------- |
|                                                        | **2013 Credit Facilities**                                                                                | **2014 Credit Facilities**                                                                                | **April 2016 Credit**

**Facilities**                           | **December 2016**

**Credit Facilities**                                                                                |
| Frequency of Appraisals

of Appraised Collateral | Annual                                                                                | Annual                                                                                | Annual                                                                | Annual                                                                                |
| LTV Requirement                                        | 1\.6x Collateral valuation to amount of debt outstanding (62\.5% LTV)                                                                                | 1\.6x Collateral valuation to amount of debt outstanding (62\.5% LTV)                                                                                | 1\.6x Collateral valuation to amount of debt outstanding (62\.5% LTV) | 1\.6x Collateral valuation to amount of debt outstanding (62\.5% LTV)                                                                                |
| LTV as of Last

Measurement Date                 | 34\.8%                                                                                | 18\.8%                                                                                | 40\.9%                                                                | 57\.5%                                                                                |
| Collateral Description                                 | Generally, certain slots, route authorities and airport gate leasehold rights used by American to operate all services between the U\.S\. and South America | Generally, certain slots, route authorities and airport gate leasehold rights used by American to operate certain services between the U\.S\. and European Union (including London Heathrow) | Generally, certain spare parts                                        | Generally, certain Ronald Reagan Washington National Airport (DCA) slots, certain La Guardia Airport (LGA) slots, certain simulators and certain leasehold rights |

At December 31, 2018, American was in compliance with the applicable collateral coverage tests as of the most recent measurement dates\.

**4\. Leases**

American leases certain aircraft and engines, including aircraft under capacity purchase agreements\. As of December 31, 2018, American had 660 leased aircraft, with remaining terms ranging from less than one year to 12 years\.

At each airport where American conducts flight operations, American has agreements, generally with a governmental unit or authority, for the use of passenger, operations and baggage handling space as well as runways and taxiways\. These

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

PenAir under the respective capacity purchased arrangement (CPAs)\. Additionally, Regional includes an allocation of corporate overhead such as IT, finance, and other administrative costs incurred by Alaska and on behalf of Horizon\.

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

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

|                            |
| -------------------------- |
| **ITEM 1A\. RISK FACTORS** |

If any of the following occurs, our business, financial condition and results of operations could be harmed\. The trading price of our common stock could also decline\. We operate in a continually changing business environment\. In this environment, new risks may emerge, and already identified risks may vary significantly in terms of impact and likelihood of occurrence\. Management cannot predict such developments, nor can it assess the impact, if any, on our business of such new risk factors or of events described in any forward\-looking statements\.

We have adopted an enterprise\-wide risk analysis and oversight program designed to identify the various risks faced by the organization, assign responsibility for managing those risks to individual executives as well as align these risks with Board oversight\. These enterprise\-wide risks have been aligned to the risk factors discussed below\.

***SAFETY, COMPLIANCE AND OPERATIONAL EXCELLENCE***

***Our reputation and financial results could be harmed in the event of an airline accident or incident\.***

An accident or incident involving one of our aircraft or an aircraft operated by one of our codeshare partners or CPA carriers could involve a significant loss of life and result in a loss of confidence in our Company by the flying public and/or aviation authorities\. We could experience significant claims from injured passengers, bystanders and surviving relatives as well as costs for the repair or replacement of a damaged aircraft and temporary or permanent loss from service\. We maintain liability insurance in amounts and of the type generally consistent with industry practice, as do our codeshare partners and CPA carriers\. However, the amount of such coverage may not be adequate to fully cover all claims, and we may be forced to bear substantial economic losses from such an event\. Substantial claims resulting from an accident in excess of our related insurance coverage would harm our business and financial results\. Moreover, any aircraft accident or incident, even if it is fully insured and does not involve one of our aircraft, could cause a public perception that our airlines or the aircraft we or our partners fly are less safe or reliable than other transportation alternatives\. This would harm our business\.

***Our operations are often affected by factors beyond our control, including delays, cancellations and other conditions, which could harm our business, financial condition and results of operations\.***

As is the case for all airlines, our operations often are affected by delays, cancellations and other conditions caused by factors largely beyond our control\.

Factors that might impact our operations include:

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------------------------------- |
| • | congestion and/or space constraints at airports, specifically in our hub locations of Seattle, Los Angeles, and San Francisco;  |

|   |                               |
| - | ----------------------------- |
| • | air traffic control problems; |

|   |                             |
| - | --------------------------- |
| • | adverse weather conditions; |

|   |                                                                                |
| - | ------------------------------------------------------------------------------ |
| • | lack of operational approval (e\.g\. new routes, aircraft deliveries, etc\.);  |

|   |                                                      |
| - | ---------------------------------------------------- |
| • | increased security measures or breaches in security; |

|   |                                           |
| - | ----------------------------------------- |
| • | contagious illness and fear of contagion; |

|   |                                                          |
| - | -------------------------------------------------------- |
| • | changes in international treaties concerning air rights; |

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