Annual Report of Southwest Airlines Co\. for year 2017

|                                    |                             |                             |             |             |
| ---------------------------------- | --------------------------- | --------------------------- | ----------- | ----------- |
|                                    | **Year ended December 31,** | **Year ended December 31,** | **Per ASM** | **Percent** |
| (in cents, except for percentages) | **2017**                    | **2016**                    | **change**  | **change**  |
| Salaries, wages, and benefits      | 4\.76¢                      | 4\.57¢                      | 0\.19¢      | 4\.2 %      |
| Fuel and oil                       | 2\.56                       | 2\.46                       | 0\.10       | 4\.1        |
| Maintenance materials and repairs  | 0\.65                       | 0\.70                       | (0\.05)     | (7\.1)      |
| Aircraft rentals                   | 0\.13                       | 0\.15                       | (0\.02)     | (13\.3)     |
| Landing fees and other rentals     | 0\.84                       | 0\.82                       | 0\.02       | 2\.4        |
| Depreciation and amortization      | 0\.79                       | 0\.82                       | (0\.03)     | (3\.7)      |
| Other operating expenses           | 1\.75                       | 1\.70                       | 0\.05       | 2\.9        |
| Total                              | 11\.48¢                     | 11\.22¢                     | 0\.26¢      | 2\.3 %      |

Operating expenses per ASM for 2017increased 2\.3 percent, compared with 2016, primarily due to wage rate increases, increases in market jet fuel prices, and charges associated with the grounding of the Company's remaining Classic aircraft\. Prior year results included $356 million of ratification bonuses accrued during 2016, associated with collective\-bargaining agreements reached with multiple unionized workgroups\. Operating expenses per ASM for 2017, excluding Fuel and oil expense and special items (a non\-GAAP financial measure), increased 4\.2 percent year\-over\-year, primarily due to wage rate increases\. See Note Regarding Use of Non\-GAAP Financial Measures and the Reconciliation of Reported Amounts to Non\-GAAP Financial Measures for additional detail regarding non\-GAAP financial measures\. Based on current trends and excluding Fuel and oil expense, special items, and profitsharing expense, the Company expects its first quarter 2018 unit costs to increase in the range of 0\.5 to 1\.5 percent, compared with first quarter 2017\. The year\-over\-year projections do not reflect the potential impact of Fuel and oil expense, special items, and profitsharing expense in both years because the Company cannot reliably predict or estimate those items or expenses or their impact to its financial statements in future periods, especially considering the significant volatility of the Fuel and oil expense line item\. Accordingly, the Company believes a reconciliation of non\-GAAP financial measures to the equivalent GAAP financial measures for projected results is not meaningful or available without unreasonable effort\.

Salaries, wages, and benefits expense for 2017increased by $521 million, or 7\.7 percent, compared with 2016\. Salaries, wages, and benefits expense per ASM for 2017increased4\.2 percent, compared with 2016\. On both a dollar and per ASM basis, the majority of the increases were the result of higher salaries and resulting Company contributions to the Company sponsored 401(k) plans, primarily driven by wage rate increases\. In addition, the Company announced a $1,000 per Employee bonus as a result of the 2017 tax reform, which comprised approximately $70 million of the increase in Salaries, wages, and benefits expense\. Prior year results included $356 million of ratification bonuses accrued during 2016, associated with collective\-bargaining agreements reached with multiple unionized workgroups\. Based on current cost trends and anticipated capacity, the Company expects first quarter 2018 Salaries, wages, and benefits expense per ASM, excluding profitsharing expense, to increase, compared with first quarter 2017\. The year\-over\-year projection does not reflect the potential impact of profitsharing expense in both years because the Company cannot reliably predict or estimate that expense or its impact to the Company's financial statements in future periods\. Accordingly, the Company believes a reconciliation of non\-GAAP financial measures to the equivalent GAAP financial measures for projected results is not meaningful or available without unreasonable effort\.

During 2017, the Company conducted negotiations with various unionized Employee groups\. See the above discussion in Company Overview regarding an agreement reached during the year\. The following table sets forth the Company’s unionized Employee groups that are currently in negotiations on collective\-bargaining agreements:

|                                                                 |                                     |                                                             |                    |
| --------------------------------------------------------------- | ----------------------------------- | ----------------------------------------------------------- | ------------------ |
| **Employee Group**                                              | **Approximate Number of Employees** | **Representatives**                                         | **Amendable Date** |
| Southwest Material Specialists (formerly known as Stock Clerks) | 300                                 | International Brotherhood of Teamsters, Local 19 ("IBT 19") | August 2013        |
| Southwest Mechanics                                             | 2,400                               | Aircraft Mechanics Fraternal Association ("AMFA")           | August 2012        |

42


Annual Report of Southwest Airlines Co\. for year 2018

to\-point route structure includes service to and from many secondary or downtown airports such as Dallas Love Field, Houston Hobby, Chicago Midway, Baltimore\-Washington International, Burbank, Manchester, Oakland, San Jose, Providence, and Ft\. Lauderdale\-Hollywood\. These conveniently located airports are typically less congested than other airlines' hub airports, which has contributed to Southwest's ability to achieve high asset utilization because aircraft can be scheduled to minimize the amount of time they are on the ground\. This, in turn, has reduced the number of aircraft and gate facilities that would otherwise be required and allows for high Employee productivity (lower headcount per aircraft)\.

The Company's focus on controlling costs also includes a continued commitment to pursuing, implementing, and enhancing initiatives to reduce fuel consumption and improve fuel efficiency\. Fuel and oil expense remained the Company's second largest operating cost for 2018, which increased compared with 2017, primarily due to higher market jet fuel prices\. As evidenced by the table below, energy prices can fluctuate significantly in a relatively short amount of time\. The table below shows the Company's average cost of jet fuel for each year beginning in 2003 and during each quarter of 2018\.

|                     |                                |                                                   |                                                             |
| ------------------- | ------------------------------ | ------------------------------------------------- | ----------------------------------------------------------- |
| **Year**            | **Cost**

**(Millions)** | **Average**

**Cost Per**

**Gallon** | **Percentage of**

**Operating**

**Expenses** |
| 2003                | $920                           | $0\.80                                            | 16\.5%                                                      |
| 2004                | $1,106                         | $0\.92                                            | 18\.1%                                                      |
| 2005                | $1,470                         | $1\.13                                            | 21\.4%                                                      |
| 2006                | $2,284                         | $1\.64                                            | 28\.0%                                                      |
| 2007                | $2,690                         | $1\.80                                            | 29\.7%                                                      |
| 2008                | $3,713                         | $2\.44                                            | 35\.1%                                                      |
| 2009\*              | $3,193                         | $2\.22                                            | 31\.2%                                                      |
| 2010\*              | $3,755                         | $2\.61                                            | 33\.4%                                                      |
| 2011\*              | $5,751                         | $3\.25                                            | 38\.2%                                                      |
| 2012\*              | $6,156                         | $3\.32                                            | 37\.3%                                                      |
| 2013\*              | $5,823                         | $3\.19                                            | 35\.3%                                                      |
| 2014\*              | $5,355                         | $2\.97                                            | 32\.6%                                                      |
| 2015\*              | $3,740                         | $1\.96                                            | 23\.6%                                                      |
| 2016\*              | $3,801                         | $1\.90                                            | 22\.7%                                                      |
| 2017\*              | $4,076                         | $1\.99                                            | 23\.0%                                                      |
| 2018                | $4,616                         | $2\.20                                            | 24\.6%                                                      |
| First Quarter 2018  | $1,018                         | $2\.07                                            | 23\.5%                                                      |
| Second Quarter 2018 | $1,202                         | $2\.21                                            | 25\.2%                                                      |
| Third Quarter 2018  | $1,205                         | $2\.24                                            | 25\.2%                                                      |
| Fourth Quarter 2018 | $1,192                         | $2\.25                                            | 24\.4%                                                      |

\*Effective as of January 1, 2018, the Company adopted Accounting Standards Update ("ASU") No\. 2017\-12, Targeted Improvements to Accounting for Hedging Activities, and ASU No\. 2017\-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost\. See Note 2 to the Consolidated Financial Statements for further information\.

The Company focuses on reducing fuel consumption and improving fuel efficiency through fleet modernization and other fuel initiatives\. For example, the Company previously retired all Boeing 737\-300 aircraftfrom its fleet and has begun scheduled service with the Boeing 737 MAX 8 aircraft\. The Boeing 737 MAX 8 is expected to continue to significantly reduce fuel use and CO^2^ emissions, as compared with the Company's other aircraft\. The Company added 18 Boeing 737 MAX 8 aircraft to its fleet in 2018 and ended 2018 with 31 Boeing 737 MAX 8 aircraft in its fleet\. In 2019, the Company expects to continue its fleet modernization initiative through the scheduled delivery of an additional 37 Boeing 737 MAX 8 aircraft and the Company's initial delivery of seven Boeing 737 MAX 7 aircraft\. The Company's fleet composition and delivery schedules are discussed in more detail below under "Properties \- Aircraft\." The Company has also undertaken a number of other fuel conservation initiatives which are discussed in detail under "Regulation \- Environmental Regulation\."

5


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

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

also includes a $2\.0 billion revolving credit facility available for drawing until April 1, 2022, which increased the available capacity under the revolving credit facility by $650 million as compared to that in the 2013 Credit Agreement\. The primary purpose of the November 2017 Amendment was to reduce the interest rate on borrowings by 0\.25%\. The obligations of United under the amended 2017 Credit Agreement are secured by liens on certain international route authorities, certain take\-off and landing rights and related assets of United\.

Borrowings under the 2017 Credit Agreement bear interest at a variable rate equal to LIBOR plus a margin of 2\.00% per annum, or another rate based on certain market interest rates, plus a margin of 1\.00% per annum\. The principal amount of the term loan must be repaid in consecutive quarterly installments of 0\.25% of the original principal amount thereof, commencing on June 30, 2017, with any unpaid balance due on April 1, 2024\. United may prepay all or a portion of the loan from time to time, at par plus accrued and unpaid interest\. United pays a commitment fee equal to 0\.75% per annum on the undrawn amount available under the revolving credit facility\.

As of December 31, 2017, United had its entire capacity of $2\.0 billion available under the revolving credit facility of the Company’s 2017 Credit Agreement\.

As of December 31, 2017, United had cash collateralized $75 million of letters of credit\. United also had $362 million of surety bonds securing various obligations at December 31, 2017\. Most of the letters of credit have evergreen clauses and are expected to be renewed on an annual basis\. The surety bonds have expiration dates through 2021\.

***EETCs\.*** As of December 31, 2017, United had $8\.6 billion principal amount of equipment notes outstanding issued under EETC financings included in notes payable in the table of outstanding debt above\. Generally, the structure of these EETC financings consists of pass\-through trusts created by United to issue pass\-through certificates, which represent fractional undivided interests in the respective pass\-through trusts and are not obligations of United\. The proceeds of the issuance of the pass\-through certificates are used to purchase equipment notes which are issued by United and secured by its aircraft\. The payment obligations under the equipment notes are those of United\. Proceeds received from the sale of pass\-through certificates are initially held by a depositary in escrow for the benefit of the certificate holders until United issues equipment notes to the trust, which purchases such notes with a portion of the escrowed funds\. These escrowed funds are not guaranteed by United and are not reported as debt on United’s consolidated balance sheet because the proceeds held by the depositary are not United’s assets\.

In February 2018, November 2017, September 2016 and June 2016, United created separate EETC pass\-through trusts, each of which issued pass\-through certificates\. The proceeds of the issuance of the pass\-through certificates are used to purchase equipment notes issued by United and secured by its aircraft\. The Company records the debt obligation upon issuance of the equipment notes rather than upon the initial issuance of the pass\-through certificates\. Certain details of the pass\-through trusts with proceeds received from issuance of debt in 2017 are as follows (in millions, except stated interest rate):

|                |           |               |                                                |                                    |                                                                    |                                                                             |                                                                                |
|:--------------:|:---------:| -------------:|:----------------------------------------------:| ----------------------------------:| ------------------------------------------------------------------:| ---------------------------------------------------------------------------:| ------------------------------------------------------------------------------------------------------:|
| **EETC Date**  | **Class** | **Principal** | **Final expected
distribution
date** | **Stated
interest
rate** | **Total debt**
**recorded
as of December 31,
2017** | **Proceeds
received from
issuance of
debt during
2017** | **Remaining
proceeds from
issuance of debt
to be received
in future
periods** |
| February 2018  |    AA     |         $677  |                   March 2030                   |                             3\.50% |                                                                $—  |                                                                         $—  |                                                                                $677  |
| February 2018  |     A     |          258  |                   March 2030                   |                             3\.70% |                                                                 —  |                                                                          —  |                                                                                258  |
| November 2017  |     B     |          258  |                  January 2026                  |                             3\.65% |                                                               258  |                                                                        258  |                                                                                —  |
| November 2017  |     B     |          236  |                  October 2025                  |                             3\.65% |                                                               236  |                                                                        236  |                                                                                —  |
| September 2016 |    AA     |          637  |                  October 2028                  |                            2\.875% |                                                               637  |                                                                        557  |                                                                                —  |
| September 2016 |     A     |          283  |                  October 2028                  |                             3\.10% |                                                               283  |                                                                        247  |                                                                                —  |
|   June 2016    |    AA     |          729  |                   July 2028                    |                             3\.10% |                                                               729  |                                                                        319  |                                                                                —  |
|   June 2016    |     A     |          324  |                   July 2028                    |                             3\.45% |                                                               324  |                                                                        142  |                                                                                —  |
|                |           |       $3,402  |                                                |                                    |                                                            $2,467  |                                                                     $1,759  |                                                                                $935  |

88


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

**ITEM 8A\. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA OF AMERICAN AIRLINES GROUP INC\.**

**Report of Independent Registered Public Accounting Firm**

To the Stockholders and Board of Directors

American Airlines Group Inc\.:

*Opinion on the Consolidated Financial Statements*

We have audited the accompanying consolidated balance sheets of American Airlines Group Inc\. and subsidiaries (the Company) as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive income, cash flows, and stockholders’ equity for each of the years in the three\-year period ended December 31, 2017, and the related notes (collectively, the consolidated financial statements)\. In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the three\-year period ended December 31, 2017, in conformity with U\.S\. generally accepted accounting principles\.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in *Internal Control – Integrated Framework (2013)* issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 21, 2018 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting\.

*Basis for Opinion*

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

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

/s/ KPMG LLP

We have served as the Company’s auditor since 2014\.

Dallas, Texas

February 21, 2018

80


Annual Report of Southwest Airlines Co\. for year 2017

|   |                                                                                |
| - | -------------------------------------------------------------------------------------------------------------------- |
| • | adjustment of the timing of auxiliary power unit starts on originating flights to reduce auxiliary power unit usage; |

|   |                                                                                |
| - | ------------------------------------------------------------------------------------ |
| • | implementation of fuel planning initiatives to safely reduce loading of excess fuel; |

|   |                                                        |
| - | ------------------------------------------------------ |
| • | aircraft cabin interior retrofitting to reduce weight; |

|   |                                                                                |
| - | ---------------------------------------------------------------------------------------------- |
| • | reduction of aircraft engine idle speed while on the ground, which also increases engine life; |

|   |                                                   |
| - | ------------------------------------------------- |
| • | galley refreshes with dry goods weight reduction; |

|   |                                                                                |
| - | --------------------------------------------------------------------------------------------------------------- |
| • | Company optimized routes (flying the best wind routes to take advantage of tailwinds or to minimize headwinds); |

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | improvements in flight planning algorithms to better match the Company's aircraft flight management system (and thereby enabling the Company to fly at the most efficient altitudes); |

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------ |
| • | substitution of Pilot and Flight Attendant flight bags with lighter Electronic Flight Bag tablets; and |

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | implementation of Real Time Descent Winds (automatic uplinking of up\-to\-date wind data to the aircraft allowing crews to time the descent to minimize thrust inputs)\.  |

The Company has also participated in Required Navigation Performance ("RNP") operations as part of the FAA's Performance Based Navigation program, which is intended to modernize the U\.S\. air traffic control system by addressing limitations on air transportation capacity and making more safe and efficient use of airspace\. RNP combines the capabilities of advanced aircraft avionics, Global Positioning System ("GPS") satellite navigation (instead of less precise ground\-based navigation), and new flight procedures to (i) enable aircraft to carry navigation capabilities rather than relying on airports; (ii) improve operational capabilities by opening up many new and more direct airport approach paths to produce safer and more efficient flight patterns; and (iii) conserve fuel and reduce carbon emissions\. Since its first use of RNP in 2011, Southwest has conducted approximately 58,000 RNP approaches, including over 19,000 in 2017\. Southwest must rely on RNP approaches published by the FAA, and the rate of introduction and utilization of RNP approaches continues to be slower than expected, with fuel efficient RNP approaches currently available at only 50 of Southwest's airports\. In addition, even at airports with approved RNP approaches, the clearance required from air traffic controllers to perform RNP approaches is sometimes not granted\. Southwest continues to work with the FAA to develop and seek more use of RNP approaches and to evolve air traffic control rules to support greater utilization of RNP\.

As part of its commitment to corporate sustainability, the Company has published the Southwest One Report^TM^ describing the Company's sustainability strategies, which include the foregoing and other efforts to reduce greenhouse gas emissions and address other environmental matters such as energy and water conservation, waste minimization, and recycling\. Information contained in the Southwest One Report is not incorporated by reference into, and does not constitute a part of, this Form 10\-K\.

**International Regulation**

All international air service is subject to certain U\.S\. federal requirements and approvals, as well as the regulatory requirements of the appropriate authorities of the foreign countries involved\. The Company has obtained the necessary economic authority from the DOT, as well as approvals required by the FAA and applicable foreign government entities, to conduct operations, under certain circumstances, to points outside of the continental United States currently served by the Company\. Certain international authorities and approvals held by the Company are subject to periodic renewal requirements\. The Company requests extensions of such authorities and approvals when and as appropriate\. To the extent the Company seeks to serve additional foreign destinations in the future, or to renew its authority to serve certain routes, it may be required to obtain necessary authority from the DOT and/or approvals from the FAA, as well as any applicable foreign government entity\.

Certain international route authorities are governed by bilateral air transportation agreements between the United States and foreign countries\. Changes in U\.S\. or foreign government aviation policies could result in the alteration or termination of such agreements, diminish the value of the Company's existing international authorities, present barriers to renewing existing or securing new authorities, or otherwise affect the Company's international operations\. In particular, there is still a degree of uncertainty about the future of scheduled commercial flight operations between the

16


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

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

*This Annual Report on Form 10\-K ("Form 10\-K") contains various "forward\-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act")\. Forward\-looking statements represent our expectations and beliefs concerning future events, based on information available to us on the date of the filing of this Form 10\-K, and are subject to various risks and uncertainties\. Factors that could cause actual results to differ materially from those referenced in the forward\-looking statements are listed in Part I, Item 1A, Risk Factors and in Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations\. We disclaim any intent or obligation to update or revise any of the forward\-looking statements, whether in response to new information, unforeseen events, changed circumstances or otherwise, except as required by applicable law\.*

**PART I**

**ITEM 1\. BUSINESS\.**

**Overview**

United Continental Holdings, Inc\. (together with its consolidated subsidiaries, "UAL" or the "Company") is a holding company and its principal, wholly\-owned subsidiary is United Airlines, Inc\. (together with its consolidated subsidiaries, "United")\. As UAL consolidates United for financial statement purposes, disclosures that relate to activities of United also apply to UAL, unless otherwise noted\. United's operating revenues and operating expenses comprise nearly 100% of UAL's revenues and operating expenses\. In addition, United comprises approximately the entire balance of UAL's assets, liabilities and operating cash flows\. When appropriate, UAL and United are named specifically for their individual contractual obligations and related disclosures and any significant differences between the operations and results of UAL and United are separately disclosed and explained\. We sometimes use the words "we," "our," "us," and the "Company" in this report for disclosures that relate to all of UAL and United\.

UAL was incorporated under the laws of the State of Delaware on December 30, 1968\. Our principal executive office is located at 233 South Wacker Drive, Chicago, Illinois 60606 (telephone number (872) 825\-4000)\.

The Company's website is located at www\.united\.com and its investor relations website is located at ir\.united\.com\. The information contained on or connected to the Company's websites is not incorporated by reference into this Annual Report on Form 10\-K and should not be considered part of this or any other report filed with the U\.S\. Securities and Exchange Commission ("SEC")\. The Company's filings with the SEC, including annual reports on Form 10\-K, quarterly reports on Form 10\-Q, current reports on Form 8\-K, and all amendments to those reports, as well as UAL's proxy statement for its annual meeting of stockholders, are accessible without charge on the Company's investor relations website, as soon as reasonably practicable, after such material is electronically filed with, or furnished to, the SEC\. Such filings are also available on the SEC's website at www\.sec\.gov\.

**Operations**

The Company transports people and cargo throughout North America and to destinations in Asia, Europe, the Middle East and Latin America\. UAL, through United and its regional carriers, operates more than 4,800 flights a day to 353 airports across five continents, with hubs at Newark Liberty International Airport ("Newark"), Chicago O'Hare International Airport ("Chicago O'Hare"), Denver International Airport ("Denver"), George Bush Intercontinental Airport ("Houston Bush"), Los Angeles International Airport ("LAX"), A\.B\. Won Pat International Airport ("Guam"), San Francisco International Airport ("SFO") and Washington Dulles International Airport ("Washington Dulles")\.

All of the Company's domestic hubs are located in large business and population centers, contributing to a large amount of "origin and destination" traffic\. The hub and spoke system allows us to transport passengers between a large number of destinations with substantially more frequent service than if each route were served directly\. The hub system also allows us to add service to a new destination from a large number of cities using only one or a limited number of aircraft\. As discussed under *Alliances* below, United is a member of Star Alliance, the world's largest alliance network\.

***Regional\.*** The Company has contractual relationships with various regional carriers to provide regional aircraft service branded as United Express\. This regional service complements our operations by carrying traffic that connects to our hubs and allows flights to smaller cities that cannot be provided economically with mainline aircraft\. Republic Airlines ("Republic"), Champlain Enterprises, LLC d/b/a CommutAir ("CommutAir"), ExpressJet Airlines ("ExpressJet"), GoJet Airlines ("GoJet"), Mesa Airlines ("Mesa"), SkyWest Airlines ("SkyWest"), Air Wisconsin Airlines ("Air Wisconsin"), and Trans States Airlines ("Trans States") are all regional carriers that operate with capacity contracted to United under capacity purchase agreements ("CPAs")\. Under these CPAs, the Company pays the regional carriers contractually agreed fees (carrier costs) for operating these flights plus a variable reimbursement (incentive payment for operational performance) based on agreed performance metrics, subject

3


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

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

Breakage\.  For mileage credits that we estimate are not likely to be redeemed ("breakage"), we recognize the associated value proportionally during the period in which the remaining mileage credits are expected to be redeemed\. We use statistical models to estimate breakage based on historical redemption patterns\. A change in assumptions as to the period over which mileage credits are expected to be redeemed, the actual redemption activity for mileage credits or the estimated fair value of mileage credits expected to be redeemed could have a material impact on our revenue in the year in which the change occurs and in future years\. At  December 31, 2017 , the aggregate deferred revenue balance associated with the SkyMiles program was  $4\.1 billion \. A hypothetical 1% change in the number of outstanding miles estimated to be redeemed would result in a $34 million impact on our deferred revenue liability at  December 31, 2017 \.

Goodwill and Indefinite\-Lived Intangible Assets

We apply a fair value\-based impairment test to the carrying value of goodwill and indefinite\-lived intangible assets on an annual basis (as of October 1) and, if certain events or circumstances indicate that an impairment loss may have been incurred, on an interim basis\. We assess the value of our goodwill and indefinite\-lived assets under either a qualitative or quantitative approach\. Under a qualitative approach, we consider various market factors, including the key assumptions listed below\. We analyze these factors to determine if events and circumstances have affected the fair value of goodwill and indefinite\-lived intangible assets\. If we determine that it is more likely than not that the asset may be impaired, we use the quantitative approach to assess the asset's fair value and the amount of the impairment\. Under a quantitative approach, we calculate the fair value of the asset using the key assumptions listed below\.

When we evaluate goodwill for impairment using a quantitative approach, we estimate the fair value of the reporting unit by considering both market capitalization and projected discounted future cash flows (an income approach)\.  When we perform a quantitative impairment assessment of our indefinite\-lived intangible assets, fair value  is estimated based on (1) recent market transactions, where available, (2) the royalty method for the Delta tradename (which assumes hypothetical royalties generated from using our tradename) or (3) projected discounted future cash flows (an income approach)\.

Key Assumptions\.  The key assumptions in our impairment tests include:  (1) forecasted revenues, expenses and cash flows, (2) terminal period revenue growth and cash flows, (3) an estimated weighted average cost of capital, (4) assumed discount rates depending on the asset and (5) a tax rate\. These assumptions are consistent with those hypothetical market participants would use\. Since we are required to make estimates and assumptions when evaluating goodwill and indefinite\-lived intangible assets for impairment, actual transaction amounts may differ materially from these estimates\.  In addition, we consider the amount by which the intangible assets' fair values exceeded their respective carrying values in the most recent fair value measurements calculated using a quantitative approach\.

Changes in certain events and circumstances could result in impairment or a change from indefinite\-lived to definite\-lived\. Factors which could cause impairment include, but are not limited to, (1) negative trends in our market capitalization, (2) reduced profitability resulting from lower passenger mile yields or higher input costs (primarily related to fuel and employees), (3) lower passenger demand as a result of weakened U\.S\. and global economies, (4) interruption to our operations due to a prolonged employee strike, terrorist attack or other reasons, (5) changes to the regulatory environment (e\.g\., diminished slot restrictions or additional Open Skies agreements), (6) competitive changes by other airlines and (7) strategic changes to our operations leading to diminished utilization of the intangible assets\.

We assessed each of the above assumptions in our most recent impairment analyses\. The combination of our most recently completed annual results and our projected revenues, expenses and cash flows more than offset any negative events and circumstances\. The stabilized operating environment for U\.S\. airlines has also contributed to improved financial results\.

Goodwill \.  Our goodwill balance, which is related to the airline segment, was  $9\.8 billion  at  December 31, 2017 \. Based upon our qualitative assessment of all relevant factors, including applicable factors noted in " Key Assumptions " above, we determined that there was no indication that goodwill was impaired\.

Identifiable Intangible Assets\.  Our identifiable intangible assets, which are related to the airline segment, had a net carrying amount of  $4\.8 billion  at  December 31, 2017 , of which  $4\.7 billion  related to indefinite\-lived intangible assets\.  Indefinite\-lived assets are not amortized and consist primarily of routes, slots, the Delta tradename and assets related to SkyTeam and collaborative arrangements\. Definite\-lived assets consist primarily of marketing and maintenance service agreements\.

We performed qualitative assessments of our indefinite\-lived intangible assets, including applicable factors noted in " Key Assumptions " above, and determined that there was no indication that the assets were impaired\. Our qualitative assessments include analyses and weighting of all relevant factors, which impact the fair value of our indefinite\-lived intangible assets\.

 41


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

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

*December 2016 Credit Facilities*

In November 2017, American and AAG entered into the First Amendment to the Amended and Restated Credit and Guaranty Agreement, amending the Amended and Restated Credit and Guaranty Agreement, dated as of December 15, 2016, pursuant to which AAG refinanced the $1\.25 billion term loan facility due December 2023 established thereunder (the December 2016 Term Loan Facility), to reduce the LIBOR margin from 2\.50% to 2\.00% and the base rate margin from 1\.50% to 1\.00%\.

Certain details of our 2013, 2014, April 2016 and December 2016 Credit Facilities (collectively referred to as the Credit Facilities) are shown in the table below as of December 31, 2017:

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

**Loan** | **2013 Revolving**

**Facility** | **2014 Term**

**Loan** | **2014 Revolving**

**Facility** | **April 2016**

**Term Loan** | **April 2016**

**Revolving Facility** | **December**

**2016**

**Term Loan** |
| Aggregate principal issued or credit facility availability

(in millions) | $1,900                        | $1,200                                 | $750                          | $1,000                                 | $1,000                              | $300                                         | $1,250                                             |
| Principal outstanding or drawn (in millions)                                    | $1,825                        | $—                                     | $728                          | $—                                     | $990                                | $—                                           | $1,238                                             |
| Maturity date                                                                   | June 2020                     | October 2022                           | October 2021                  | October 2022                           | April 2023                          | October 2022                                 | December 2023                                      |
| LIBOR margin                                                                    | 2\.00%                        | 2\.25%                                 | 2\.00%                        | 2\.25%                                 | 2\.00%                              | 2\.25%                                       | 2\.00%                                             |

The Term Loans are repayable in annual installments in an amount equal to 1\.00% of the aggregate principal amount issued, with any unpaid balance due on the respective maturity dates\. Voluntary prepayments may be made by American at any time\.

The 2013, 2014 and April 2016 Revolving Facilities provide that American may from time to time borrow, repay and reborrow loans thereunder\. The 2013 and 2014 Revolving Facilities have the ability to issue letters of credit thereunder in an aggregate amount outstanding at any time up to $150 million and $300 million, respectively\. The 2013, 2014 and April 2016 Revolving Facilities are each subject to an undrawn annual fee of 0\.75%\. As of December 31, 2017, there were no borrowings or letters of credit outstanding under the 2013, 2014 or April 2016 Revolving Facilities\. The December 2016 Credit Facilities provide for a revolving credit facility that may be established in the future\.

Subject to certain limitations and exceptions, the Credit Facilities are secured by collateral, including certain spare parts, certain slots, certain route authorities, certain simulators and certain leasehold rights\. American has the ability to make future modifications to the collateral pledged, subject to certain restrictions\. American’s obligations under the Credit Facilities are guaranteed by AAG\. American is required to maintain a certain minimum ratio of appraised value of the collateral to the outstanding loans as further described below in *“Collateral\-Related Covenants\.”*

The Credit Facilities contain events of default customary for similar financings, including cross default to other material indebtedness\. Upon the occurrence of an event of default, the outstanding obligations may be accelerated and become due and payable immediately\. In addition, if a “change of control” occurs, American will (absent an amendment or waiver) be required to repay at par the loans outstanding under the Credit Facilities and terminate the 2013, 2014 and April 2016 Revolving Facilities and any revolving credit facilities established under the December 2016 Credit Facilities\. The Credit Facilities also include covenants that, among other things, require AAG to maintain a minimum aggregate liquidity (as defined in the Credit Facilities) of not less than $2\.0 billion, and limit the ability of AAG and its restricted subsidiaries to pay dividends and make certain other payments, make certain investments, incur additional indebtedness, incur liens on the collateral, dispose of the collateral, enter into certain affiliate transactions and engage in certain business activities, in each case subject to certain exceptions\.

98


Annual Report of Southwest Airlines Co\. for year 2018

price by applying fair value based on historical redemption patterns\. Points earned from business partner activity, which primarily consist of points sold, along with related services, to companies participating in the Rapid Rewards loyalty program, are valued using a relative fair value methodology based on the contractual rate which partners pay to Southwest to award Rapid Rewards points to the business partner’s customers\. For points that are expected to expire unused, the Company recognizes spoilage in proportion to the pattern of points used by the Customer, which approximates the average period over which the population of Rapid Reward Members redeem their points\. The Company records passenger revenue related to air transportation when the transportation is delivered\. The marketing elements are recognized as Other \- net revenue when earned\. See Note 5 for further information\.

***Advertising***

Advertising costs are charged to expense as incurred\. Advertising and promotions expense for the years ended December 31, 2018, 2017, and 2016 was $215 million, $224 million, and $232 million, respectively, and is included as a component of Other operating expense in the accompanying Consolidated Statement of Income\.

***Share\-based Employee Compensation***

The Company has share\-based compensation plans covering certain Employees, including a plan that also covers the Company’s Board of Directors\. The Company accounts for share\-based compensation based on its grant date fair value\. See Note 9 for further information\.

***Financial Derivative Instruments***

The Company accounts for financial derivative instruments at fair value and applies hedge accounting rules where appropriate\. The Company utilizes various derivative instruments, including jet fuel, crude oil, unleaded gasoline, and heating oil\-based derivatives, to attempt to reduce the risk of its exposure to jet fuel price increases\. These instruments are accounted for as cash flow hedges upon proper qualification\. The Company also has interest rate swap agreements to convert a portion of its fixed\-rate debt to floating rates and has swap agreements that convert certain floating\-rate debt to a fixed\-rate\. The majority of these interest rate hedges are appropriately designated as either fair value hedges or as cash flow hedges\.

Since the majority of the Company’s financial derivative instruments are not traded on a market exchange, the Company estimates their fair values\. Depending on the type of instrument, the values are determined by the use of present value methods or option value models with assumptions about commodity prices based on those observed in underlying markets\.

The Company adopted the New Hedging Standard as of January 1, 2018\. See Note 2 for further information on this adoption\.

All cash flows associated with purchasing and selling derivatives are classified as operating cash flows in the Consolidated Statement of Cash Flows, within Changes in certain assets and liabilities\. The Company classifies its cash collateral provided to or held from counterparties in a "net" presentation on the Consolidated Balance Sheet against the fair value of the derivative positions with those counterparties\. See Note 10 for further information\.

***Software Capitalization***

The Company capitalizes certain internal and external costs related to the acquisition and development of internal use software during the application development stages of projects\. The Company amortizes these costs using the straight\-line method over the estimated useful life of the software, which is typically five to fifteen years\. Costs incurred during the preliminary project or the post\-implementation/operation stages of the project are expensed as incurred\. Capitalized computer software, included as a component of Ground property and equipment in the accompanying Consolidated Balance Sheet, net of accumulated depreciation, was $674 million and $654 million at December 31, 2018, and 2017,

76


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

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

*2017\-2 EETCs*

In August 2017, American created two pass\-through trusts which issued approximately $797 million aggregate principal amount of Series 2017\-2 Class AA and Class A EETCs (the 2017\-2 EETCs) in connection with the financing of 30 aircraft previously delivered to American or scheduled to be delivered to American through April 2018 (the 2017\-2 Aircraft)\. A portion of the net proceeds received from the sale of the 2017\-2 EETCs has been used to acquire Series AA and A equipment notes issued by American to the pass\-through trusts and the balance of such proceeds is being held in escrow for the benefit of the holders of the 2017\-2 EETCs until such time as American issues additional Series AA and A equipment notes to the pass\-through trusts, which trusts will purchase such additional equipment notes with the escrowed funds\. These escrowed funds are not guaranteed by American and are not reported as debt on our consolidated balance sheet because the proceeds held by the depository are not American’s assets\.

In October 2017, American created one additional pass\-through trust which issued approximately $221 million aggregate principal amount of Series 2017\-2 Class B EETCs (the 2017\-2 Class B EETCs) in connection with the financing of the 2017\-2 Aircraft\. A portion of the net proceeds received from the sale of the Series 2017\-2 Class B EETCs was used on the date of issuance of the 2017\-2 Class B EETCs to acquire Series B equipment notes issued by American in connection with the financing of certain 2017\-2 Aircraft, and the balance of such proceeds is being held in escrow for the benefit of the holders of the 2017\-2 Class B EETCs until such time as American issues additional Series B equipment notes to the pass\-through trust, which will purchase such additional equipment notes with a portion of the escrowed funds\. These escrowed funds are not guaranteed by American and are not reported as debt on our consolidated balance sheet because the proceeds held by the depository are not American’s assets\.

As of December 31, 2017, approximately $735 million of the escrowed proceeds from the 2017\-2 EETCs have been used to purchase equipment notes issued by American\. Interest and principal payments on equipment notes issued in connection with the 2017\-2 EETCs are payable semi\-annually in April and October of each year, with interest payments beginning in April 2018 and principal payments beginning in October 2018\. These equipment notes are secured by liens on the aircraft financed with the proceeds of the 2017\-2 EETCs\.

Certain information regarding the 2017\-2 EETC equipment notes and the remaining escrowed proceeds of the 2017\-2 EETCs, as of December 31, 2017, is set forth in the table below\.

|                               |                   |                   |                   |
| ----------------------------- | ----------------- | ----------------- | ----------------- |
|                               | **2017\-2 EETCs** | **2017\-2 EETCs** | **2017\-2 EETCs** |
|                               | **Series AA**     | **Series A**      | **Series B**      |
| Aggregate principal issued    | $545 million      | $252 million      | $221 million      |
| Remaining escrowed proceeds   | $152 million      | $70 million       | $61 million       |
| Fixed interest rate per annum | 3\.35%            | 3\.60%            | 3\.70%            |
| Maturity date                 | October 2029      | October 2029      | October 2025      |

***(c) Equipment Loans and Other Notes Payable Issued in 2017***

In 2017, American entered into agreements under which it borrowed $1\.0 billion in connection with the financing of certain aircraft\. Debt incurred under these agreements matures in 2027 through 2029 and bears interest at fixed and variable rates of LIBOR plus an applicable margin averaging 3\.08% at December 31, 2017\.

***(d) Senior Notes***

The details of our 6\.125%, 5\.50% and 4\.625% senior notes are shown in the table below as of December 31, 2017:

|                                            |                                                |                                                |                                                  |
| ------------------------------------------ | ---------------------------------------------- | ---------------------------------------------- | ------------------------------------------------ |
|                                            | **6\.125% Senior Notes**                       | **5\.50% Senior Notes**                        | **4\.625% Senior Notes**                         |
| Aggregate principal issued and outstanding | $500 million                                   | $750 million                                   | $500 million                                     |
| Maturity date                              | June 2018                                      | October 2019                                   | March 2020                                       |
| Fixed interest rate per annum              | 6\.125%                                        | 5\.50%                                         | 4\.625%                                          |
| Interest payments                          | Semi\-annually in arrears in June and December | Semi\-annually in arrears in April and October | Semi\-annually in arrears in March and September |

100


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

2019 Accomplishments and Highlights

Recognition and Awards

• Ranked "Highest in Customer Satisfaction Among Traditional Carriers" in 2019 by J\.D\. Power for the 12^th^  year in a row\.

• Named "Best U\.S\. Airline" by Condé Nast Traveler in their 2019 Readers Choice Awards for the second consecutive year\.

• Mileage Plan™ ranked first in U\.S\. News & World Report's list of Best Travel Rewards Programs for the fifth time\.

• Ranked as top U\.S\. airline in Newsweek's 2020 Best Customer Service awards\.

• Named "Best Mid\-Size Airline" by TripAdvisor in their 2019 Travelers Choice awards\.

• Earned top spot for customer satisfaction on the American Customer Satisfaction Index Travel Report for 2018\-2019\.

• Named "Best Airline" by Kayak in their 2019 Travel Hacker Awards\.

• Ranked the best U\.S\. airline in Money Magazine for the second year in a row\.

• Ranked as the top U\.S\. airline in the Dow Jones Sustainability Index (DJSI) for the third consecutive year\.

Our People and Communities

• Ranked among Forbes' 2019 global list for "World's Best Employers" for the fifth year in a row\.

• Completed Flight Path, our leader\-led program aimed at informing and engaging our employees, bringing over 95% of Air Group employees together to discuss our culture and future\.

• Awarded $163 million in incentive pay for 2019\.

• Launched LIFT, Alaska's newly renamed social and environmental impact program, complete with a week of employee volunteer events in eight cities across our network\.

• Donated over $15 million and contributed more than 41,000 volunteer hours to support nonprofits in our local communities, focusing on youth and education, medical (research/transportation) and community outreach\.

Shareholder Return

In 2019, we paid cash dividends of $173 million and repurchased 1,192,820 shares of our common stock for $75 million under the $1 billion share repurchase program authorized by our Board of Directors in August 2015\. As of December 31, 2019, the Company has repurchased approximately 7\.1 million shares for $513 million under this program\.

Since 2007, we have repurchased 62 million shares of common stock for $1\.7 billion for an average price of approximately $27\.89 per share\. In 2019, we increased our quarterly dividend 9% from $0\.32 per share to $0\.35 per share, and, subsequent to December 31, 2019, we announced a 7% increase to $0\.375 per share for 2020\. Overall, we returned $248 million to shareholders during 2019\. We currently expect to increase capital returns to shareholders in 2020 to approximately $430 million, of which approximately $250 million will be from share repurchases\.

Labor Update

In July 2019, our aircraft technicians, represented by AMFA, ratified an agreement to integrate Airbus technicians into the collective bargaining agreement with Boeing technicians, as well as extend the contract term by two years\. The ratification of the agreement brings all of our labor groups under single collective bargaining agreements, an important milestone less than three years after the merger with Virgin America\. In September 2019, Alaska's clerical, office, passenger service, ramp service and stores agents, represented by the IAM, ratified new five\-year contracts\. Both the IAM and AMFA agreements included signing bonuses and wage rate increases, which were implemented in the third quarter\.

32


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

these airlines for operating an agreed\-upon number of aircraft, without regard to the number of passengers on board\. In addition, these agreements provide that we either reimburse or pay 100% of certain variable costs, such as airport landing fees, fuel and passenger liability insurance\.

***Cargo***

Our cargo division provides a wide range of freight and mail services, with facilities and interline connections available across the globe\.

**Distribution and Marketing Agreements**

Passengers can purchase tickets for travel on American through several distribution channels, including our website (*www\.aa\.com*), our reservations centers and third\-party distribution channels, including those provided by or through global distribution systems (e\.g\., Amadeus, Sabre and Travelport), conventional travel agents, travel management companies and online travel agents (e\.g\., Expedia, including its booking sites Orbitz and Travelocity, and The Priceline Group)\. To remain competitive, we need to successfully manage our distribution costs and rights, increase our distribution flexibility and improve the functionality of third\-party distribution channels, while maintaining an industry\-competitive cost structure\. For more discussion, see Part I, Item 1A\. Risk Factors – “*We rely on third\-party distribution channels and must manage effectively the costs, rights and functionality of these channels*\.”

In general, beyond nonstop city pairs, carriers that have the greatest ability to seamlessly connect passengers to and from markets have a competitive advantage\. In some cases, however, foreign governments limit U\.S\. air carriers’ rights to transport passengers beyond designated gateway cities in foreign countries\. In order to improve access to domestic and foreign markets, we have arrangements with other airlines including through the **one**world alliance, other cooperation agreements, joint business agreements (JBAs), and marketing relationships, as further discussed below\.

***Member of oneworld Alliance***

American is a founding member of the **one**world alliance, which includes British Airways, Cathay Pacific Airways, Finnair, Iberia, Japan Airlines, LATAM Airlines Group, Malaysia Airlines, Qantas Airways, Qatar Airways, Royal Jordanian, S7 Airlines and SriLankan Airlines\. The **one**world alliance links the networks of the member carriers and their respective affiliates to enhance customer service and smooth connections to the destinations served by the alliance, including linking the carriers’ loyalty programs and access to the carriers’ airport lounge facilities\.

***Cooperation and Joint Business Agreements***

American has established a transatlantic JBA with British Airways, Iberia and Finnair, and separately, a transpacific JBA with Japan Airlines, each of which has been granted antitrust immunity\. Joint business agreements enable the carriers party to the relevant agreement to cooperate on flights between particular destinations and allow pooling and sharing of certain revenues and costs, enhanced loyalty program reciprocity and cooperation in other areas\. Accordingly, American and its joint business partners received regulatory approval to enter into these JBAs and cooperation agreements\. Joint business agreements have become common approaches to address key regulatory restrictions typically applicable to international airline service, including limitations on the foreign ownership of airlines and national laws prohibiting foreign airlines from carrying passengers beyond specific gateway cities\. Our competitors, including Delta Air Lines and United Airlines, are party to similar arrangements\.

In October 2017, American and its transatlantic partners executed an amended and restated JBA which, among other things, extends the term of the agreement\. An application is pending with the U\.S\. Department of Transportation (DOT) to add Aer Lingus, which is now owned by the parent company of British Airways and Iberia, to the transatlantic JBA\.

The transatlantic joint business relationship benefits from a grant of antitrust immunity from the DOT and was reviewed by the European Commission (EC) in July 2010\. In connection with this review, we provided certain commitments to the EC regarding, among other things, the availability of take\-off and landing slots at London Heathrow (LHR) or London Gatwick (LGW) airports\. The commitments accepted by the EC are binding for 10 years with the possibility of renewal by the EC\. However, in light of the impending exit of the United Kingdom from the European Union (EU) (Brexit) and the related possibility that the EC would no longer have regulatory responsibility for the United Kingdom when the commitments expire in July 2020, the United Kingdom Competition and Markets Authority (CMA) in October 2018 opened an investigation into the transatlantic JBA\. We are cooperating fully with the CMA\.

We have also signed a JBA with Qantas Airways and in 2015 applied for antitrust immunity with the DOT for the revised relationship, but we withdrew that application in November 2016 after it was tentatively denied by the DOT\. In February 2018, we filed a new application for antitrust immunity with the DOT, which, if granted, would allow us to further expand our

6


Annual Report of Southwest Airlines Co\. for year 2017

to the Company under the Revenue Credit Agreement originates from (i) use and lease agreements with other airlines, (ii) various concession agreements, and (iii) other airport miscellaneous revenues\.

The Company’s liquidity could be impacted by this project to the extent there are timing differences between the Company’s payment of the Facilities Payments pursuant to the Facilities Agreement and the transfer of monies back to the Company pursuant to the Revenue Credit Agreement; however, the Company does not currently expect that to occur\. The project has not had a significant impact on the Company’s capital resources or financial position\.

**Fort Lauderdale\-Hollywood International Airport**

The Company has committed to oversee and manage the design and construction of Fort Lauderdale\-Hollywood International Airport's Terminal 1 Modernization Project, including the design and construction of a new five\-gate Concourse A with an international processing facility, at a cost not to exceed $333 million\. Funding for the project has come directly from Broward County aviation sources, but flows through the Company in its capacity as manager of the project\. Construction of Concourse A was completed during second quarter 2017, and construction on Terminal 1 is estimated to be completed by mid\-2018\. In general, as work is being completed on the project by various contractors, invoices are submitted to Broward County for initial payment to the Company, which then makes such payments to the contractors performing the work\.

The Company’s liquidity could be impacted by this project to the extent there are instances in which the Company chooses to make payments to contractors prior to receiving initial payment from Broward County, although the Company currently does not expect this to occur often based on its past experience with smaller projects conducted at the airport\. The project is not expected to have a significant impact on the Company’s capital resources or financial position\.

**Los Angeles International Airport**

In March 2013, the Company executed a lease agreement (the "T1 Lease") with Los Angeles World Airports ("LAWA"), which owns and operates Los Angeles International Airport ("LAX")\. Under the T1 Lease, which was amended in June 2014 and September 2017, the Company is overseeing and managing the design, development, financing, construction, and commissioning of the airport's Terminal 1 Modernization Project at a cost not to exceed $526 million (including proprietary renovations, or $510 million excluding proprietary renovations)\. In October 2017, the Company executed a separate lease agreement with LAWA (the "T1\.5 Lease")\. The Company intends to oversee and manage the design, development, financing, construction, and commissioning of a passenger processing facility between Terminal 1 and 2 (the "Terminal 1\.5 Project")\. The Terminal 1\.5 Project is expected to include ticketing, baggage claim, passenger screening, and a bus gate at a cost not to exceed $479 million for site improvements and non\-proprietary improvements\.

These projects are being funded primarily using the Regional Airports Improvement Corporation ("RAIC"), which is a quasi\-governmental special purpose entity that acts as a conduit borrower under syndicated credit facilities provided by groups of lenders\. Loans made under the separate credit facilities for the Terminal 1 Modernization Project and the Terminal 1\.5 Project are being used to fund the development of each of these projects, and the outstanding loans will be repaid with the proceeds of LAWA’s payments to purchase completed construction phases\. The Company has guaranteed the obligations of the RAIC under each of the credit facilities of the respective lease agreements\.

The Company’s liquidity could be impacted by these projects under certain circumstances; however, the Company does not expect this to occur based on its past experience with other projects\. These projects are not expected to have a significant impact on the Company’s capital resources or financial position\. Construction on the Terminal 1 Modernization Project began during 2014 and is estimated to be completed during 2018\. Construction on the Terminal 1\.5 Project began during third quarter 2017 and is estimated to be completed during 2020\.

**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

The Company’s Consolidated Financial Statements have been prepared in accordance with GAAP\. The Company’s significant accounting policies are described in Note 1 to the Consolidated Financial Statements\. The preparation of

59


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

**NOTE 10\. SPECIAL ITEMS**

In 2017, the Company recognized special items of $118 million for merger\-related costs associated with its acquisition of Virgin America\. Costs classified as merger\-related are directly attributable to merger activities\. The Company also recognized a special tax benefit of $280 million due to the remeasurement of net deferred tax liabilities as a result of the Tax Cuts and Jobs Act signed into law on December 22, 2017, partially offset by certain state tax law enactments\.

In 2016, the Company recognized $117 million in merger\-related costs\. $39 million of these costs were not deductible under the U\.S\. federal tax law, as discussed in Note 6\. The Company recognized a special tax expense of $17 million representing the impact of adjustments to the Company's position on income sourcing in various states\.

In 2015, the Company recognized special items of $32 million in aggregate\. The special items included expense of $14 million for a lump sum settlements offered to terminated and vested participants in the qualified defined benefit pension plans and a litigation\-related matter\. See Note 7 for more information regarding the pension settlement charge\. The Company also recognized a special tax benefit of $26 million representing the discrete impacts of adjustments to the Company's position on income sourcing in various states\.

The following breaks down merger\-related costs incurred in 2017 and 2016 (in millions):

|                                      |          |          |
| ------------------------------------ | -------- | -------- |
|                                      | **2017** | **2016** |
| Consulting and professional services | **$52**  | $32      |
| Severance and retention benefits     | **40**   | 22       |
| Banking fees                         | **—**    | 36       |
| Legal and accounting fees            | **3**    | 22       |
| Other merger\-related costs ^(a)^    | **23**   | 5        |
| Total Merger\-related Costs          | **$118** | $117     |

|     |                                                                                |
| --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (a) | Other merger\-related costs consist primarily of costs for marketing and advertising, IT, training and skill development, employee appreciation and company sponsored events, moving expenses, supplies, and other immaterial expenses\. |

**NOTE 11\. STOCK\-BASED COMPENSATION PLANS**

The Company has various equity incentive plans under which it may grant stock awards to directors, officers and employees\. The Company also has an employee stock purchase plan\.

The table below summarizes the components of total stock\-based compensation (in millions):

|                                                  |          |          |          |
| ------------------------------------------------ | -------- | -------- | -------- |
|                                                  | **2017** | **2016** | **2015** |
| Stock options                                    | **$3**   | $2       | $2       |
| Stock awards                                     | **24**   | 11       | 11       |
| Deferred stock awards                            | **1**    | 1        | 1        |
| Employee stock purchase plan                     | **6**    | 5        | 3        |
| Stock\-based compensation                        | **$34**  | $19      | $17      |
| Tax benefit related to stock\-based compensation | **$13**  | $7       | $7       |

Unrecognized stock\-based compensation for non\-vested options and awards and the weighted\-average period the expense will be recognized (in millions):

|                                        |            |                                         |
| -------------------------------------- | ---------- | --------------------------------------- |
|                                        | **Amount** | **Weighted\-Average**

**Period** |
| Stock options                          | **$3**     | 1\.2                                    |
| Stock awards                           | **34**     | 1\.7                                    |
| Unrecognized stock\-based compensation | **$37**    | 1\.7                                    |

The Company is authorized to issue 17 million shares of common stock under these plans, of which 10,927,824 shares remain available for future grants of either options or stock awards as of December 31, 2017\.

 89


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

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

Segment Reporting

Segment results are prepared based on our internal accounting methods described below, with reconciliations to consolidated amounts in accordance with GAAP\. Our segments are not designed to measure operating income or loss directly related to the products and services included in each segment on a stand\-alone basis\.

|                                  |             |               |                              |       |                  |
| -------------------------------- | ----------- | ------------- | ---------------------------- | ----- | ---------------- |
| **(in millions)**                | **Airline** | **Refinery**  | **Intersegment Sales/Other** |       | **Consolidated** |
| **Year Ended December 31, 2017** |             |               |                              |       |                  |
| Operating revenue:               | $40,742     | $5,039        |                              |       | $41,244          |
| Sales to airline segment         |             |               | $

(886

)       | ^(1)^ |                  |
| Exchanged products               |             |               | (3,240

)              | ^(2)^ |                  |
| Sales of refined products        |             |               | (411

)                | ^(3)^ |                  |
| Operating income                 | 6,004       | 110           |                              |       | 6,114            |
| Interest expense (income), net   | 403         | (7

)   |                              |       | 396              |
| Depreciation and amortization    | 2,188       | 47            |                              |       | 2,235            |
| Total assets, end of period      | 51,165      | 2,127         |                              |       | 53,292           |
| Capital expenditures             | 3,743       | 148           |                              |       | 3,891            |
| **Year Ended December 31, 2016** |             |               |                              |       |                  |
| Operating revenue:               | $39,406     | $3,843        |                              |       | $39,639          |
| Sales to airline segment         |             |               | $

(695

)       | ^(1)^ |                  |
| Exchanged products               |             |               | (2,658

)              | ^(2)^ |                  |
| Sales of refined products        |             |               | (257

)                | ^(3)^ |                  |
| Operating income (loss) ^(4)^    | 7,077       | (125

) |                              |       | 6,952            |
| Interest expense, net            | 386         | 2             |                              |       | 388              |
| Depreciation and amortization    | 1,862       | 40            |                              |       | 1,902            |
| Total assets, end of period      | 49,930      | 1,331         |                              |       | 51,261           |
| Capital expenditures             | 3,270       | 121           |                              |       | 3,391            |
| **Year Ended December 31, 2015** |             |               |                              |       |                  |
| Operating revenue:               | $40,398     | $4,741        |                              |       | $40,704          |
| Sales to airline segment         |             |               | $

(990

)       | ^(1)^ |                  |
| Exchanged products               |             |               | (3,108

)              | ^(2)^ |                  |
| Sales of refined products        |             |               | (337

)                | ^(3)^ |                  |
| Operating income ^(4)^           | 7,512       | 290           |                              |       | 7,802            |
| Interest expense, net            | 481         | —             |                              |       | 481              |
| Depreciation and amortization    | 1,805       | 30            |                              |       | 1,835            |
| Total assets, end of period      | 51,785      | 1,349         |                              |       | 53,134           |
| Capital expenditures             | 2,853       | 92            |                              |       | 2,945            |

|       |                                                                                |
| ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(1)^ | Represents transfers, valued on a market price basis, from the refinery to the airline segment for use in airline operations\. We determine market price by reference to the market index for the primary delivery location, which is New York Harbor, for jet fuel from the refinery\. |

|       |                                                                                |
| ----- | ------------------------------------------------------------------------------------------------------------------------------ |
| ^(2)^ | Represents value of products delivered under our exchange agreements, as discussed above, determined on a market price basis\. |

|       |                                                                                |
| ----- | ---------------------------------------------------------------------------------------- |
| ^(3)^ | These sales were at or near cost; accordingly, the margin on these sales is de minimis\. |

|       |                                                                                |
| ----- | -------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(4)^ | Includes the impact of pricing arrangements between the airline and refinery segments with respect to the refinery's inventory price risk\.  |

 86


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

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

|         |                 |                                                                                |
| ------- | --------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
|  4\.5   | UAL
United | [Third Supplemental Indenture, dated as of January 26, 2017, among United Continental Holdings, Inc\., United Airlines, Inc\. and The Bank of New York Mellon Trust Company, N\.A\., as Trustee, providing for the issuance of 5\.000% Senior Notes due 2024 (filed as Exhibit 4\.2 to UAL's Form 8\-K filed January 27, 2017, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000095015517000004/e75742257ex4_2.htm) |
| 4\.6    | UAL
United | [Form of 5\.000% Senior Notes due 2024 (filed as Exhibit A to Exhibit 4\.2 to UAL's Form 8\-K filed January 27, 2017, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000095015517000004/e75742257ex4_2.htm)                                                                                |
| 4\.7    | UAL
United | [Form of Notation of Note Guarantee (filed as Exhibit B to Exhibit 4\.2 to UAL's Form 8\-K filed January 27, 2017, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000095015517000004/e75742257ex4_2.htm)                                                                                |
| 4\.8    | UAL
United | [Fourth Supplemental Indenture, dated as of September 29, 2017, among United Continental Holdings, Inc\., United Airlines, Inc\. and The Bank of New York Mellon Trust Company, N\.A\., as Trustee, providing for the issuance of 4\.250% Senior Notes due 2022 (filed as Exhibit 4\.2 to UAL's Form 8\-K filed October 4, 2017, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000119312517302468/d463744dex42.htm) |
| 4\.9    | UAL
United | [Form of 4\.250% Senior Notes due 2022 (filed as Exhibit A to Exhibit 4\.2 to UAL's Form 8\-K filed October 4, 2017, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000119312517302468/d463744dex42.htm)                                                                                |
| 4\.10   | UAL
United | [Form of Notation of Note Guarantee (filed as Exhibit B to Exhibit 4\.2 to UAL's Form 8\-K filed October 4, 2017, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000119312517302468/d463744dex42.htm)                                                                                |
| 4\.11   | UAL
United | [Fifth Supplemental Indenture, dated as of May 9, 2019, among United Continental Holdings, Inc\., United Airlines, Inc\. and The Bank of New York Mellon Trust Company, N\.A\., as Trustee (filed as Exhibit 4\.2 to UAL's Form 8\-K filed May 10, 2019, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000119312519144324/d745969dex42.htm)                                                                         |
| 4\.12   | UAL
United | [Form of 4\.875% Senior Notes due 2025 (filed as Exhibit A to Exhibit 4\.2 to UAL's Form 8\-K filed May 10, 2019, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000119312519144324/d745969dex42.htm#ex4_2toc745969_33)                                                                                |
| 4\.13   | UAL
United | [Form of Notation of Note Guarantee (filed as Exhibit B to Exhibit 4\.2 to UAL's Form 8\-K filed May 10, 2019, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000119312519144324/d745969dex42.htm#ex4_2toc745969_33)                                                                                |
| 4\.14   | UAL
United | [Description of the Registrant's Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934](https://www.example.com/ual12311910kex414.htm)                                                                                |
|         |                 | **Material Contracts**                                                                                |
|  †10\.1 | UAL             | [Agreement, dated April 19, 2016, by and among PAR Capital Management, Inc\., Altimeter Capital Management, LP, United Continental Holdings, Inc\. and the other signatories listed on the signature page thereto (filed as Exhibit 10\.1 to UAL's Form 8\-K filed April 20, 2016, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000110465916112937/a16-8741_2ex10d1.htm)                                           |
|  †10\.2 | UAL             | [United Airlines Holdings, Inc\. Profit Sharing Plan (amended and restated effective January 1, 2019)](https://www.example.com/ual12311910kex102.htm)                                                                                |
|  †10\.3 | UAL
United | [Employment Agreement, dated December 31, 2015, among United Continental Holdings, Inc\., United Airlines, Inc\. and Oscar Munoz (filed as Exhibit 10\.1 to UAL's Form 8\-K/A filed January 7, 2016, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000110465916088696/a16-1427_1ex10d1.htm)                                                                                |
|  †10\.4 | UAL
United | [Amendment to Employment Agreement, dated April 19, 2016, by and among United Continental Holdings, Inc\., United Airlines, Inc\. and Oscar Munoz (filed as Exhibit 10\.1 to UAL's Form 8\-K filed April 20, 2016, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000110465916112678/a16-8741_1ex10d1.htm)                                                                                |
|  †10\.5 | UAL
United | [Second Amendment to Employment Agreement, dated April 21, 2017, by and among United Continental Holdings, Inc\., United Airlines, Inc\. and Oscar Munoz (filed as Exhibit 10\.1 to UAL's Current Report on Form 8\-K filed on April 21, 2017, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000110465917025203/a17-11675_1ex10d1.htm)                                                                              |
|  †10\.6 | UAL
United | [Transition Agreement, dated as of December 4, 2019, by and among United Airlines Holdings, Inc\., United Airlines, Inc\. and Oscar Munoz (filed as Exhibit 10\.1 to UAL's Current Report on Form 8\-K filed on December 6, 2019, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000110465919070590/tm1924595d1_ex10-1.htm)                                                                                |
|  †10\.7 | UAL
United | [SERP Agreement, dated as of October 1, 2010, by and among United Continental Holdings, Inc\., Continental Airlines, Inc\. and Gerald Laderman (filed as Exhibit 10\.2 to UAL's Form 10\-Q for the quarter ended September 30, 2015, Commission file number 1\-6033, and incorporated herein by reference)](http://www.sec.gov/Archives/edgar/data/100517/000119312515350093/d63220dex102.htm)                                                                                |

96


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

***We face challenges in integrating our computer, communications and other technology systems\.***

Among the principal risks of integrating our businesses and operations are the risks relating to integrating various computer, communications and other technology systems that are necessary to operate US Airways and American as a single integrated business and to achieve cost synergies by eliminating redundancies\. While we have to date successfully integrated many of our systems, including our customer reservations system and our pilot, flight attendant and fleet scheduling system, we still have to complete several additional important system integration or replacement projects\. In a number of prior airline mergers, the integration of these systems or deployment of replacement systems has taken longer, been more disruptive and cost more than originally forecasted\. The implementation process to integrate or replace these various systems will involve a number of risks that could adversely impact our business, results of operations and financial condition\. New systems will replace multiple legacy systems and the related implementation will be a complex and time\-consuming project involving substantial expenditures for implementation consultants, system hardware, software and implementation activities, as well as the transformation of business and financial processes\.

We cannot assure you that our security measures, change control procedures or disaster recovery plans will be adequate to prevent disruptions or delays in connection with systems integration or replacement\. Disruptions in or changes to these systems could result in a disruption to our business and the loss of important data\. Any of the foregoing could result in a material adverse effect on our business, results of operations and financial condition\.

***We rely heavily on technology and automated systems to operate our business, and any failure of these technologies or systems could harm our business, results of operations and financial condition\.***

We are highly dependent on existing and emerging technology and automated systems to operate our business\. These technologies and systems include our computerized airline reservation system, flight operations systems, financial planning, management and accounting systems, telecommunications systems, website, maintenance systems and check\-in kiosks\. In order for our operations to work efficiently, our website and reservation system must be able to accommodate a high volume of traffic, maintain secure information and deliver flight information, as well as issue electronic tickets and process critical financial information in a timely manner\. Substantially all of our tickets are issued to passengers as electronic tickets\. We depend on our reservation system, which is hosted and maintained under a long\-term contract by a third\-party service provider, to be able to issue, track and accept these electronic tickets\. If our technologies or automated systems are not functioning or if our third\-party service providers were to fail to adequately provide technical support, system maintenance or timely software upgrades for any one of our key existing systems, we could experience service disruptions or delays, which could harm our business and result in the loss of important data, increase our expenses and decrease our revenues\. In the event that one or more of our primary technology or systems vendors goes into bankruptcy, ceases operations or fails to perform as promised, replacement services may not be readily available on a timely basis, at competitive rates or at all, and any transition time to a new system may be significant\.

Our technologies and automated systems cannot be completely protected against events that are beyond our control, including natural disasters, power failures, terrorist attacks, cyber\-attacks, data theft, equipment and software failures, computer viruses or telecommunications failures\. Substantial or sustained system failures could cause service delays or failures and result in our customers purchasing tickets from other airlines\. We cannot assure you that our security measures, change control procedures or disaster recovery plans are adequate to prevent disruptions or delays\. Disruption in or changes to these technologies or systems could result in a disruption to our business and the loss of important data\. Any of the foregoing could result in a material adverse effect on our business, results of operations and financial condition\.

***We are at risk of losses and adverse publicity stemming from any public incident involving our company, our people or our brand, including any accident or other public incident involving our personnel or aircraft, or the personnel or aircraft of our regional, codeshare or joint business operators\.***

In a modern world where news can be captured and travel rapidly, we are at risk of adverse publicity stemming from any public incident involving our company, our people or our brand\. Such an incident could involve the actual or alleged behavior of any of our more than 125,000 employees\. Further, if our personnel or one of our aircraft, or personnel of, or an aircraft that is operated under our brand by, one of our regional operators or an airline with which we have a marketing alliance, joint business or codeshare relationship, were to be involved in a public incident, accident or catastrophe, we could be exposed to significant reputational harm and potential legal liability\. The insurance we carry may be inapplicable or inadequate to cover any such incident, accident or catastrophe\. In the event that our insurance is inapplicable or not adequate, we may be forced to bear substantial losses from an incident or accident\. In addition, any such incident, accident or catastrophe involving our personnel or one of our aircraft (or personnel and aircraft of our regional operators and our codeshare partners) could create an adverse public perception, which could harm our reputation, result in air travelers being reluctant to fly on our

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