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

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

|                                                    |                                                     |                                                     |                                                     |                                                     |
| -------------------------------------------------- | --------------------------------------------------- | --------------------------------------------------- | --------------------------------------------------- | --------------------------------------------------- |
|                                                    | **Fair Value Measurements as of December 31, 2016** | **Fair Value Measurements as of December 31, 2016** | **Fair Value Measurements as of December 31, 2016** | **Fair Value Measurements as of December 31, 2016** |
|                                                    | **Total**                                           | **Level 1**                                         | **Level 2**                                         | **Level 3**                                         |
| Short\-term investments  ^(1)^  ^(2)^ :            |                                                     |                                                     |                                                     |                                                     |
| Money market funds                                 | $589                                                | $589                                                | $—                                                  | $—                                                  |
| Corporate obligations                              | 2,550                                               | —                                                   | 2,550                                               | —                                                   |
| Bank notes/certificates of deposit/time deposits   | 2,898                                               | —                                                   | 2,898                                               | —                                                   |
|                                                    | 6,037                                               | 589                                                 | 5,448                                               | —                                                   |
| Restricted cash and short\-term investments  ^(1)^ | 638                                                 | 638                                                 | —                                                   | —                                                   |
| Total                                              | $6,675                                              | $1,227                                              | $5,448                                              | $—                                                  |

|       |                                                                                |
| ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(1)^ | Unrealized gains or losses on short\-term investments and restricted cash and short\-term investments are recorded in accumulated other comprehensive income (loss) at each measurement date\. |

|       |                                                                                |
| ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(2)^ | All short\-term investments are classified as available\-for\-sale and stated at fair value\. Our short\-term investments mature in one year or less except for  $385 million  of bank notes/certificates of deposit/time deposits and  $230 million  of corporate obligations\. |

***Fair Value of Debt***

The fair value of our long\-term debt was estimated using quoted market prices or discounted cash flow analyses, based on our current estimated incremental borrowing rates for similar types of borrowing arrangements\. If our long\-term debt was measured at fair value, it would have been classified as Level 2 in the fair value hierarchy\.

The carrying value and estimated fair value of our long\-term debt, including current maturities, were as follows (in millions):

|                                               |                               |                           |                               |                           |
| --------------------------------------------- | ----------------------------- | ------------------------- | ----------------------------- | ------------------------- |
|                                               | **December 31, 2017**         | **December 31, 2017**     | **December 31, 2016**         | **December 31, 2016**     |
|                                               | **Carrying**

**Value** | **Fair**

**Value** | **Carrying**

**Value** | **Fair**

**Value** |
| Long\-term debt, including current maturities | $25,065                       | $25,848                   | $24,344                       | $24,983                   |

***Other Investments***

We have an approximate 25% ownership interest in Republic Airways Holdings Inc\. (Republic), which we received in the second quarter of 2017 in consideration for our unsecured claim in Republic’s bankruptcy case\. This ownership interest is accounted for under the equity method and our portion of Republic’s financial results is recognized within other, net on the consolidated statements of operations\. In 2017, we recognized $544 million of regional expense from our capacity purchase agreement with Republic\.

Additionally, in the third quarter of 2017, we acquired 2\.7% of the outstanding shares of China Southern Airlines Company Limited for $203 million\. Since our subscription agreement restricts the sale or transfer of these shares for three years, we account for this investment under the cost method\.

These investments are reflected within other assets on our consolidated balance sheets\.

**9\. Employee Benefit Plans**

We sponsor defined benefit and defined contribution pension plans for eligible employees\. The defined benefit pension plans provide benefits for participating employees based on years of service and average compensation for a specified period of time before retirement\. Effective November 1, 2012, substantially all of our defined benefit pension plans were frozen and we began providing enhanced benefits under our defined contribution pension plans for certain employee groups\. We use a December 31 measurement date for all of our defined benefit pension plans\. We also provide certain retiree medical and other postretirement benefits, including health care and life insurance benefits, to retired employees\. Effective November 1, 2012, we modified our retiree medical and other postretirement benefits plans to eliminate the company subsidy for employees who retire on or after November 1, 2012\. As a result of modifications to our retiree medical and other postretirement benefits plans in 2012, we recognized a negative plan

106


Annual Report of DELTA AIR LINES, INC\.  for year 2018

Other\.  Primarily includes globally\-diversified, risk\-managed commingled funds consisting mainly of equity, fixed income and commodity exposures\. Investments in these strategies are typically valued monthly by third\-party administrators or valuation agents with an annual audit performed by an independent third party\.

On an annual basis we assess the potential for adjustments to the fair value of all investments\.  Certain of our investments valued using NAV as a practical expedient have a lag in the availability of data\. This primarily applies to private equity, private equity\-related strategies and real assets\. We solicit valuation updates from the investment fund managers and use their information and corroborating data from public markets to determine any needed fair value adjustments\.

Other

We also sponsor defined benefit pension plans for eligible employees in certain foreign countries\. These plans did not have a material impact on our Consolidated Financial Statements in any period presented\.

Profit Sharing Program

Our broad\-based employee profit sharing program provides that, for each year in which we have an annual pre\-tax profit, as defined by the terms of the program, we will pay a specified portion of that profit to employees\. In determining the amount of profit sharing, the program defines profit as pre\-tax profit adjusted for profit sharing and certain other items\. For the years ended  December 31, 2018 ,  2017  and  2016 , we recorded expenses of   $1\.3 billion ,   $1\.1 billion  and   $1\.1 billion  under the profit sharing program, respectively\.

Effective October 1, 2017, we aligned our profit sharing plans under a single formula\. Under this formula, our profit sharing program pays 10% to all eligible employees for the first $2\.5 billion of annual profit and 20% of annual profit above $2\.5 billion\. Prior to that time, the profit sharing program for pilots used this formula but for 2016 and the first nine months of 2017, the profit sharing program for merit, ground and flight attendant employees paid 10% of annual profit and, if we exceeded our prior\-year results, the program paid 20% of the year\-over\-year increase in profit to eligible employees\.

NOTE 11 \. COMMITMENTS AND CONTINGENCIES

Aircraft Purchase Commitments

Our future aircraft purchase commitments totaled approximately   $16\.2 billion  at  December 31, 2018 :

|                   |           |
| ----------------- | --------- |
| **(in millions)** | **Total** |
| 2019              | $3,290    |
| 2020              | 3,130     |
| 2021              | 3,190     |
| 2022              | 2,760     |
| 2023              | 1,850     |
| Thereafter        | 1,940     |
| Total             | $16,160   |

Our future aircraft purchase commitments included the following aircraft at  December 31, 2018 :

|                   |                          |
| ----------------- | ------------------------ |
| **Aircraft Type** | **Purchase Commitments** |
| A220\-100         | 36                       |
| A220\-300         | 50                       |
| A321\-200         | 62                       |
| A321\-200neo      | 100                      |
| A330\-900neo      | 35                       |
| A350\-900         | 14                       |
| B\-737\-900ER     | 18                       |
| CRJ\-900          | 15                       |
| Total             | 330                      |

 87


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

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

Significant financing events in 2016 were as follows:

Share Repurchases

The Company used $2\.6 billion of cash to purchase 50 million shares of its common stock during 2016 under its share repurchase programs\.

Debt Issuances

In 2016, United completed two EETC offerings for a total principal amount of $2\.0 billion\. Of the $2\.0 billion, United received and recorded $708 million of proceeds as debt as of December 31, 2016 to finance the purchase of 17 aircraft\.

In 2016, United borrowed approximately $369 million aggregate principal amount from various financial institutions to finance the purchase of several aircraft delivered in 2016\.

Debt and Capital Lease Principal Payments

During the year ended December 31, 2016, the Company made debt and capital lease principal payments of $1\.4 billion\.

Significant financing events in 2015 were as follows:

Share Repurchases

The Company used $1\.2 billion of cash to purchase 21 million shares of its common stock during 2015 under its share repurchase programs\.

Debt Issuances

During 2015, United issued $1\.4 billion of debt related to EETC offerings to finance aircraft\.

In 2015, United borrowed approximately $590 million aggregate principal amount from various financial institutions to finance the purchase of several aircraft delivered in 2015\.

Debt and Capital Lease Principal Payments

During the year ended December 31, 2015, the Company made debt and capital lease principal payments of $2\.3 billion, including the following prepayments:

|   |                                                                      |
| - | -------------------------------------------------------------------- |
| • | UAL used cash to repurchase all $321 million par value 2026 Notes\.  |

|   |                                                                      |
| - | -------------------------------------------------------------------- |
| • | UAL used cash to repurchase all $311 million par value 2028 Notes\.  |

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------------------ |
| • | UAL used cash to prepay, at par, $300 million principal amount of its $500 million term loan due September 2021\.  |

For additional information regarding these Liquidity and Capital Resource matters, see Notes 3, 10, 11 and 12 to the financial statements included in Part II, Item 8 of this report\. For information regarding non\-cash investing and financing activities, see the Company’s statements of consolidated cash flows\.

***Credit Ratings\.*** As of the filing date of this report, UAL and United had the following corporate credit ratings:

|                                                                                |                                                                                |                                                                                |                                                                                |
|:------------------------------------------------------------------------------------- |:-------------------------------------------------------------------------------------:|:-------------------------------------------------------------------------------------:|:-------------------------------------------------------------------------------------:|
|                                                                                |                                          S&P                                          |                                        Moody’s                                        |                                         Fitch                                         |
| UAL                                                                                |                                         BB\-                                          |                                          Ba2                                          |                                          BB                                           |
| United                                                                                |                                         BB\-                                          |                                          \*                                           |                                          BB                                           |
| \*The credit agency does not issue corporate credit ratings for subsidiary entities\. | \*The credit agency does not issue corporate credit ratings for subsidiary entities\. | \*The credit agency does not issue corporate credit ratings for subsidiary entities\. | \*The credit agency does not issue corporate credit ratings for subsidiary entities\. |

37


Annual Report of Southwest Airlines Co\. for year 2017

During November 2017, the Company issued $300 million senior unsecured notes due 2022\. The notes bear interest at 2\.75 percent\. Interest is payable semi\-annually in arrears on May 16 and November 16, beginning in 2018\.

Also during November 2017, the Company issued $300 million senior unsecured notes due 2027\. The notes bear interest at 3\.45 percent\. Interest is payable semi\-annually in arrears on May 16 and November 16, beginning in 2018\.

During November 2016, the Company issued $300 million senior unsecured notes due 2026\. The notes bear interest at 3\.00 percent\. Interest is payable semi\-annually in arrears on May 15 and November 15\.

During October 2016, the Company entered into a term loan agreement providing for loans to the Company aggregating up to $215 million, to be secured by mortgages on seven of the Company's 737\-800 aircraft\. The Company borrowed the full $215 million and secured this loan with the requisite seven aircraft mortgages\. The loan matures on October 31, 2026, and is repayable via semi\-annual installments of principal that begin April 30, 2018\. The loan bears interest at the LIBO Rate (as defined in the term loan agreement) plus 1\.10 percent, which equates to a current rate of 2\.67 percent, and interest is payable semi\-annually in installments\.

During third quarter 2016, the Company entered into term loan agreements to purchase the equity interest in four aircraft that were previously classified as operating leases, for a total of $20 million\. The loans were set to mature in years 2018 to 2021, but were paid in full on August 1, 2017, utilizing available cash on hand\.

During November 2015, the Company issued $500 million senior unsecured notes due 2020\. The notes bear interest at 2\.65 percent, payable semi\-annually in arrears on May 5 and November 5\. Concurrently, the Company entered into a fixed\-to\-floating interest rate swap to convert the interest on these unsecured notes to a floating rate until their maturity\. See Note 10 for further information on the interest\-rate swap agreement\.

During November 2014, the Company issued $300 million senior unsecured notes due 2019\. The notes bear interest at 2\.75 percent, payable semi\-annually in arrears on May 6 and November 6\. Concurrently, the Company entered into a fixed\-to\-floating interest rate swap to convert the interest on these unsecured notes to a floating rate until their maturity\. See Note 10 for further information on the interest\-rate swap agreement\.

On July 1, 2009, the Company entered into a term loan agreement providing for loans to the Company aggregating up to $124 million, to be secured by mortgages on five of the Company’s 737\-700 aircraft\. The Company borrowed the full $124 million and secured this loan with the requisite five aircraft mortgages\. The loan matures on July 1, 2019, and is repayable semi\-annually in installments of principal and interest that began January 1, 2010\. The loan bears interest at a fixed rate of 4\.84 percent\. In September 2015, the Company prepaid $24 million on the loan agreement, which in turn released one of the encumbered aircraft\. As such, the remaining four aircraft related to this transaction are still encumbered as of December 31, 2017\.

On April 29, 2009, the Company entered into a term loan agreement providing for loans to the Company aggregating up to $332 million, to be secured by mortgages on 14 of the Company’s 737\-700 aircraft\. The Company borrowed the full $332 million and secured the loan with the requisite 14 aircraft mortgages\. The loan matures on May 6, 2019, and is being repaid via quarterly installments of principal and interest that began August 6, 2009\. The loan bears interest at the LIBO Rate (as defined in the term loan agreement) plus 3\.30 percent\. Pursuant to the terms of the term loan agreement, the Company entered into an interest rate swap agreement to convert the variable rate on the term loan to a fixed 6\.315 percent until maturity\.

On May 6, 2008, the Company entered into a term loan agreement providing for loans to the Company aggregating up to $600 million, to be secured by first\-lien mortgages on 21 of the Company’s 737\-700 aircraft\. On May 9, 2008, the Company borrowed the full $600 million and secured these loans with the requisite 21 aircraft mortgages\. The loans mature on May 9, 2020, and are repayable quarterly in installments of principal and interest, with the first payment made on August 9, 2008\. The loans bear interest at the LIBO Rate (as defined in the term loan agreement) plus 0\.95 percent\. Pursuant to the terms of the term loan agreement, the Company entered into an interest rate swap agreement to convert the variable rate on the term loan to a fixed 5\.223 percent until maturity\.

88


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

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The Company may be required to recognize impairments in the future due to, among other factors, extreme fuel price volatility, tight credit markets, a decline in the fair value of certain tangible or intangible assets, unfavorable trends in historical or forecasted results of operations and cash flows and an uncertain economic environment, as well as other uncertainties\. The Company can provide no assurance that a material impairment charge of tangible or intangible assets will not occur in a future period\. The value of the Company’s aircraft could be impacted in future periods by changes in supply and demand for these aircraft\. Such changes in supply and demand for certain aircraft types could result from grounding of aircraft by the Company or other carriers\. An impairment charge could have a material adverse effect on the Company’s financial position and results of operations\.

***The Company’s ability to use its net operating loss carryforwards to offset future taxable income for U\.S\. federal income tax purposes may be significantly limited due to various circumstances, including certain possible future transactions involving the sale or issuance of UAL common stock, or if taxable income does not reach sufficient levels\.***

As of December 31, 2017, UAL reported consolidated federal net operating loss (“NOL”) carryforwards of approximately $2\.4 billion\.

The Company’s ability to use its NOL carryforwards may be limited if it experiences an “ownership change” as defined in Section 382 (“Section 382”) of the Internal Revenue Code of 1986, as amended (the “Code”)\. An ownership change generally occurs if certain stockholders increase their aggregate percentage ownership of a corporation’s stock by more than 50 percentage points over their lowest percentage ownership at any time during the testing period, which is generally the three\-year period preceding any potential ownership change\.

There is no assurance that the Company will not experience a future ownership change under Section 382 that may significantly limit or possibly eliminate its ability to use its NOL carryforwards\. Potential future transactions involving the sale or issuance of UAL common stock, including the exercise of conversion options under the terms of any convertible debt that UAL may issue in the future, the repurchase of such debt with UAL common stock, any issuance of UAL common stock for cash, and the acquisition or disposition of such stock by a stockholder owning 5% or more of UAL common stock, or a combination of such transactions, may increase the possibility that the Company will experience a future ownership change under Section 382\.

Under Section 382, a future ownership change would subject the Company to additional annual limitations that apply to the amount of pre\-ownership change NOLs that may be used to offset post\-ownership change taxable income\. This limitation is generally determined by multiplying the value of a corporation’s stock immediately before the ownership change by the applicable long\-term tax\-exempt rate\. Any unused annual limitation may, subject to certain limits, be carried over to later years, and the limitation may, under certain circumstances, be increased by built\-in gains in the assets held by such corporation at the time of the ownership change\. This limitation could cause the Company’s U\.S\. federal income taxes to be greater, or to be paid earlier, than they otherwise would be, and could cause all or a portion of the Company’s NOL carryforwards to expire unused\. Similar rules and limitations may apply for state income tax purposes\. The Company’s ability to use its NOL carryforwards will also depend on the amount of taxable income it generates in future periods\. The Company’s NOL carryforwards may expire before it can generate sufficient taxable income to use them in full\.

***The final impacts of the Tax Cuts and Jobs Act could be materially different from our current estimates\.***

On December 22, 2017, the Tax Cuts and Jobs Act was signed into law (the “Tax Act”)\. The Tax Act introduced significant changes to the Code\. We continue to examine the impact the Tax Act may have on our business\. Notwithstanding the reduction in the federal corporate income tax rate as a result of Tax Act, the estimated impact of the new law is based on management’s current knowledge and assumptions and recognized impacts could be materially different from current estimates based upon our further analysis of the new law\.

19


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

***Economic uncertainty, or another recession, would likely impact demand for our product and could harm our financial condition and results of operations\.***

The airline industry, which is subject to relatively high fixed costs and highly variable and unpredictable demand, is particularly sensitive to changes in economic conditions\. We are also highly dependent on U\.S\. consumer confidence and the health of the U\.S\. economy\. Unfavorable U\.S\. economic conditions have historically driven changes in travel patterns and have resulted in reduced spending for both leisure and business travel\. For some consumers, leisure travel is a discretionary expense, and shorter distance travelers, in particular, have the option to replace air travel with surface travel\. Businesses are able to forgo air travel by using communication alternatives such as videoconferencing or may be more likely to purchase less expensive tickets to reduce costs, which can result in a decrease in average revenue per seat\. Unfavorable economic conditions also hamper the ability of airlines to raise fares to counteract increased fuel, labor and other costs\. Unfavorable or even uncertain economic conditions could negatively affect our financial condition and results of operations\.

***INFORMATION TECHNOLOGY***

***We rely heavily on automated systems to operate our business, and a failure to invest in new technology or a disruption of our current systems or their operators could harm our business\.***

We depend on automated systems to operate our business, including our airline reservation system, our telecommunication systems, our website, our maintenance systems, our check\-in kiosks, mobile devices, and other systems\. Substantially all of our tickets are issued to our guests as electronic tickets, and the majority of our guests check\-in using our website, airport kiosks, or our mobile application\. We depend on our reservation system to be able to issue, track and accept these electronic tickets\. In order for our operations to work efficiently, we must continue to invest in new technology to ensure that our website, reservation system and check\-in systems are able to accommodate a high volume of traffic, maintain information security and deliver important flight information\. Substantial or repeated website, reservations system or telecommunication systems failures or service disruptions could reduce the attractiveness of our services and cause our guests to do business with another airline\. In addition, we rely on other automated systems for crew scheduling, flight dispatch and other operational needs\. We are in the final stages of moving our primary data facility\. Disruptions, failed migration, untimely recovery, or a breach of these systems or the data center could result in the loss of important data, an increase of our expenses, an impact on our operational performance, or a possible temporary cessation of our operations\.

***Failure to appropriately comply with information security rules and regulations or safeguard our employee or guest data could result in damage to our reputation and cause us to incur substantial legal and regulatory cost\.***

We accept, store and transmit information about our guests, our employees, our business partners, and our business\. Many international and U\.S\. jurisdictions have established or are in the process of establishing their own data security and privacy regulatory framework with which we, our business partners, and our corporate customers must comply\. There are also various bills pending at the U\.S\. state and federal levels that could impose additional privacy and data security obligations\. This uncertain and increasingly complex regulatory environment may result in significant expenses associated with increased investment in technology and the development of new operational processes, particularly as we continue to collect and retain large amounts of personal information\. If our online activities or our other customer\-facing technology systems do not function as designed, we may experience a loss of customer confidence, decreased sales, or be exposed to fraud, any of which could materially and adversely affect our reputation and operations\. In addition, we frequently rely on third\-party hosting sites and data processors, including cloud providers\. To the extent that either we or third parties with whom we share information are found to be out of compliance with applicable laws and regulations, we could be subject to additional litigation, regulatory risks and reputational harm\.

***Cyber security threats have and will continue to impact our business\. Failure to appropriately mitigate these risks could negatively impact our operations, reputation and financial condition\.***

Our sensitive information relies on secure transmission over public and private networks\. Our systems are subject to increasing and evolving cyber security risks\. Unauthorized parties have attempted and continue to attempt to gain access to our systems and information, including through fraudulent misrepresentation and other means of deception\. Methods used by unauthorized parties are continually evolving and may be difficult to identify\. Because of these ever\-evolving risks and regular attacks, we continue to review policies and educate our people on various methods utilized in attempts to gain unauthorized access to bolster awareness and encourage cautionary practices\. However, the nature of these attacks means that proper policies and education may not be enough to prevent all unauthorized access\. A compromise of our systems, the security of our infrastructure or those of other business partners that result in our information being accessed or stolen by unauthorized persons could adversely affect our operations and our reputation\.

 23


Annual Report of DELTA AIR LINES, INC\.  for year 2018

2018 Unsecured Notes

During the June 2018 quarter, we issued   $1\.6 billion  in aggregate principal amount of unsecured notes, consisting of   $600 million  of   3\.4%  Notes due 2021,   $500 million  of   3\.8%  Notes due 2023 and   $500 million  of   4\.375%  Notes due 2028 (collectively, the "Notes")\. Concurrently with issuing the Notes, we entered into interest rate derivatives that swapped payments of fixed rate interest for payments of floating rate interest, which reduced our effective interest rate to one\-month LIBOR plus   1\.17% \. See Note 5, "Derivatives," for more information about the interest rate swaps\.

The Notes are equal in right of payment with our other unsubordinated indebtedness and senior in right of payment to our future subordinated debt\. The Notes are subject to covenants that, among other things, limit our ability to incur liens securing indebtedness for borrowed money or finance leases and engage in mergers and consolidations or transfer all or substantially all of our assets, in each case subject to certain exceptions\. The Notes are also subject to customary event of default provisions, including cross\-defaults to other material indebtedness\.

If we experience certain changes of control, followed by a ratings decline of any series of Notes by   two  of the ratings agencies to a rating below investment grade, we must offer to repurchase such series\.

We used the net proceeds from the offering of the Notes to repay borrowings outstanding under our secured Pacific term loan B\-1 facility and 2015 term loan facility and for general corporate purposes\.

2018 Unsecured Revolving Credit Facility

During the June 2018 quarter, we entered into a   $2\.65 billion  unsecured revolving credit facility, up to   $500 million  of which may be used for the issuance of letters of credit (the “Revolving Credit Facility”)\. The Revolving Credit Facility was undrawn at the time we entered into it and as of  December 31, 2018 \. The Revolving Credit Facility replaced the undrawn secured Pacific Revolving Credit Facility and the 2015 Revolving Credit Facility, both of which were terminated in conjunction with the repayment of the term loans described above\.

The Revolving Credit Facility is split evenly into a   $1\.325 billion  three\-year facility and a   $1\.325 billion  five\-year facility\. Borrowings on both facilities bear interest at a variable rate equal to LIBOR, or another index rate, in each case plus a specified margin\.

NYTDC Special Facilities Revenue Bonds

During the June 2018 quarter, the New York Transportation Development Corporation ("NYTDC") issued Special Facilities Revenue Bonds, Series 2018 (the "2018 Bonds") in the aggregate principal amount of   $1\.4 billion \. We entered into loan agreements with the NYTDC to use the proceeds from the 2018 Bonds to finance a portion of the construction costs for the new terminal facilities at the LaGuardia Airport\. The proceeds from the 2018 Bonds are recorded in cash restricted for airport construction on the balance sheet\. Additional information about the construction project at the LaGuardia Airport is included in  Note 9 , "Airport Redevelopment\."

We are required to pay debt service on the 2018 Bonds through payments under loan agreements with NYTDC, and we have guaranteed the 2018 Bonds\.

Financial Covenants

We were in compliance with the covenants in our financing agreements at  December 31, 2018 \.

Availability Under Revolving Credit Facilities

The table below shows availability under revolving credit facilities, all of which were undrawn, as of  December 31, 2018 :

|                                                      |        |
| ---------------------------------------------------- | ------ |
| **(in millions)**                                    |        |
| Unsecured Revolving Credit Facility                  | $2,650 |
| Other revolving credit facilities

      | 380    |
| Total availability under revolving credit facilities | $3,030 |

During February 2019, we drew   $750 million  from our unsecured Revolving Credit Facility for general corporate purposes\.

 76


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

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

Geographic Information

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

Our operating revenue by geographic region (as defined by the U\.S\. Department of Transportation) is summarized in the following table:

|                   |                             |                             |                             |
| ----------------- | --------------------------- | --------------------------- | --------------------------- |
|                   | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** |
| **(in millions)** | **2017**                    | **2016**                    | **2015**                    |
| Domestic          | $29,556                     | $28,108                     | $27,884                     |
| Atlantic          | 6,044                       | 5,919                       | 6,505                       |
| Pacific           | 2,730                       | 2,939                       | 3,503                       |
| Latin America     | 2,914                       | 2,673                       | 2,812                       |
| Total             | $41,244                     | $39,639                     | $40,704                     |

Our tangible assets consist primarily of flight equipment, which is mobile across geographic markets\. Accordingly, assets are not allocated to specific geographic regions\.

NOTE 15 \. RESTRUCTURING

The following table shows the balances and activity for restructuring charges:

|                                  |               |               |               |
| -------------------------------- | ------------- | ------------- | ------------- |
| **(in millions)**                | **2017**      | **2016**      | **2015**      |
| Liability at beginning of period | $333          | $467          | $504          |
| Payments                         | (103

) | (144

) | (127

) |
| Additional expenses and other    | 7             | 10            | 90            |
| Liability at end of period       | $237          | $333          | $467          |

Restructuring charges primarily include remaining lease payments for permanently grounded aircraft related to domestic and Pacific fleet restructurings\. We are continuing to restructure our domestic fleet by replacing a portion of our 50\-seat regional fleet with more efficient and customer preferred aircraft and replacing older, less cost effective B\-757\-200 aircraft with B\-737\-900ER aircraft\. We are also restructuring our Pacific network by retiring the B\-747\-400 fleet (the last aircraft retired during 2017) and replacing the fleet with smaller\-gauge, widebody aircraft to better match capacity with demand\.

 87


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

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|                |                          |
| -------------- | ------------------------ |
|  **ITEM 9B\.** | **OTHER INFORMATION\.**  |

None\.

**PART III**

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

Certain information required by this item with respect to UAL is incorporated by reference from UAL’s definitive proxy statement for its 2018 Annual Meeting of Stockholders\. Information regarding the executive officers of UAL is presented below\.

Information required by this item with respect to United is omitted pursuant to General Instruction I(2)(c) of Form 10\-K\.

**EXECUTIVE OFFICERS OF UAL**

The executive officers of UAL as of February 23, 2018 are listed below, along with their ages, tenure as officer and business background for at least the last five years\.

**Kate Gebo\.** Age 49\. Ms\. Gebo has served as Executive Vice President Human Resources and Labor Relations of UAL and United since December 2017\. From November 2016 to November 2017, Ms\. Gebo served as Senior Vice President Global Customer Service Delivery and Chief Customer Officer of United\. From October 2015 to November 2016, Ms\. Gebo served as Vice President of the Office of the Chief Executive Officer\. From November 2009 to October 2015, Ms\. Gebo served as Vice President of Corporate Real Estate of United\.

**Brett J\. Hart\.** Age 48\. Mr\. Hart has served as Executive Vice President, Chief Administrative Officer and General Counsel of UAL and United since May 2017\. From February 2012 to May 2017, he served as Executive Vice President and General Counsel of UAL and United\. Mr\. Hart served as acting Chief Executive Officer and principal executive officer of the Company, on an interim basis, from October 2015 to March 2016\. From December 2010 to February 2012, he served as Senior Vice President, General Counsel and Secretary of UAL, United and Continental Airlines, Inc\. (“Continental”)\. From June 2009 to December 2010, Mr\. Hart served as Executive Vice President, General Counsel and Corporate Secretary at Sara Lee Corporation, a consumer food and beverage company\. From March 2005 to May 2009, Mr\. Hart served as Deputy General Counsel and Chief Global Compliance Officer of Sara Lee Corporation\.

**Gregory L\. Hart\.** Age 52\. Mr\. Hart has served as Executive Vice President and Chief Operations Officer of UAL and United since February 2014\. From December 2013 to February 2014, he served as Senior Vice President Operations of UAL and United\. From September 2012 to December 2013, Mr\. Hart served as Senior Vice President Technical Operations of United\. From October 2010 to September 2012, Mr\. Hart served as Senior Vice President Network of United and Continental\. From September 2008 to September 2010, Mr\. Hart served as Vice President Network Strategy of Continental\. Mr\. Hart joined Continental in 1997\.

**Linda P\. Jojo\.** Age 52\. Ms\. Jojo has served as Executive Vice President Technology and Chief Digital Officer of UAL and United since May 2017\. From November 2014 to May 2017, Ms\. Jojo served as Executive Vice President and Chief Information Officer of UAL and United\. From July 2011 to October 2014, Ms\. Jojo served as Executive Vice President and Chief Information Officer of Rogers Communications, Inc\., a Canadian communications and media company\. From October 2008 to June 2011, Ms\. Jojo served as Chief Information Officer of Energy Future Holdings, a Dallas\-based privately held energy company and electrical utility provider\.

**Chris Kenny\.** Age 53\. Mr\. Kenny has served as Vice President and Controller of UAL and United since October 2010\. From September 2003 to September 2010, Mr\. Kenny served as Vice President and Controller of Continental\. Mr\. Kenny joined Continental in 1997\.

**J\. Scott Kirby\. A**ge 50\. Mr\. Kirby has served as President of UAL and United since August 2016\. Prior to joining the Company, from December 2013 to August 2016, Mr\. Kirby served as President of American Airlines

105


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

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

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

|                                                  |                                      |                                      |                                      |                                      |              |              |
| ------------------------------------------------ | ------------------------------------ | ------------------------------------ | ------------------------------------ | ------------------------------------ | ------------ | ------------ |
|                                                  | **Twelve Months Ended December 31,** | **Twelve Months Ended December 31,** | **Twelve Months Ended December 31,** | **Twelve Months Ended December 31,** | **Change**   | **Change**   |
|                                                  | **Air Group**                        | **Air Group**                        | **Virgin America**                   | **Combined**                         | **Combined** | **Combined** |
| ***(in millions)***                              | **2017**  **^(b)^**                  | **2016** **^(b)^**                   | **2016** **^(c)^**                   | **2016** **^(a)^**                   | **$**        | **%**        |
| Wages and benefits                               | **$1,931**                           | $1,394                               | 284                                  | 1,678                                | 253          | 15\.1 %      |
| Variable incentive pay                           | **135**                              | 127                                  | 32                                   | 159                                  | (24)         | (15\.1)%     |
| Aircraft maintenance                             | **391**                              | 270                                  | 80                                   | 350                                  | 41           | 11\.7 %      |
| Aircraft rent                                    | **274**                              | 114                                  | 170                                  | 284                                  | (10)         | (3\.5)%      |
| Landing fees and other rentals                   | **460**                              | 320                                  | 107                                  | 427                                  | 33           | 7\.7 %       |
| Contracted services                              | **314**                              | 247                                  | 60                                   | 307                                  | 7            | 2\.3 %       |
| Selling expenses                                 | **368**                              | 248                                  | 123                                  | 371                                  | (3)          | (0\.8)%      |
| Depreciation and amortization                    | **372**                              | 363                                  | 37                                   | 400                                  | (28)         | (7\.0)%      |
| Food and beverage service                        | **195**                              | 126                                  | 49                                   | 175                                  | 20           | 11\.4 %      |
| Third\-party regional carrier expense            | **121**                              | 95                                   | —                                    | 95                                   | 26           | 27\.4 %      |
| Other                                            | **562**                              | 367                                  | 86                                   | 453                                  | 109          | 24\.1 %      |
| Total non\-fuel, non\-special operating expenses | **$5,123**                           | $3,671                               | $1,028                               | $4,699                               | $424         | 9\.0 %       |

^(a), (b), (c)^ See footnotes on the Combined Comparative Operating Statistics table above\.

***Wages and Benefits***

Wages and benefits increased during 2017 by $537 million, or 39%, compared to 2016\. On a Combined Comparative basis, total wages and benefits increased by $253 million or 15%\. The primary components of wages and benefits, including a reconciliation of 2016 on a Combined Comparative basis, are shown in the following table:

|                               |                                      |                                      |                                      |                                      |              |              |
| ----------------------------- | ------------------------------------ | ------------------------------------ | ------------------------------------ | ------------------------------------ | ------------ | ------------ |
|                               | **Twelve Months Ended December 31,** | **Twelve Months Ended December 31,** | **Twelve Months Ended December 31,** | **Twelve Months Ended December 31,** | **Change**   | **Change**   |
|                               | **Air Group**                        | **Air Group**                        | **Virgin America**                   | **Combined**                         | **Combined** | **Combined** |
| ***(in millions)***           | **2017**  **^(b)^**                  | **2016** **^(b)^**                   | **2016** **^(c)^**                   | **2016** **^(a)^**                   | **$**        | **%**        |
| Wages                         | **$1,468**                           | $1,022                               | $224                                 | $1,246                               | $222         | 18%          |
| Medical and other benefits    | **216**                              | 192                                  | 23                                   | 215                                  | 1            | —%           |
| Defined contribution plans    | **103**                              | 67                                   | 22                                   | 89                                   | 14           | 16%          |
| Pension—defined benefit plans | **39**                               | 37                                   | —                                    | 37                                   | 2            | 5%           |
| Payroll taxes                 | **105**                              | 76                                   | 15                                   | 91                                   | 14           | 15%          |
| Total wages and benefits      | **$1,931**                           | $1,394                               | $284                                 | $1,678                               | $253         | 15%          |

^(a), (b), (c)^ See footnotes on the Combined Comparative Operating Statistics table above\.

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

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

 45


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

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

7\. Income Taxes

The significant components of the income tax provision were (in millions):

|                                |                             |                             |                             |
| ------------------------------ | --------------------------- | --------------------------- | --------------------------- |
|                                | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** |
|                                | **2019**                    | **2018**                    | **2017**                    |
| Current income tax provision:  |                             |                             |                             |
| State and Local                | $2                          | $3                          | $10                         |
| Foreign                        | 8                           | 29                          | 14                          |
| Current income tax provision   | 10                          | 32                          | 24                          |
| Deferred income tax provision: |                             |                             |                             |
| Federal                        | 498                         | 390                         | 2,026                       |
| State and Local                | 62                          | 50                          | 63                          |
| Deferred income tax provision  | 560                         | 440                         | 2,089                       |
| Total income tax provision     | $570                        | $472                        | $2,113                      |

  The income tax provision differed from amounts computed at the statutory federal income tax rate as follows (in millions):

|                                                       |                             |                             |                             |
| ----------------------------------------------------- | --------------------------- | --------------------------- | --------------------------- |
|                                                       | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** |
|                                                       | **2019**                    | **2018**                    | **2017**                    |
| Statutory income tax provision                        | $474                        | $396                        | $1,188                      |
| State income tax provision, net of federal tax effect | 47                          | 44                          | 59                          |
| Book expenses not deductible for tax purposes         | 31                          | 12                          | 33                          |
| Foreign income taxes, net of federal tax effect       | 8                           | 23                          | 7                           |
| Change in valuation allowance                         | 4                           | (6

)                 | (3

)                 |
| 2017 Tax Act                                          | —                           | —                           | 823                         |
| Other, net                                            | 6                           | 3                           | 6                           |
| Income tax provision                                  | $570                        | $472                        | $2,113                      |

We provide a valuation allowance for our deferred tax assets, which include our net operating losses (NOLs), when it is more likely than not that some portion, or all of our deferred tax assets, will not be realized\. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income\. We consider all available positive and negative evidence and make certain assumptions in evaluating the realizability of our deferred tax assets\. Many factors are considered that impact our assessment of future profitability, including conditions which are beyond our control, such as the health of the economy, the availability and price volatility of aircraft fuel and travel demand\.

94


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

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

See the table below for the unaudited impact resulting from the adoption of these standards on our Consolidated Financial Statements\.

|                                                                                |                             |                                           |                                           |                             |                             |                             |                             |                                           |                                           |                             |                             |                             |
| ------------------------------------------------------------------------------ | --------------------------- | ----------------------------------------- | ----------------------------------------- | --------------------------- | --------------------------- | --------------------------- | --------------------------- | ----------------------------------------- | ----------------------------------------- | --------------------------- | --------------------------- | --------------------------- |
|                                                                                | **Year Ended December 31,** | **Year Ended December 31,**               | **Year Ended December 31,**               | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,**               | **Year Ended December 31,**               | **Year Ended December 31,** | **Year Ended December 31,** | **Year Ended December 31,** |
|                                                                                | **2017**                    | **2017**                                  | **2017**                                  | **2017**                    | **2017**                    | **2017**                    | **2016**                    | **2016**                                  | **2016**                                  | **2016**                    | **2016**                    | **2016**                    |
| **(Unaudited)**

**(in millions, except per share data and statistics)** | **As Reported**             | **Revenue from Contracts with Customers** | **Revenue from Contracts with Customers** | **Retirement Benefits**     | **Retirement Benefits**     | **As Adjusted**             | **As Reported**             | **Revenue from Contracts with Customers** | **Revenue from Contracts with Customers** | **Retirement Benefits**     | **Retirement Benefits**     | **As Adjusted**             |
| **Income statement:**                                                          |                             |                                           |                                           |                             |                             |                             |                             |                                           |                                           |                             |                             |                             |
| Passenger revenue                                                              | $34,819                     | $2,297                                    |
                                    | $—                          |
                      | $37,116                     | $33,777                     | $2,189                                    |
                                    | $—                          |
                      | $35,966                     |
| Cargo revenue                                                                  | 729                         | 15                                        |
                                    | —                           |
                      | 744                         | 668                         | 16                                        |
                                    | —                           |
                      | 684                         |
| Other revenue                                                                  | 5,696                       | (2,418                                    | )                                         | —                           |
                      | 3,278                       | 5,194                       | (2,394                                    | )                                         | —                           |
                      | 2,800                       |
| Operating expense                                                              | (35,130)                    | (92                                       | )                                         | 50                          |
                      | (35,172)                    | (32,687)                    | (92                                       | )                                         | 325                         |
                      | (32,454)                    |
| Non\-operating expense                                                         | (413)                       | (3                                        | )                                         | (50                         | )                           | (466)                       | (316)                       | (2                                        | )                                         | (325                        | )                           | (643)                       |
| Income tax provision                                                           | (2,124)                     | (171                                      | )                                         | —                           |
                      | (2,295)                     | (2,263)                     | 105                                       |
                                    | —                           |
                      | (2,158)                     |
| Net income                                                                     | 3,577                       | (372                                      | )                                         | —                           |
                      | 3,205                       | 4,373                       | (178                                      | )                                         | —                           |
                      | 4,195                       |
| Diluted earnings per share                                                     | $4\.95                      | $(0\.52                                   | )                                         | —                           |
                      | $4\.43                      | $5\.79                      | $(0\.24                                   | )                                         | —                           |
                      | $5\.55                      |
| **Operating statistics:**                                                      |                             |                                           |                                           |                             |                             |                             |                             |                                           |                                           |                             |                             |                             |
| Pre\-tax margin                                                                | 13\.8%                      | (0\.4                                     | )%                                        | —                           |  %                          | 13\.4%                      | 16\.7%                      | (0\.6                                     | )%                                        | —                           |  %                          | 16\.1%                      |
| Passenger mile yield ^(1)^                                                     | 15\.99¢                     | 1\.06                                     |  ¢                                        | —                           |
                      | 17\.05¢                     | 15\.85¢                     | 1\.03                                     |  ¢                                        | —                           |
                      | 16\.88¢                     |
| PRASM ^(1)^                                                                    | 13\.69¢                     | 0\.90                                     |  ¢                                        | —                           |
                      | 14\.59¢                     | 13\.41¢                     | 0\.87                                     |  ¢                                        | —                           |
                      | 14\.28¢                     |
| TRASM ^(1)^                                                                    | 16\.22¢                     | (0\.04                                    | )¢                                        | —                           |
                      | 16\.18¢                     | 15\.74¢                     | (0\.08                                    | )¢                                        | —                           |
                      | 15\.66¢                     |
| CASM ^(1)^                                                                     | 13\.81¢                     | 0\.04                                     |  ¢                                        | (0\.02                      | )¢                          | 13\.83¢                     | 12\.98¢                     | 0\.04                                     |  ¢                                        | (0\.13                      | )¢                          | 12\.89¢                     |
| **Balance sheet:**                                                             |                             |                                           |                                           |                             |                             |                             |                             |                                           |                                           |                             |                             |                             |
| Deferred income taxes, net                                                     | $935                        | $419                                      |
                                    | $—                          |
                      | $1,354                      | $3,064                      | $589                                      |
                                    | $—                          |
                      | $3,653                      |
| Air traffic liability                                                          | 4,888                       | (524                                      | )                                         | —                           |
                      | 4,364                       | 4,626                       | (546                                      | )                                         | —                           |
                      | 4,080                       |
| Frequent flyer deferred revenue (current and noncurrent)                       | 4,118                       | 2,082                                     |
                                    | —                           |
                      | 6,200                       | 3,926                       | 1,877                                     |
                                    | —                           |
                      | 5,803                       |
| Other accrued and other noncurrent liabilities                                 | 3,969                       | 241                                       |
                                    | —                           |
                      | 4,210                       | 3,785                       | 268                                       |
                                    | —                           |
                      | 4,053                       |
| Retained earnings                                                              | 9,636                       | (1,380                                    | )                                         | —                           |
                      | 8,256                       | 7,903                       | (1,009                                    | )                                         | —                           |
                      | 6,894                       |

|       |                                                                                |
| ----- | ---------------------------------------------------------------------------------- |
| ^(1)^ | Refer to the "Glossary of Defined Terms" below for the definition of these terms\. |

 44


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

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

None\.

**ITEM 9A\. CONTROLS AND PROCEDURES**

**Management’s Evaluation of Disclosure Controls and Procedures**

The term “disclosure controls and procedures” is defined in Rules 13a\-15(e) and 15d\-15(e) of the Exchange Act\. This term refers to the controls and procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC\. An evaluation of the effectiveness of AAG’s and American’s disclosure controls and procedures as of December 31, 2017 was performed under the supervision and with the participation of AAG’s and American’s management, including AAG’s and American’s Chief Executive Officer (CEO) and Chief Financial Officer (CFO)\. Based on that evaluation, AAG’s and American’s management, including AAG’s and American’s CEO and CFO, concluded that AAG’s and American’s disclosure controls and procedures were effective as of December 31, 2017\.

**Changes in Internal Control over Financial Reporting**

On December 9, 2013, AAG acquired US Airways Group and its subsidiaries\. We are still in the process of integrating certain processes, technology and operations for the post\-Merger combined company, and we will continue to evaluate the impact of any related changes to our internal control over financial reporting\. For the year ended December 31, 2017, there has been no change in AAG’s or American’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, AAG’s and American’s internal control over financial reporting\.

**Limitation on the Effectiveness of Controls**

We believe that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected\. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, and the CEO and CFO of AAG and American believe that our disclosure controls and procedures were effective at the “reasonable assurance” level as of December 31, 2017\.

**Management’s Annual Report on Internal Control over Financial Reporting**

Management of AAG and American is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a\-15(f) and 15d\-15(f) under the Exchange Act\. AAG’s and American’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP\. AAG’s and American’s internal control over financial reporting includes policies and procedures that:

|   |                                                                                |
| - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of AAG or American, respectively; |

|   |                                                                                |
| - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of AAG or American are being made only in accordance with authorizations of management and directors of AAG or American, respectively; and |

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of AAG’s or American’s assets that could have a material effect on the financial statements\. |

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

Management assessed the effectiveness of AAG’s and American’s internal control over financial reporting as of December 31, 2017\. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in its Internal Control – Integrated Framework (2013 Framework)\.

Based on our assessment and those criteria, AAG’s and American’s management concludes that AAG and American, respectively, maintained effective internal control over financial reporting as of December 31, 2017\.

170


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

**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 American refinanced the $1\.3 billion term loan facility due December 2023 established thereunder (the December 2016 Term Loan Facility, and together with a revolving credit facility that may be established thereunder in the future, the December 2016 Credit Facilities), 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 Credit Facilities, 2014 Credit Facilities, April 2016 Credit Facilities and December 2016 Credit Facilities (collectively referred to as the Credit Facilities) are shown in the table below as of December 31, 2018:

|                                                                                |                                |                                  |                            |                                       |                                  |                                             |                                     |
| ------------------------------------------------------------------------------- | ------------------------------ | -------------------------------- | -------------------------- | ------------------------------------- | -------------------------------- | ------------------------------------------- | ----------------------------------- |
|                                                                                | **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 Replacement 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                         | $1,000                           | $1,250                     | $1,543                                | $1,000                           | $300                                        | $1,250                              |
| Principal outstanding or drawn (in millions)                                    | $1,825                         | $—                               | $1,215                     | $—                                    | $980                             | $—                                          | $1,225                              |
| Maturity date                                                                   | June 2025                      | October 2023                     | October 2021               | October 2023                          | April 2023                       | October 2023                                | December 2023                       |
| LIBOR margin                                                                    | 1\.75%                         | 2\.00%                           | 2\.00%                     | 2\.00%                                | 2\.00%                           | 2\.00%                                      | 2\.00%                              |

The term loans under each of the Credit Facilities 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 Revolving Facility, 2014 Revolving Facility and April 2016 Revolving Facility provide that American may from time to time borrow, repay and reborrow loans thereunder\. The 2013 Revolving Facility and 2014 Revolving Facility have the ability to issue letters of credit thereunder in an aggregate amount outstanding at any time up to $100 million and $200 million, respectively\. The 2013 Revolving Facility, 2014 Revolving Facility and April 2016 Revolving Facility are each subject to an undrawn annual fee of 0\.63%\. As of December 31, 2018, there were no borrowings or letters of credit outstanding under the 2013 Revolving Facility, 2014 Revolving Facility or April 2016 Revolving Facility\. The December 2016 Credit Facilities provide for a revolving credit facility that may be established thereunder 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 Revolving Facility, 2014 Revolving Facility and April 2016 Revolving Facility and any revolving credit facility 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\.

101


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

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

|          |                 |                                                                                |
| --------:|:--------------- |:--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
|  \*4\.15 | 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\.16 | 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\.17 | 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\.18 | 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\.19 | 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)                                                                                |
|          |                 | **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 Continental Holdings, Inc\. Profit Sharing Plan (amended and restated effective January 1, 2016) (Filed as Exhibit 10\.2 to UAL’s Form  10\-K for the year ended December 31, 2016, Commission file number  1\-6033, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000119312517054129/d300268dex102.htm)                                                                                |
|   †10\.3 | UAL             | [First Amendment, dated January 29, 2018, to United Continental Holdings, Inc Profit Sharing Plan ](https://www.example.com/d471340dex103.htm)                                                                                |
| \*†10\.4 | 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\.5 | 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\.6 | UAL
United | [Second Amendment to Employment Agreement, dated April 21, 2017, by and among United Continental Holdings, Inc\., United Airlines, Inc\. and Oscar Munoz (incorporated by reference to Exhibit 10\.1 to the Registrant’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\.7 | UAL
United | [SERP Agreement, dated as of October 1, 2010, by and among United Continental Holdings, Inc\., Continental Airlines, Inc\. and James E\. Compton (filed as Exhibit 10\.12 to UAL’s Form  10\-K for the year ended December 31, 2010, Commission file number  1\-6033, and incorporated herein by reference) ](http://www.sec.gov/Archives/edgar/data/100517/000119312511042335/dex1012.htm)                                                                                |

111


Annual Report of Southwest Airlines Co\. for year 2018

The Company has historically entered into agreements with some of its co\-brand, payment, and loyalty partners that contain exclusivity aspects which place certain confidential restrictions on the Company from entering into certain arrangements with other payment and loyalty partners\. These arrangements generally extend for the terms of the agreements, which typically are for five to seven years, but none of which are more than 10 years in length\. Some of these agreements automatically renew on an annual basis, unless either party objects to such extension\. The Company believes the financial benefits generated by the exclusivity aspects of these arrangements outweigh the risks involved with such agreements\.

**2****\. NEW ACCOUNTING PRONOUNCEMENTS AND ACCOUNTING CHANGES**

On August 29, 2018, the Financial Accounting Standards Board (the "FASB") issued ASU No\. 2018\-15, Intangibles—Goodwill and Other—Internal\-Use Software\. This new standard requires a customer in a cloud computing arrangement that is a service contract to follow the internal\-use software guidance in Accounting Standards Codification ("ASC") 350\-40, Accounting for Internal\-Use Software, to determine which implementation costs to (i) capitalize as assets and amortize over the term of the hosting arrangement or (ii) expense as incurred\. This new standard is effective for public business entities in fiscal years beginning after December 15, 2019\. Early adoption is permitted, including during an interim period\. Entities have the option to apply this standard prospectively to all implementation costs incurred after the date of adoption or retrospectively\. The Company is evaluating this new standard, but does not expect it to have a significant impact on its financial statement presentation or results\.

On August 28, 2018, the FASB issued ASU No\. 2018\-13, Fair Value Measurement\. This standard is effective for public business entities in fiscal years beginning after December 15, 2019, and for interim periods within those years\. Early adoption is permitted, including during an interim period\. This new standard requires changes to the disclosure requirements for fair value measurements for certain Level 3 items, and specifies that some of the changes must be applied prospectively, while others should be applied retrospectively\. The Company is evaluating this new standard, but does not expect it to have a significant impact on its financial statement disclosures\. See Note 11 for further information on the Company's fair value measurements\.

On August 28, 2018, the FASB issued ASU No\. 2018\-14, Compensation—Retirement Benefits—Defined Benefit Plans—General\. This new standard makes changes to the disclosure requirements for sponsors of defined benefit pension and/or other postretirement benefit plans to improve effectiveness of notes to the financial statements\. This standard is effective for public business entities in fiscal years ending after December 15, 2020\. Early adoption is permitted\. Entities will apply this standard using a retrospective approach\. The Company elected to early adopt this standard as of December 31, 2018, on a retrospective basis as required\. Therefore disclosures within Note 13 have been reduced to reflect the elimination of certain previously required disclosures\. The adoption had no impact on the Company's Net income, earnings per share, or cash flows\.

On August 28, 2017, the FASB issued the New Hedging Standard\. The New Hedging Standard amends the hedge accounting model to enable entities to better portray the economics of their risk management activities in the financial statements and enhance the transparency and understandability of hedge results\. The New Hedging Standard also simplifies the application of hedge accounting in certain situations\. The New Hedging Standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted in any interim or annual period\. The Company elected to early adopt the New Hedging Standard as of January 1, 2018, utilizing a modified retrospective approach, as required\. The most significant impacts of the New Hedging Standard on the Company's accounting are the elimination of the requirement to separately measure and record ineffectiveness for all cash flow hedges in a hedging relationship, as well as a change in classification of premium expense associated with option contracts\. Such premium expense for the Company's fuel hedges was previously reflected as a component of Other (gains) losses, net, in the Consolidated Statement of Income, but under the New Hedging Standard is reflected as a component of the line item to which the hedge relates, which is Fuel and oil expense\. As such, premium expense for the years ended December 31, 2017 and 2016, has been reclassified in order to be comparative with current period results in the accompanying Consolidated Statement of Income\. The impact of the cumulative effect of the adjustment to move the reporting of ineffectiveness as of January 1, 2018, to AOCI from Retained earnings, was a $20 million loss,

78


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

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

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

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

**(Net of Recoveries)** | **Sales, Retirements and Transfers** | **Balance at End of Year** |
| **Allowance for obsolescence of spare parts** |                                  |                                                         |                                                 |                                      |                            |
| Year ended December 31, 2017                  | $720                             | $18                                                     | $—                                              | $(21)                                | $717                       |
| Year ended December 31, 2016                  | 689                              | 28                                                      | —                                               | 3                                    | 720                        |
| Year ended December 31, 2015                  | 638                              | 42                                                      | —                                               | 9                                    | 689                        |
| **Allowance for uncollectible accounts**      |                                  |                                                         |                                                 |                                      |                            |
| Year ended December 31, 2017                  | $35                              | $41                                                     | $(55)                                           | $—                                   | $21                        |
| Year ended December 31, 2016                  | 37                               | 47                                                      | (49)                                            | —                                    | 35                         |
| Year ended December 31, 2015                  | 14                               | 45                                                      | (22)                                            | —                                    | 37                         |

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

Unaudited summarized financial data by quarter for 2017 and 2016 (in millions):

|                    |                   |                    |                   |                    |
| ------------------ | ----------------- | ------------------ | ----------------- | ------------------ |
|                    | **First Quarter** | **Second Quarter** | **Third Quarter** | **Fourth Quarter** |
| **2017**           |                   |                    |                   |                    |
| Operating revenues | $9,621            | $11,102            | $10,875           | $10,597            |
| Operating expenses | 9,017             | 9,575              | 9,650             | 9,921              |
| Operating income   | 604               | 1,527              | 1,225             | 676                |
| Net income         | 263               | 827                | 649               | 183                |
| **2016**           |                   |                    |                   |                    |
| Operating revenues | $9,427            | $10,360            | $10,591           | $9,786             |
| Operating expenses | 8,104             | 8,603              | 9,159             | 8,995              |
| Operating income   | 1,323             | 1,757              | 1,432             | 791                |
| Net income         | 710               | 972                | 758               | 341                |

American’s fourth quarter 2017 results include $384 million of total net special items that principally included a $123 million charge for the $1,000 cash bonus and associated payroll taxes granted to mainline employees as of December 31, 2017 in recognition of the 2017 Tax Act, $81 million of Merger integration expenses, $58 million of fleet restructuring expenses, a $20 million net charge resulting from fair value adjustments to bankruptcy obligations and a $93 million special non\-cash charge to income tax expense to reflect the impact on American’s deferred tax assets and liabilities resulting from the 2017 Tax Act\.

American’s fourth quarter 2016 results include $273 million of total net special items that principally included $121 million of Merger integration expenses, $104 million of fleet restructuring expenses and a $47 million net charge resulting from fair value adjustments to bankruptcy obligations\.

168