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

Certain airline alliances, joint ventures and joint businesses have been, or may in the future be, granted immunity from antitrust regulations by governmental authorities for specific areas of cooperation, such as joint pricing decisions\. To the extent alliances formed by our competitors can undertake activities that are not available to us, our ability to effectively compete may be hindered\. Our ability to attract and retain customers is dependent upon, among other things, our ability to offer our customers convenient access to desired markets\. Our business could be adversely affected if we are unable to maintain or obtain alliance and marketing relationships with other air carriers in desired markets\.

American has established a transatlantic JBA with British Airways, Iberia and Finnair, a transpacific JBA with Japan Airlines and a JBA relating to Australia and New Zealand with Qantas Airways, each of which has been granted antitrust immunity\. The transatlantic JBA relationship benefits from a grant of antitrust immunity from the DOT and was reviewed by the EC in July 2010\. In connection with this review, we provided certain commitments to the EC regarding, among other things, the availability of take\-off and landing slots at LHR or LGW airports\. The commitments accepted by the EC are binding for 10 years\. In October 2018, in anticipation of Brexit and the expiry of the EC commitments in July 2020, the CMA opened an investigation into the transatlantic JBA\. We continue to fully cooperate with the CMA\. An application for antitrust immunity is also pending with the DOT to add Aer Lingus, which is owned by the parent company of British Airways and Iberia, to the transatlantic JBA\. The foregoing arrangements are important aspects of our international network and we are dependent on the performance and continued cooperation of the other airlines party to those agreements\. No assurances can be given as to any benefits that we may derive from such arrangements or any other arrangements that may ultimately be implemented, or whether or not regulators will, or if granted continue to, approve or impose material conditions on our business activities\.

Additional mergers and other forms of industry consolidation, including antitrust immunity grants, may take place and may not involve us as a participant\. Depending on which carriers combine and which assets, if any, are sold or otherwise transferred to other carriers in connection with any such combinations, our competitive position relative to the post\-combination carriers or other carriers that acquire such assets could be harmed\. In addition, as carriers combine through traditional mergers or antitrust immunity grants, their route networks will grow, and that growth will result in greater overlap with our network, which in turn could decrease our overall market share and revenues\. Such consolidation is not limited to the U\.S\., but could include further consolidation among international carriers in Europe and elsewhere\.

Additionally, our AAdvantage loyalty program, which is an important element of our sales and marketing programs, faces significant and increasing competition from the loyalty programs offered by other travel companies, as well as from similar loyalty benefits offered by banks and other financial services companies\. Competition among loyalty programs is intense regarding the rewards, fees, required usage, and other terms and conditions of these programs\. These competitive factors affect our ability to attract and retain customers, increase usage of our loyalty program and maximize the revenue generated by our loyalty program\.

Downturns in economic conditions could adversely affect our business \.

Due to the discretionary nature of business and leisure travel spending and the highly competitive nature of the airline industry, our revenues are heavily influenced by the condition of the U\.S\. economy and economies in other regions of the world\. Unfavorable conditions in these broader economies have resulted, and may result in the future, in decreased passenger demand for air travel, changes in booking practices and related reactions by our competitors, all of which in turn have had, and may have in the future, a strong negative effect on our business\. See also  “The airline industry is intensely competitive and dynamic\.”

Our business has been and will continue to be affected by many changing economic and other conditions beyond our control, including global events that affect travel behavior, and our results of operations could be volatile and fluctuate due to seasonality\.

Our business, results of operations and financial condition have been and will continue to be affected by many changing economic and other conditions beyond our control, including, among others:

|   |                                                                                |
| - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | actual or potential changes in international, national, regional and local economic, business and financial conditions, including recession, inflation, higher interest rates, wars, terrorist attacks and political instability; |

|   |                                                                                |
| - | --------------------------------------------------------------------------------------- |
| • | changes in consumer preferences, perceptions, spending patterns and demographic trends; |

|   |                                                                                |
| - | ---------------------------------------------------------------------------------------------------------------------------------- |
| • | changes in the competitive environment due to industry consolidation, changes in airline alliance affiliations, and other factors; |

17


Annual Report of Southwest Airlines Co\. for year 2018

|   |                                                                                |
| - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | the DOT has been given the authority to impose triple the maximum fines for damages to passengers' wheelchairs or other mobility aids, as well as for injury to passengers with disabilities; |

|   |                                                                                |
| - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | the DOT has been directed to implement a rulemaking to require air carriers to promptly provide a refund for any ancillary fee paid for services a passenger does not receive; and |

|   |                                                                                |
| - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
| • | the Reauthorization Act makes it an unfair and deceptive practice to involuntarily deplane a revenue passenger onboard an aircraft if that passenger is traveling on a confirmed reservation and is checked\-in for the relevant flight prior to the applicable check\-in deadline\. |

***Aviation Taxes and Fees***

The statutory authority for the federal government to collect most types of aviation taxes, which are used, in part, to finance programs administered by the FAA, must be periodically reauthorized by the U\.S\. Congress\. The Reauthorization Act extends most commercial aviation taxes for five years through September 30, 2023\.

In addition to FAA\-related taxes, there are additional federal taxes related to the U\.S\. Department of Homeland Security\. These taxes do not need to be reauthorized periodically\. Congress has set the Transportation Security Fee paid by passengers at $5\.60 per one\-way passenger trip\. In addition, inbound international passengers are subject to immigration and customs fees that are indexed to inflation\. These fees are used to support the operations of U\.S\. Customs and Border Protection ("CBP")\. Finally, the U\.S\. Department of Agriculture's Animal and Plant Health Inspection Service imposes an agriculture inspection fee on arriving international passengers\.

In 2019, the Company expects to continue to benefit from the comprehensive U\.S\. tax reform legislation enacted by Congress in late 2017, which includes, among other items, a reduced federal corporate tax rate\. At the same time, the legislation eliminates certain tax deductions and preferences\. These changes not only impact the Company directly, but could be impacting the U\.S\. economy as a whole, including consumer demand\.

In 2019, Congress is expected to consider legislation to boost federal spending on public infrastructure, including at airports\. This legislation could result in an increase in the maximum Passenger Facility Charge, which is assessed by airports and collected by airlines, currently capped at $4\.50 per passenger enplanement (with a maximum of two Passenger Facility Charges on a one\-way trip or four Passenger Facility Charges on a roundtrip, for a maximum of $18\.00 total)\. Conversely, this legislation could also result in an infusion of federal investment in public infrastructure that may benefit all modes of transportation\.

Finally, the annual congressional budget process is another legislative vehicle by which new aviation taxes or regulations may be imposed\. The annual appropriations bill funds the federal government \- including the DOT, the FAA, the Transportation Security Administration (the "TSA"), and CBP\. Passage of the fiscal year 2020 appropriations bill will be considered throughout 2019 and could result in an increase in one or more of the taxes and fees discussed above, as well as new mandates on the DOT to begin or complete rulemakings related to airline consumer protection\.

**Operational, Safety, and Health Regulation**

The FAA has the authority to regulate safety aspects of civil aviation operations\. Specifically, the Company and certain of its third\-party service providers are subject to the jurisdiction of the FAA with respect to aircraft maintenance and operations, including equipment, ground facilities, dispatch, communications, training, and other matters affecting air safety\. The FAA, acting through its own powers or through the appropriate U\.S\. Attorney, has the power to bring proceedings for the imposition and collection of civil penalties for violation of the FAA regulations\.

The FAA requires airlines to obtain and maintain an Air Carrier Operating Certificate, as well as other certificates, approvals, and authorities\. These certificates, approvals, and authorities are subject to suspension or revocation for cause\.

The FAA has rules in effect with respect to flight, duty, and rest regulations\. Among other things, the rules (i) require a ten hour minimum rest period prior to a pilot’s flight duty period; (ii) mandate that a pilot must have an opportunity for eight hours of uninterrupted sleep within the rest period; and (iii) impose pilot "flight time" and "duty time" limitations based upon report times, the number of scheduled flight segments, and other operational factors\. The Reauthorization Act contains a provision requiring the implementation of an FAA rule mandating a rest period of at

12


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

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

**NOTE 14 \- SPECIAL CHARGES**

Special charges in the statements of consolidated operations consisted of the following for the years ended December 31 (in millions):

|                                                                                |          |              |              |
| ------------------------------------------------------------------------------------------------------------- | -------- | ------------ | ------------ |
| Operating:                                                                                | **2018** | **2017 (a)** | **2016 (a)** |
| Impairment of assets                                                                                | $377     | $25          | $412         |
| Termination of an engine maintenance service agreement                                                        | 64       | —            | —            |
| Severance and benefit costs                                                                                | 41       | 116          | 37           |
| Cleveland airport lease restructuring                                                                         | —        | —            | 74           |
| Labor agreement costs                                                                                | —        | —            | 171          |
| (Gains) losses on sale of assets and other special charges                                                    | 5        | 35           | 51           |
| Total operating special charges                                                                               | 487      | 176          | 745          |
| Nonoperating:                                                                                |          |              |              |
| Postretirement curtailment gain                                                                               | —        | —            | (107)        |
| Gains on extinguishment of debt and other                                                                     | —        | —            | (1)          |
| Total operating and nonoperating special charges before income taxes                                          | 487      | 176          | 637          |
| Nonoperating mark\-to\-market ("MTM") losses on financial instruments                                         | 5        | —            | —            |
| Total special charges and MTM losses on financial instruments                                                 | 492      | 176          | 637          |
| Income tax benefit                                                                                | (110)    | (63)         | (229)        |
| Income tax adjustments (Note 7)                                                                               | (5)      | (179)        | 180          |
| Total special charges and MTM losses on financial instruments, net of income taxes and income tax adjustments | $377     | $(66)        | $588         |

(a) Amounts adjusted due to the adoption of Accounting Standards Update No\. 2014\-09, *Revenue from Contracts with Customers (Topic 606)* andAccounting Standards Update No\. 2017\-07, *Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost\.* See Note 1 to the financial statements contained in Part II, Item 8 of this report for additional information\.

***2018***

The Company conducted its annual impairment review of intangible assets in the fourth quarter of 2018, which consisted of a comparison of the book value of specific assets to the fair value of those assets\. Due to increased costs without sufficient corresponding increases in revenue in the Hong Kong market, the Company determined that the value of its Hong Kong routes had been impaired\. Accordingly, in the fourth quarter of 2018, the Company recorded a special non\-cash impairment charge of $206 million ($160 million net of taxes) associated with its Hong Kong routes\. The collateral pledged under the Company's term loan, including the Hong Kong routes, continues to be sufficient to satisfy the loan covenants\. The Company determined the fair value of the Hong Kong routes using a variation of the income approach known as the excess earnings method, which discounts an asset's projected future net cash flows to determine the current fair value\. Assumptions used in the discounted cash flow methodology include a discount rate, which is based upon the Company's current weighted average cost of capital plus an asset\-specific risk factor, and a projection of sales, expenses, gross margin, tax rates and contributory asset charges for four future years and a terminal growth rate\. The assumptions used for future projections are determined based upon the Company's asset\-specific forecasts along with the Company's strategic plan\. These assumptions are inherently uncertain as they relate to future events and circumstances\. Actual results will be influenced by the competitive environment, fuel costs and other expenses, and potentially other unforeseen events or circumstances that could have a material negative impact on future results\.

In May 2018, the Brazil–United States open skies agreement was ratified, which provides air carriers with unrestricted access between the United States and Brazil\. The Company determined that the approval of the open skies agreement impaired the entire value of its Brazil route authorities because the agreement removes all limitations or reciprocity requirements for flights between the United States and Brazil\. Accordingly, the Company recorded a $105 million special charge ($82 million net of taxes) to write off the entire value of the intangible asset associated with its Brazil routes\. This asset is not part of any collateral pledged against any of the Company's borrowings\. The Company continues to maintain its slot assets related to Brazil since airport access is still regulated by slot allocations that are limited by airport facility constraints\.

During 2018, the Company also recorded $66 million ($51 million net of taxes) of fair value adjustments related to aircraft purchased off lease, write\-offs of unexercised aircraft purchase options and other impairments related to certain fleet types and international slots no longer in use\.

86


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

aviation, labor, environmental, data protection/privacy, competition and other matters applicable to the provision of air transportation services by us or our alliance, joint business or codeshare partners\. The impact on our business of any treaties, laws and regulations that replace the existing EU counterparts cannot be predicted\. Any of these effects, and others we cannot anticipate, could materially adversely affect our business, results of operations and financial condition\.

***We are subject to many forms of environmental and noise regulation and may incur substantial costs as a result\.***

We are subject to increasingly stringent federal, state, local and foreign laws, regulations and ordinances relating to the protection of the environment and noise reduction, including those relating to emissions to the air, discharges to surface and subsurface waters, safe drinking water, and the management of hazardous substances, oils and waste materials\. Compliance with environmental laws and regulations can require significant expenditures, and violations can lead to significant fines and penalties\.

We are also subject to other environmental laws and regulations, including those that require us to investigate and remediate soil or groundwater to meet certain remediation standards\. Under federal law, generators of waste materials, and current and former owners or operators of facilities, can be subject to liability for investigation and remediation costs at locations that have been identified as requiring response actions\. Liability under these laws may be strict, joint and several, meaning that we could be liable for the costs of cleaning up environmental contamination regardless of fault or the amount of waste directly attributable to us\. We have liability for investigation and remediation costs at various sites, although such costs currently are not expected to have a material adverse effect on our business\.

We have various leases and agreements with respect to real property, tanks and pipelines with airports and other operators\. Under these leases and agreements, we have agreed to indemnify the lessor or operator against environmental liabilities associated with the real property or operations described under the agreement, in some cases even if we are not the party responsible for the initial event that caused the environmental damage\. We also participate in leases with other airlines in fuel consortiums and fuel committees at airports, where such indemnities are generally joint and several among the participating airlines\.

Governmental authorities in several U\.S\. and foreign cities are also considering, or have already implemented, aircraft noise reduction programs, including the imposition of nighttime curfews and limitations on daytime take offs and landings\. We have been able to accommodate local noise restrictions imposed to date, but our operations could be adversely affected if locally\-imposed regulations become more restrictive or widespread\.

***We are subject to risks associated with climate change, including increased regulation to reduce emissions of greenhouse gases\.***

There is increasing global regulatory focus on climate change and GHG emissions\. For example, in October 2016, ICAO passed a resolution adopting the ICAO CORSIA, which is a global, market\-based emissions offset program to encourage carbon\-neutral growth beyond 2020\. The CORSIA was supported by the board of Airlines for America (the principal U\.S\. airline trade association) and IATA (the principal international airline trade association), and by American and many other U\.S\. and foreign airlines\. The CORSIA will increase operating costs for American and most other airlines, including other U\.S\. airlines that operate internationally, but the implementation of a global program, as compared to regional emission reduction schemes, should ensure that these costs will be more predictable and more evenly applied to American and its competitors since there will be a common global regulatory regime\. The CORSIA is expected to be implemented in phases, beginning in 2021\. Certain details still need to be developed and the impact of the CORSIA cannot be fully predicted\. While we do not anticipate any significant emissions allowance expenditures in 2018, compliance with the CORSIA or similar emissions\-related requirements could significantly increase our operating costs beyond 2018\. Further, the potential impact of the CORSIA or other emissions\-related requirements on our costs will ultimately depend on a number of factors, including baseline emissions, the price of emission allowances or offsets and the number of future flights subject to such emissions\-related requirements\. These costs have not been completely defined and could fluctuate\.

In addition, in December 2015, at the 21st Conference of the Parties to the United Nations Framework Convention on Climate Change, over 190 countries, including the United States, reached an agreement (the Paris Agreement) to reduce GHG emissions\. While the United States has since announced that it will withdraw from the Paris Agreement and there is no express reference to aviation in that agreement, to the extent countries implement that agreement or impose other climate change regulations, either with respect to the aviation industry or with respect to related industries such as the aviation fuel industry, it could have an adverse direct or indirect effect on our business\.

In 2018, the EPA is expected to finalize a rule implementing aircraft engine GHG emission standards\. It is anticipated that the EPA rule will closely align with recent ICAO carbon dioxide emission standards\. The new standards, which were supported

26


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

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors

Alaska Air Group, Inc\.:

Opinion on Internal Control Over Financial Reporting

We have audited Alaska Air Group, Inc\. and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2019, based on criteria established in  Internal Control \- Integrated Framework (2013)  issued by the Committee of Sponsoring Organizations of the Treadway Commission\. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in  Internal Control \- Integrated Framework (2013)  issued by the Committee of Sponsoring Organizations of the Treadway Commission\.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive operations, shareholders’ equity, and cash flows for each of the years in the three\-year period ended December 31, 2019, and the related notes (collectively, the consolidated financial statements), and our report dated February 12, 2020 expressed an unqualified opinion on those consolidated financial statements\.

Basis for Opinion

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

We conducted our audit in accordance with the standards of the PCAOB\. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects\. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk\. Our audit also included performing such other procedures as we considered necessary in the circumstances\. We believe that our audit provides a reasonable basis for our opinion\.

Definition and Limitations of Internal Control Over Financial Reporting

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

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

/s/ KPMG LLP

Seattle, Washington

February 12, 2020

86


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

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

Stock\-settled RSU award activity for all plans for the years ended December 31, 2017, 2016 and 2015 is as follows:

|                                  |                      |                                                                             |
| -------------------------------- | -------------------- | --------------------------------------------------------------------------- |
|                                  | **Number of Shares** | **Weighted**

**Average Grant**

**Date Fair**

**Value** |
|                                  | **(In thousands)**   |                                                                             |
| Outstanding at December 31, 2014 | 21,342               | $26\.43                                                                     |
| Granted                          | 2,213                | 46\.62                                                                      |
| Vested and released              | (17,163)             | 25\.20                                                                      |
| Forfeited                        | (785)                | 27\.12                                                                      |
| Outstanding at December 31, 2015 | 5,607                | $38\.08                                                                     |
| Granted                          | 2,655                | 41\.34                                                                      |
| Vested and released              | (2,754)              | 34\.83                                                                      |
| Forfeited                        | (321)                | 40\.15                                                                      |
| Outstanding at December 31, 2016 | 5,187                | $41\.48                                                                     |
| Granted                          | 2,309                | 48\.58                                                                      |
| Vested and released              | (2,708)              | 39\.63                                                                      |
| Forfeited                        | (464)                | 44\.48                                                                      |
| Outstanding at December 31, 2017 | 4,324                | $46\.94                                                                     |

As of December 31, 2017, there was $121 million of unrecognized compensation cost related to stock\-settled RSUs\. These costs are expected to be recognized over a weighted average period of one year\. The total fair value of stock\-settled RSUs vested during the years ended December 31, 2017, 2016 and 2015 was $123 million, $107 million and $750 million, respectively\.

***(b) Stock Appreciation Rights (SARs)***

AAG assumed US Airways Group’s outstanding SARs in connection with the Merger using an exchange ratio of one to one\. These SARs were granted with an exercise price equal to the underlying common stock’s fair value at the date of each grant, have service conditions, become exercisable over a three\-year vesting period and expire if unexercised at the end of their term, which ranges from seven to ten years\. During 2017, 2016 and 2015, 0\.8 million, 1\.7 million and 3\.0 million SARs, respectively, were exercised at weighted average exercise prices of $15\.71, $14\.49 and $12\.09, respectively, for a total intrinsic value of $27 million, $49 million and $102 million, respectively\. As of December 31, 2017, AAG had 1\.2 million SARs outstanding with an aggregate intrinsic value of $54 million and weighted average exercise price of $8\.08 that expire between 2018 and 2020 if unexercised\.

***(c) ASU 2016\-09: Compensation \- Stock Compensation (Topic 718): Improvements to Employee Share\-Based Payment Accounting***

This ASU simplified the accounting for share\-based payment award transactions including the financial statement presentation of excess tax benefits and deficiencies\. American adopted this ASU during the second quarter of 2016, which resulted in the recognition of $418 million of previously unrecognized excess tax benefits in deferred tax assets and an increase to retained earnings on the consolidated balance sheet as of the beginning of 2016\.

167


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

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

***(b) EETCs***

*2016\-3 EETCs*

During the first quarter of 2017, all remaining net proceeds of the Series 2016\-3 Class AA and Class A EETCs (the 2016\-3 EETCs), in the amount of $109 million, were used to purchase equipment notes issued by American in connection with the financing of two of the 25 aircraft financed under the 2016\-3 EETCs (such 25 aircraft, the 2016\-3 Aircraft)\.

In October 2017, American created one additional pass\-through trust which issued approximately $193 million aggregate principal amount of Series 2016\-3 Class B EETCs (the 2016\-3 Class B EETCs) in connection with the financing of the 2016\-3 Aircraft\. The proceeds received from the sale of the 2016\-3 Class B EETCs were used on the date of issuance of the 2016\-3 Class B EETCs to acquire Series B equipment notes issued by American in connection with the financing of the 2016\-3 Aircraft\.

Interest and principal payments on equipment notes issued in connection with the 2016\-3 EETCs are payable semi\-annually in April and October of each year, with interest payments that began in April 2017 and principal payments that began in October 2017 for the Class AA and Class A EETCs and interest and principal payments beginning in April 2018 for the Class B EETCs\. These equipment notes are secured by liens on the 2016\-3 Aircraft\.

Certain information regarding the 2016\-3 EETC equipment notes, as of December 31, 2017, is set forth in the table below\.

|                               |                   |                   |                   |
| ----------------------------- | ----------------- | ----------------- | ----------------- |
|                               | **2016\-3 EETCs** | **2016\-3 EETCs** | **2016\-3 EETCs** |
|                               | **Series AA**     | **Series A**      | **Series B**      |
| Aggregate principal issued    | $558 million      | $256 million      | $193 million      |
| Fixed interest rate per annum | 3\.00%            | 3\.25%            | 3\.75%            |
| Maturity date                 | October 2028      | October 2028      | October 2025      |

*2017\-1 EETCs*

In January 2017, American created three pass\-through trusts which issued approximately $983 million aggregate principal amount of Series 2017\-1 Class AA, Class A and Class B EETCs (the 2017\-1 EETCs) in connection with the financing of 24 aircraft delivered to American through May 2017 (the 2017\-1 Aircraft)\.

During the first six months of 2017, all of the net proceeds received from the sale of the 2017\-1 EETCs were used to purchase equipment notes issued by American in connection with the financing of the 2017\-1 Aircraft\. Interest and principal payments on equipment notes issued in connection with the 2017\-1 EETCs are payable semi\-annually in February and August of each year, with interest payments that began in August 2017 and principal payments beginning in February 2018\. These equipment notes are secured by liens on the 2017\-1 Aircraft\.

Certain information regarding the 2017\-1 EETC equipment notes, as of December 31, 2017, is set forth in the table below\.

|                               |                   |                   |                   |
| ----------------------------- | ----------------- | ----------------- | ----------------- |
|                               | **2017\-1 EETCs** | **2017\-1 EETCs** | **2017\-1 EETCs** |
|                               | **Series AA**     | **Series A**      | **Series B**      |
| Aggregate principal issued    | $537 million      | $248 million      | $198 million      |
| Fixed interest rate per annum | 3\.65%            | 4\.00%            | 4\.95%            |
| Maturity date                 | February 2029     | February 2029     | February 2025     |

99


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

***Aircraft and Engine Purchase Commitments***

As of December 31, 2017, we had definitive purchase agreements with Airbus, Boeing and Embraer for the acquisition of the following mainline and regional aircraft:

|                |          |          |          |          |          |                                    |           |
| -------------- | -------- | -------- | -------- | -------- | -------- | ---------------------------------- | --------- |
|                | **2018** | **2019** | **2020** | **2021** | **2022** | **2023 and**

**Thereafter** | **Total** |
| **Airbus**     |          |          |          |          |          |                                    |           |
| A320neo Family | —        | 25       | 25       | 25       | 20       | 5                                  | 100       |
| A350 XWB       | —        | —        | 2        | 5        | 5        | 10                                 | 22        |
| **Boeing**     |          |          |          |          |          |                                    |           |
| 737 MAX Family | 16       | 20       | 19       | 21       | 20       | —                                  | 96        |
| 787 Family     | 6        | 2        | —        | —        | —        | —                                  | 8         |
| **Embraer**    |          |          |          |          |          |                                    |           |
| E175  ^(1)^    | 5        | 5        | —        | —        | —        | —                                  | 10        |
| Total          | 27       | 52       | 46       | 51       | 45       | 15                                 | 236       |

|       |                                                                                |
| ----- | --------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(1)^ | These aircraft may be operated by wholly\-owned regional subsidiaries which would operate the aircraft under capacity purchase arrangements\. |

We also have agreements for 37 spare engines to be delivered in 2018 and beyond\.

As of December 31, 2017, we had financing commitments for all of the aircraft currently on order and scheduled to be delivered through April 2018\. We do not have financing commitments for the following aircraft currently on order and scheduled to be delivered through the end of 2018: 11 Boeing 737 MAX Family aircraft, five Boeing 787 Family aircraft and five Embraer E175 regional aircraft\. In addition, we do not have financing commitments in place for substantially all aircraft currently on order and scheduled to be delivered in 2019 and beyond\. See Part I, Item 1A\. Risk Factors –*“We will need to obtain sufficient financing or other capital to operate successfully”* for additional discussion\.

See Note 11 to AAG’s Consolidated Financial Statements in Part II, Item 8A and Note 9 to American’s Consolidated Financial Statements in Part II, Item 8B for additional information on aircraft and engine acquisition commitments\.

***Other Information***

For information concerning the estimated useful lives and residual values for owned aircraft and terms for leased aircraft, see Note 1 and Note 11 to AAG’s Consolidated Financial Statements in Part II, Item 8A and Note 1 and Note 9 to American’s Consolidated Financial Statements in Part II, Item 8B\.

**Ground Properties**

At each airport where we conduct flight operations, we lease passenger, operations and baggage handling space, generally from the airport operator, and in some cases on a subleased basis from other airlines\. Our agreements with airports also provide for the non\-exclusive use of runways, taxiways and other improvements and facilities; landing fees under these agreements typically are based on the number of landings and weight of aircraft\. These leases and use agreements generally contain provisions for periodic adjustments of lease rates, landing fees and other charges applicable under that type of agreement\. Additionally, our main operational facilities are associated with our hubs\. At these locations and in other cities we serve, we maintain administrative offices, catering, cargo, training, maintenance and other facilities, in each case as necessary to support our operations in the particular city\.

We own our corporate headquarters buildings in Fort Worth, Texas\. We lease or have built on leased property our training facilities in Fort Worth, Texas, our principal overhaul and maintenance base in Tulsa, Oklahoma, our regional reservation offices, and administrative offices throughout the U\.S\. and abroad\. Construction continues on a new, five\-building headquarters on the corporate campus in Fort Worth, Texas, which is scheduled for completion and move\-in in phases over the second half of 2019\.

For information concerning the estimated lives for owned ground properties and terms for lease properties, see Note 1 and Note 11 to AAG’s Consolidated Financial Statements in Part II, Item 8A and Note 1 and Note 9 to American’s Consolidated Financial Statements in Part II, Item 8B\.

35


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

**AMERICAN AIRLINES GROUP INC\.**

**CONSOLIDATED BALANCE SHEETS**

**(In millions, except shares and par value)**

|                                                                                |                  |                  |
| ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------- | ---------------- |
|                                                                                | **December 31,** | **December 31,** |
|                                                                                | **2018**         | **2017**         |
| **ASSETS**                                                                                |                  |                  |
| **Current assets**                                                                                |                  |                  |
| Cash                                                                                | $275             | $295             |
| Short\-term investments                                                                                | 4,485            | 4,771            |
| Restricted cash and short\-term investments                                                                                | 154              | 318              |
| Accounts receivable, net                                                                                | 1,706            | 1,752            |
| Aircraft fuel, spare parts and supplies, net                                                                                | 1,522            | 1,359            |
| Prepaid expenses and other                                                                                | 495              | 651              |
| Total current assets                                                                                | 8,637            | 9,146            |
| **Operating property and equipment**                                                                                |                  |                  |
| Flight equipment                                                                                | 41,499           | 40,318           |
| Ground property and equipment                                                                                | 8,764            | 8,267            |
| Equipment purchase deposits                                                                                | 1,278            | 1,217            |
| Total property and equipment, at cost                                                                                | 51,541           | 49,802           |
| Less accumulated depreciation and amortization                                                                                | (17,443)         | (15,646)         |
| Total property and equipment, net                                                                                | 34,098           | 34,156           |
| **Operating lease right\-of\-use assets**                                                                                | 9,151            | —                |
| **Other assets**                                                                                |                  |                  |
| Goodwill                                                                                | 4,091            | 4,091            |
| Intangibles, net of accumulated amortization of $663 and $622, respectively                                                                                | 2,137            | 2,203            |
| Deferred tax asset                                                                                | 1,145            | 1,816            |
| Other assets                                                                                | 1,321            | 1,373            |
| Total other assets                                                                                | 8,694            | 9,483            |
| **Total assets**                                                                                | $60,580          | $52,785          |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)**                                                                                |                  |                  |
| **Current liabilities**                                                                                |                  |                  |
| Current maturities of long\-term debt and finance leases                                                                                | $3,294           | $2,554           |
| Accounts payable                                                                                | 1,773            | 1,688            |
| Accrued salaries and wages                                                                                | 1,427            | 1,672            |
| Air traffic liability                                                                                | 4,339            | 4,042            |
| Loyalty program liability                                                                                | 3,267            | 3,121            |
| Operating lease liabilities                                                                                | 1,654            | —                |
| Other accrued liabilities                                                                                | 2,342            | 2,281            |
| Total current liabilities                                                                                | 18,096           | 15,358           |
| **Noncurrent liabilities**                                                                                |                  |                  |
| Long\-term debt and finance leases, net of current maturities                                                                                | 21,179           | 22,511           |
| Pension and postretirement benefits                                                                                | 6,907            | 7,497            |
| Loyalty program liability                                                                                | 5,272            | 5,701            |
| Operating lease liabilities                                                                                | 7,902            | —                |
| Other liabilities                                                                                | 1,393            | 2,498            |
| Total noncurrent liabilities                                                                                | 42,653           | 38,207           |
| **Commitments and contingencies (Note 12)**                                                                                |                  |                  |
| **Stockholders' equity (deficit)**                                                                                |                  |                  |
| Common stock, $0\.01 par value; 1,750,000,000 shares authorized, 460,610,870 shares issued and outstanding at December 31, 2018; 475,507,887 shares issued and outstanding at December 31, 2017 | 5                | 5                |
| Additional paid\-in capital                                                                                | 4,964            | 5,714            |
| Accumulated other comprehensive loss                                                                                | (5,274)          | (5,154)          |
| Retained earnings (deficit)                                                                                | 136              | (1,345)          |
| Total stockholders' deficit                                                                                | (169)            | (780)            |
| **Total liabilities and stockholders’ equity (deficit)**                                                                                | $60,580          | $52,785          |

See accompanying notes to consolidated financial statements\.

83


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

**AMERICAN AIRLINES GROUP INC\.**

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**

**(In millions, except share amounts)**

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

**Stock** | **Additional**

**Paid\-in**

**Capital** | **Accumulated**

**Other**

**Comprehensive**

**Loss** | **Retained**

**Earnings**

**(Deficit)** | **Total** |
| **Balance at December 31, 2015**                                                                      | $6                          | $11,591                                               | $(4,732)                                                                  | $(1,230)                                              | $5,635    |
| Net income                                                                                | —                           | —                                                     | —                                                                         | 2,584                                                 | 2,584     |
| Other comprehensive loss                                                                              | —                           | —                                                     | (351)                                                                     | —                                                     | (351)     |
| Cash tax withholding on shares issued                                                                 | —                           | (56)                                                  | —                                                                         | —                                                     | (56)      |
| Purchase and retirement of 119,823,621 shares of AAG common stock                                     | (1)                         | (4,415)                                               | —                                                                         | —                                                     | (4,416)   |
| Dividends declared on AAG common stock ($0\.40 per share)                                             | —                           | —                                                     | —                                                                         | (224)                                                 | (224)     |
| Issuance of 2,506,067 shares of AAG common stock pursuant to employee stock plans                     | —                           | —                                                     | —                                                                         | —                                                     | —         |
| Settlement of single\-dip unsecured claims held in distributed claims reserve                         | —                           | 3                                                     | —                                                                         | —                                                     | 3         |
| Share\-based compensation expense                                                                     | —                           | 100                                                   | —                                                                         | —                                                     | 100       |
| Impact of adoption of Accounting Standards Update (ASU) 2016\-09 related to share\-based compensation | —                           | —                                                     | —                                                                         | 418                                                   | 418       |
| Impact of adoption of ASU 2014\-09 related to revenue recognition (See Note 1(b))                     | —                           | —                                                     | —                                                                         | (3,977)                                               | (3,977)   |
| **Balance at December 31, 2016**                                                                      | 5                           | 7,223                                                 | (5,083)                                                                   | (2,429)                                               | (284)     |
| Net income                                                                                | —                           | —                                                     | —                                                                         | 1,282                                                 | 1,282     |
| Other comprehensive loss                                                                              | —                           | —                                                     | (71)                                                                      | —                                                     | (71)      |
| Cash tax withholding on shares issued                                                                 | —                           | (51)                                                  | —                                                                         | —                                                     | (51)      |
| Purchase and retirement of 33,953,127 shares of AAG common stock                                      | —                           | (1,563)                                               | —                                                                         | —                                                     | (1,563)   |
| Dividends declared on AAG common stock ($0\.40 per share)                                             | —                           | —                                                     | —                                                                         | (198)                                                 | (198)     |
| Issuance of 2,166,861 shares of AAG common stock pursuant to employee stock plans                     | —                           | —                                                     | —                                                                         | —                                                     | —         |
| Settlement of single\-dip unsecured claims held in distributed claims reserve                         | —                           | 15                                                    | —                                                                         | —                                                     | 15        |
| Share\-based compensation expense                                                                     | —                           | 90                                                    | —                                                                         | —                                                     | 90        |
| **Balance at December 31, 2017**                                                                      | 5                           | 5,714                                                 | (5,154)                                                                   | (1,345)                                               | (780)     |
| Net income                                                                                | —                           | —                                                     | —                                                                         | 1,412                                                 | 1,412     |
| Other comprehensive loss                                                                              | —                           | —                                                     | (120)                                                                     | —                                                     | (120)     |
| Cash tax withholding on shares issued                                                                 | —                           | (37)                                                  | —                                                                         | —                                                     | (37)      |
| Purchase and retirement of 16,606,157 shares of AAG common stock                                      | —                           | (799)                                                 | —                                                                         | —                                                     | (799)     |
| Dividends declared on AAG common stock ($0\.40 per share)                                             | —                           | —                                                     | —                                                                         | (188)                                                 | (188)     |
| Issuance of 1,709,140 shares of AAG common stock pursuant to employee stock plans                     | —                           | —                                                     | —                                                                         | —                                                     | —         |
| Share\-based compensation expense                                                                     | —                           | 86                                                    | —                                                                         | —                                                     | 86        |
| Impact of adoption of ASU 2016\-01 related to financial instruments (See Note 1(b))                   | —                           | —                                                     | —                                                                         | 60                                                    | 60        |
| Impact of adoption of ASU 2016\-02 related to leases (See Note 1(b))                                  | —                           | —                                                     | —                                                                         | 197                                                   | 197       |
| **Balance at December 31, 2018**                                                                      | $5                          | $4,964                                                | $(5,274)                                                                  | $136                                                  | $(169)    |

See accompanying notes to consolidated financial statements\.

85


Annual Report of Southwest Airlines Co\. for year 2019

Southwest Airlines Co\.

Notes to Consolidated Financial Statements

1 \. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

Southwest Airlines Co\. (the "Company") operates Southwest Airlines, a major domestic airline\. The Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries, which include AirTran Holdings, LLC, the successor to AirTran Holdings, Inc\. ("AirTran Holdings"), the former parent company of AirTran Airways, Inc\. ("AirTran Airways")\. The accompanying Consolidated Financial Statements include the results of operations and cash flows for all periods presented and all significant inter\-entity balances and transactions have been eliminated\. The preparation of financial statements in conformity with generally accepted accounting principles in the United States ("GAAP") requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes\. Actual results could differ from these estimates\.

Effective as of January 1, 2019, the Company adopted Accounting Standards Update ("ASU") No\. 2016\-02, Leases,

codified in Accounting Standards Codification ("ASC") 842 (the "New Lease Standard")\. All amounts and disclosures

set forth in this Form 10\-K for the year ended December 31, 2019, reflect the adoption of this ASU, while all periods prior to 2019 remain in accordance with prior accounting requirements\. See Note  2  for further information\.

Effective as of January 1, 2018, the Company adopted ASU No\. 2017\-12, Targeted Improvements to Accounting for Hedging Activities (the "New Hedging Standard")\. All amounts and disclosures set forth in this Form 10\-K reflect the adoption of this ASU\. See Note 2 for further information\.

Cash and Cash Equivalents

Cash in excess of that necessary for operating requirements is invested in short\-term, highly liquid, income\-producing investments\. Investments with original maturities of three months or less when purchased are classified as cash and cash equivalents, which primarily consist of certificates of deposit, money market funds, and investment grade commercial paper issued by major corporations and financial institutions\. Cash and cash equivalents are stated at cost, which approximates fair value\.

As of  December 31, 2019 ,   $25 million  in cash collateral deposits were held by the Company from its fuel hedge counterparties, and   no  cash collateral deposits were held by or provided by the Company to its interest rate hedge counterparties\. As of  December 31, 2018 ,   no  cash collateral deposits were held by or provided by the Company from its fuel hedge counterparties, and   no  cash collateral deposits were held by or provided by the Company to its interest rate hedge counterparties\. Cash collateral amounts provided or held associated with fuel and interest rate derivative instruments are not restricted in any way and earn interest income at an agreed upon rate that approximates the rates earned on short\-term securities issued by the U\.S\. Government\. Depending on the fair value of the Company’s fuel and interest rate derivative instruments, the amounts of collateral deposits held or provided at any point in time can fluctuate significantly\. See  Note 10  for further information on these collateral deposits and fuel derivative instruments\.

Short\-term and Noncurrent Investments

Short\-term investments consist of investments with original maturities of greater than three months but less than twelve months when purchased\. These are primarily short\-term securities issued by the U\.S\. Government and certificates of deposit issued by domestic banks\. All of these investments are classified as available\-for\-sale securities and are stated at fair value, which approximates cost\. For all short\-term investments, at each reset period or upon reinvestment, the Company accounts for the transaction as Proceeds from sales of short\-term investments for the security relinquished, and Purchases of short\-investments for the security purchased, in the accompanying Consolidated Statement of Cash Flows\. Unrealized gains and losses, net of tax, if any, are recognized in Accumulated other comprehensive income (loss) ("AOCI") in the accompanying Consolidated Balance Sheet\. Realized net gains and losses on specific

69


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

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

**United Continental Holdings, Inc\. and Subsidiary Companies**

**United Airlines, Inc\. and Subsidiary Companies**

**Annual Report on Form 10\-K**

**For the Year Ended** **December 31, 2018**

|           |                                                                                |                                                                     |
| --------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------- |
|           |                                                                                | **Page**                                                            |
|           | **PART I**                                                                                |                                                                     |
| Item 1\.  | [Business](https://www.example.com#s372A919C3CE8530A9582FFA5A3EB7145)                                                                                |
[3](https://www.example.com#s372A919C3CE8530A9582FFA5A3EB7145)  |
| Item 1A\. | [Risk Factors](https://www.example.com#s7D7213CD83D25F9C825DC9A941B5EFB6)                                                                                |
[8](https://www.example.com#s7D7213CD83D25F9C825DC9A941B5EFB6)  |
| Item 1B\. | [Unresolved Staff Comments](https://www.example.com#sB14B42AFD634581F94B11405ADC7B1BA)                                                                                |
[18](https://www.example.com#sB14B42AFD634581F94B11405ADC7B1BA) |
| Item 2\.  | [Properties](https://www.example.com#sE4729869CC26580CAF90338A21E4EB19)                                                                                |
[19](https://www.example.com#sE4729869CC26580CAF90338A21E4EB19) |
| Item 3\.  | [Legal Proceedings](https://www.example.com#s2AEC3C130DCC56F3AF61CBF7D0824B86)                                                                                |
[20](https://www.example.com#s2AEC3C130DCC56F3AF61CBF7D0824B86) |
| Item 4\.  | [Mine Safety Disclosures](https://www.example.com#s9E6A4B0C58285584AC9F04426519A130)                                                                                |
[21](https://www.example.com#s9E6A4B0C58285584AC9F04426519A130) |
|           | **PART II**                                                                                |                                                                     |
| Item 5\.  | [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](https://www.example.com#sB2B3167EBDA252278FEA7B3AF0FBCF38) |
[21](https://www.example.com#sB2B3167EBDA252278FEA7B3AF0FBCF38) |
| Item 6\.  | [Selected Financial Data](https://www.example.com#sFDD3A9712BC95BB5955EB7F689909477)                                                                                |
[22](https://www.example.com#sFDD3A9712BC95BB5955EB7F689909477) |
| Item 7\.  | [Management's Discussion and Analysis of Financial Condition and Results of Operations](https://www.example.com#s6AAD7DFC68A8550D8AA80AB6ACE30C74)                        |
[24](https://www.example.com#s6AAD7DFC68A8550D8AA80AB6ACE30C74) |
| Item 7A\. | [Quantitative and Qualitative Disclosures About Market Risk](https://www.example.com#s0848C5E9A7F8543280206A3411CBB400)                                                   |
[39](https://www.example.com#s0848C5E9A7F8543280206A3411CBB400) |
| Item 8\.  | [Financial Statements and Supplementary Data](https://www.example.com#s81B616CED4765B5DB3A3CB0AA2544931)                                                                  |
[40](https://www.example.com#s81B616CED4765B5DB3A3CB0AA2544931) |
|           | [Combined Notes to Consolidated Financial Statements](https://www.example.com#s1B55AB41B6B95A44B99E4068B99A77DF)                                                          |
[54](https://www.example.com#s1B55AB41B6B95A44B99E4068B99A77DF) |
| Item 9\.  | [Changes in and Disagreements with Accountants on Accounting and Financial Disclosure](https://www.example.com#sA79AAF3C74765F349FBD81944B2E0914)                         |
[90](https://www.example.com#sA79AAF3C74765F349FBD81944B2E0914) |
| Item 9A\. | [Controls and Procedures](https://www.example.com#sEBEE37F2920051EFBF80574DCD99E560)                                                                                |
[90](https://www.example.com#sEBEE37F2920051EFBF80574DCD99E560) |
| Item 9B\. | [Other Information](https://www.example.com#sDE4561568FFF56A5AE3D9FEBC9ABDED7)                                                                                |
[93](https://www.example.com#sDE4561568FFF56A5AE3D9FEBC9ABDED7) |
|           | **PART III**                                                                                |                                                                     |
| Item 10\. | [Directors, Executive Officers and Corporate Governance](https://www.example.com#s44B033B10E195022B93D50540F9A7DFA)                                                       |
[93](https://www.example.com#s44B033B10E195022B93D50540F9A7DFA) |
| Item 11\. | [Executive Compensation](https://www.example.com#s92AAA3C6B40058C0AD0DF3E43B216941)                                                                                |
[94](https://www.example.com#s92AAA3C6B40058C0AD0DF3E43B216941) |
| Item 12\. | [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](https://www.example.com#s24AAF78CAF19583DB0A4E12DFB7705CB)               |
[94](https://www.example.com#s24AAF78CAF19583DB0A4E12DFB7705CB) |
| Item 13\. | [Certain Relationships and Related Transactions, and Director Independence](https://www.example.com#s17688E4312235AC782AA0CD4B45BE0E8)                                    |
[94](https://www.example.com#s17688E4312235AC782AA0CD4B45BE0E8) |
| Item 14\. | [Principal Accountant Fees and Services](https://www.example.com#sD20B96356758528C82E2CE16D5E06892)                                                                       |
[94](https://www.example.com#sD20B96356758528C82E2CE16D5E06892) |
|           | **PART IV**                                                                                |                                                                     |
| Item 15\. | [Exhibits and Financial Statement Schedules](https://www.example.com#s7CECE35A07405BD695FCCA7DC42A264A)                                                                   |
[96](https://www.example.com#s7CECE35A07405BD695FCCA7DC42A264A) |
| Item 16\. | [Form 10\-K Summary](https://www.example.com#sBFC0593441965E69916B94634F735D2A)                                                                                |
[96](https://www.example.com#sBFC0593441965E69916B94634F735D2A) |


Annual Report of Southwest Airlines Co\. for year 2017

**6****\. LONG\-TERM DEBT**

|                                                               |                       |                       |
| ------------------------------------------------------------- | --------------------- | --------------------- |
| **(in millions)**                                             | **December 31, 2017** | **December 31, 2016** |
| 5\.125% Notes due March 2017                                  | $—                    | $301                  |
| French Credit Agreements due 2018 \- 2\.54%                   | 1                     | 14                    |
| Fixed\-rate 737 Aircraft Notes payable through 2018 \- 7\.03% | 3                     | 8                     |
| 2\.75% Notes due 2019                                         | 300                   | 301                   |
| Term Loan Agreement payable through 2019 \- 6\.315%           | 66                    | 106                   |
| Term Loan Agreement payable through 2019 \- 4\.84%            | 19                    | 28                    |
| 2\.65% Notes due 2020                                         | 491                   | 492                   |
| Term Loan Agreement payable through 2020 \- 5\.223%           | 237                   | 284                   |
| 737 Aircraft Notes payable through 2020                       | 155                   | 206                   |
| Term Loan Agreements payable through 2021 \- 7\.94%           | —                     | 20                    |
| 2\.75% Notes due 2022                                         | 300                   | —                     |
| Pass Through Certificates due 2022 \- 6\.24%                  | 294                   | 324                   |
| Term Loan Agreement payable through 2026 \- 2\.67%            | 215                   | 215                   |
| 3\.00% Notes due 2026                                         | 300                   | 300                   |
| 3\.45% Notes due 2027                                         | 300                   | —                     |
| 7\.375% Debentures due 2027                                   | 127                   | 130                   |
| Capital leases                                                | 885                   | 681                   |
|                                                               | $3,693                | $3,410                |
| Less current maturities                                       | 348                   | 566                   |
| Less debt discount and issuance costs                         | 25                    | 23                    |
|                                                               | $3,320                | $2,821                |

AirTran Holdings is party to aircraft purchase financing facilities, and as of December 31, 2017, 17 Boeing 737 aircraft remained that were financed under floating\-rate facilities\. Each note is secured by a first mortgage on the aircraft to which it relates\. The notes bear interest at a floating rate per annum equal to a margin plus the three or six\-month LIBOR in effect at the commencement of each semi\-annual or three\-month period, as applicable\. As of December 31, 2017, the weighted average interest rate was 4\.81 percent\. Principal and interest under the notes are payable semi\-annually or every three months as applicable\. As of December 31, 2017, the remaining debt outstanding may be prepaid without penalty under all aircraft loans provided under such facilities\. The remaining notes mature in years 2018 to 2020\. As discussed further in Note 10, a portion of the above floating\-rate debt has been effectively converted to a fixed rate via interest rate swap agreements which expire as the underlying notes mature\.

At December 31, 2017, AirTran Holdings was party to an additional aircraft purchase financing facility, and one Boeing 737 aircraft was financed under the fixed\-rate facility\. The note is secured by a first mortgage on the aircraft to which it relates\. As of December 31, 2017, the interest rate was 7\.03 percent\. The remaining note matured on January 11, 2018\.

In October 2009, AirTran Holdings completed a public offering of $115 million of convertible senior notes due November 1, 2016\. Such notes bore interest at 5\.25 percent payable semi\-annually, in arrears, on May 1 and November 1\. As a result of the Company's acquisition of AirTran in 2011 and subsequent dividends declared by the Company, the convertible senior notes were convertible into AirTran conversion units of 169\.8265 per $1,000 in principal amount of such notes\. Based on the terms of the merger agreement, the holders of these notes could receive shares of the Company’s common stock at a conversion rate of 54\.5143 shares and $615\.16 in cash per $1,000 in principal amount of such notes\. During 2016, all the bonds matured, the majority of which had been converted prior to the maturity date, with approximately 6 million shares issued and cash paid of approximately $68 million\.

87


Annual Report of Southwest Airlines Co\. for year 2018

The Company works collaboratively with foreign national governments and airports to provide risk\-based security measures at international departure locations\.

In September 2017, the Department of Homeland Security granted the Company designation coverage under the Support Anti\-Terrorism by Fostering Effective Technologies Act of 2002 (the "SAFETY Act") through September 29, 2022\. The designation is based on the security program utilized by the Company to protect its Employees, Customers, and assets from terrorists and other criminal activities\. Designation coverage affords the Company certain limitations of liability for claims arising out of an "act of terrorism," as defined under the SAFETY Act\.

The Company has also made significant investments to address the effect of security regulations, including investments in facilities, equipment, and technology to process Customers, checked baggage, and cargo efficiently; however, the Company is not able to predict the impact, if any, that various security measures or the lack of TSA resources at certain airports will have on Passenger revenues and the Company’s costs, either in the short\-term or the long\-term\.

**Environmental Regulation**

The Company is subject to various federal laws and regulations relating to the protection of the environment, including the Clean Air Act, the Resource Conservation and Recovery Act, the Clean Water Act, the Safe Drinking Water Act, and the Comprehensive Environmental Response, Compensation and Liability Act, as well as state and local laws and regulations\. These laws and regulations govern aircraft drinking water, emissions, storm water discharges from operations, and the disposal of materials such as jet fuel, chemicals, hazardous waste, and aircraft deicing fluid\.

Additionally, in conjunction with airport authorities, other airlines, and state and local environmental regulatory agencies, the Company, as a normal course of business, undertakes voluntary investigation or remediation of soil or groundwater contamination at various airport sites\. The Company does not believe that any environmental liability associated with these airport sites will have a material adverse effect on the Company's operations, costs, or profitability, nor has it experienced any such liability in the past that has had a material adverse effect on its operations, costs, or profitability\.

Further regulatory developments pertaining to the control of engine exhaust emissions from ground support equipment could increase operating costs in the airline industry\. The Company does not believe, however, that pendingenvironmental regulatory developments in this area will have a material effect on the Company's capital expenditures or otherwise materially adversely affect its operations, operating costs, or competitive position\.

The federal government, as well as several state and local governments, the governments of other countries, and the United Nations’ International Civil Aviation Organization ("ICAO") are considering legislative and regulatory proposals and voluntary measures to address climate change by reducing green\-house gas emissions\. At the federal level, in July 2016, the Environmental Protection Agency (the "EPA") issued a final endangerment finding for greenhouse gas emissions from certain types of aircraft engines, which the agency determined contribute to the pollution that causes climate change and endangers public health and the environment\. Following this endangerment finding, per the federal Clean Air Act, the EPA is required to promulgate new regulations for controlling greenhouse gas emissions from aircraft, including potential new carbon\-efficiency standards on aircraft and engine manufacturers\.

The EPA's endangerment finding preceded adoption by the ICAO Assembly of a new "global market\-based measure" framework in an effort to control carbon dioxide emissions from international aviation\. The focal point of this framework is a carbon offsetting system on aircraft operators designed to cap the growth of emissions related to international aviation emissions\. Assuming the U\.S\. Government remains committed to the ICAO framework agreement and adopts terms for implementing it into U\.S\. law, this system is scheduled to be phased in beginning in 2021\. Regardless of the method of regulation, policy changes with regard to climate change are possible, which could significantly increase operating costs in the airline industry and, as a result, adversely affect operations\.

In addition to climate change, aircraft noise continues to be an environmental focus, especially as the FAA implements new flight procedures as part of its NextGen airspace modernization program discussed above\. The Airport Noise and Capacity Act of 1990 gives airport operators the right, under certain circumstances, to implement local noise abatement programs, provided they do not unreasonably interfere with interstate or foreign commerce or the national air transportation system\. Some airports have established airport restrictions to limit noise, including restrictions on aircraft types to be used and limits on the number of hourly or daily operations or the time of operations\. These types of

14


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

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

Lease Cost \. The Company's lease cost for the years ended December 31 included the following components (in millions):

|                                       |              |              |              |
| ------------------------------------- | ------------ | ------------ | ------------ |
|                                       | **2019**     | **2018**     | **2017**     |
| Operating lease cost                  | $1,038       | $1,213       | $1,433       |
| Variable and short\-term lease cost   | 2,548        | 2,569        | 2,209        |
| Amortization of finance lease assets  | 68           | 75           | 77           |
| Interest on finance lease liabilities | 85           | 44           | 24           |
| Sublease income                       | (32

) | (38

) | (36

) |
| Total lease cost                      | $3,707       | $3,863       | $3,707       |

Lease terms and commitments \. United's leases include aircraft leases for aircraft that are directly leased by United and aircraft that are operated by regional carriers on United's behalf under CPAs (but excluding aircraft owned by United) and non\-aircraft leases\. Aircraft operating leases relate to leases of   114  mainline and   325  regional aircraft while finance leases relate to leases of   28  mainline and   17  regional aircraft\. United's aircraft leases have remaining lease terms of   one month  to   10 years  with expiration dates ranging from  2020  through  2029 \. Under the terms of most aircraft leases, United has the right to purchase the aircraft at the end of the lease term, in some cases at fair market value, and in others, at a percentage of cost\.

Non\-aircraft leases have remaining lease terms of   one month  to   34 years , with expiration dates ranging from  2020  through  2053 \.

The table below summarizes the Company's scheduled future minimum lease payments under operating and finance leases, recorded on the balance sheet, as of  December 31, 2019  (in millions):

|                                               |                      |                    |
| --------------------------------------------- | -------------------- | ------------------ |
|                                               | **Operating Leases** | **Finance Leases** |
| 2020                                          | $920                 | $62                |
| 2021                                          | 754                  | 75                 |
| 2022                                          | 591                  | 49                 |
| 2023                                          | 633                  | 38                 |
| 2024                                          | 626                  | 35                 |
| After 2024                                    | 4,214                | 57                 |
| Minimum lease payments                        | 7,738                | 316                |
| Imputed interest                              | (2,106

)      | (50

)       |
| Present value of minimum lease payments       | 5,632                | 266                |
| Less: current maturities of lease obligations | (686

)        | (46

)       |
| Long\-term lease obligations                  | $4,946               | $220               |

As of  December 31, 2019 , we have additional leases of approximately   $500 million  for several mainline aircraft, regional jets under a CPA and airport facilities and office space leases that have not yet commenced\. These leases will commence in  2020  and  2021  with lease terms of up to   13 years \.

Our lease agreements do not provide a readily determinable implicit rate nor is it available to us from our lessors\. Instead, we estimate United's incremental borrowing rate based on information available at lease commencement in order to discount lease payments to present value\. The table below presents additional information related to our leases as of December 31:

|                                                            |          |          |
| ---------------------------------------------------------- | -------- | -------- |
|                                                            | **2019** | **2018** |
| Weighted\-average remaining lease term \- operating leases | 11 years | 10 years |
| Weighted\-average remaining lease term \- finance leases   | 6 years  | 5 years  |
| Weighted\-average discount rate \- operating leases        | 5\.2%    | 5\.2%    |
| Weighted\-average discount rate \- finance leases          | 5\.7%    | 45\.8%   |

80


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

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgment\. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates\.

Assessment of Mileage Plan™ Model

As discussed in Note 2 to the consolidated financial statements, the Company has a Mileage Plan™ loyalty program which provides frequent flyer travel awards to program members based upon accumulated loyalty mileage credits\. The Company utilizes a complex model to account for the Mileage Plan™ program, which involves numerous inputs and assumptions\. Deferred revenues related to the Mileage Plan™ program were $2\.0 billion as of December 31, 2019\. Associated Mileage Plan™ revenues recognized from deferred revenue and recorded in passenger revenue were $704 million for the year ended December 2019\.

We identified the assessment of the Mileage Plan™ model as a critical audit matter\. This was due to the high degree of auditor judgment to assess that sufficient audit evidence was obtained over the complex design of the model as well as the key inputs and assumptions used to develop the estimates\. Key inputs include miles credited and miles redeemed and key assumptions include estimated breakage and the standalone selling price of a mile\.

The primary procedures we performed to address this critical audit matter included the following\. We tested certain internal controls over the Company’s Mileage Plan™ process, including controls over the integrity of the model as well as key inputs and key assumptions utilized in the model\. We reperformed key calculations utilized in the Mileage Plan™ accounting model\. We tested that the miles credited and miles redeemed inputs matched information technology system data\. We inspected that the Company’s methodology to develop key assumptions was consistent with historical methods\. We compared the breakage rate assumption to historical breakage and breakage rates used by others in the airline industry\. We considered changes in the Mileage Plan™ program terms and customer behavior for potential changes in the breakage rate\. We evaluated the fluctuation in the standalone selling price of a mile assumption by comparing it to changes in passenger ticket fares\. We compared the standalone selling price of a mile assumption to other data points including miles sold on the Company’s website and the contractual rates that miles are sold to other airline and bank partners\. We evaluated fluctuations in Mileage Plan™ balances in relation to program changes, economic conditions, and observed industry trends and events\.

In addition, we evaluated the overall sufficiency of audit evidence obtained over the Mileage Plan™ model\.

/s/ KPMG LLP

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

Seattle ,  Washington

February 12, 2020

49


Annual Report of Southwest Airlines Co\. for year 2017

would be LIBOR plus a spread of 100\.0 basis points\. The facility contains a financial covenant requiring a minimum coverage ratio of adjusted pre\-tax income to fixed obligations, as defined\. As of December 31, 2017, the Company was in compliance with this covenant and there were no amounts outstanding under the revolving credit facility\.

During November 2017, the Company launched the Fourth Quarter 2017 ASR Program by advancing $250 million to a financial institution in a privately negotiated transaction\. The Company received 4\.1 million shares in total under the Fourth Quarter 2017 ASR Program, which was completed in January 2018\. The purchase was recorded as a treasury share purchase for purposes of calculating earnings per share\. Following the launch of the Fourth Quarter 2017 ASR Program, during the period from November 29, 2017 to December 15, 2017, the Company repurchased 1\.6 million shares of its common stock on the open market\. See Part II, Item 5 for further information on the Company's share repurchase authorizations\.

During second quarter 2017, the Company completed its previously authorized $2\.0 billion share repurchase program, bringing in a total of 41\.3 million shares over the course of the program\. On May 17, 2017, the Company's Board of Directors approved a new $2\.0 billion share repurchase program\. Following the Board of Directors' authorization of the Company's new $2\.0 billion share repurchase program, the Company entered into the following share repurchases:

|                                                                       |                     |               |
| --------------------------------------------------------------------- | ------------------- | ------------- |
| **Share repurchases (in millions)**                                   | **Shares received** | **Cash paid** |
| Third Quarter 2017 Accelerated Share Repurchase Program

 | 5\.3                | $300          |
| Fourth Quarter 2017 Accelerated Share Repurchase Program              | 4\.1                | 250           |
| Open Market Share Repurchases                                         | 1\.6                | 100           |
| Total                                                                 | 11\.0               | $650          |

On June 1, 2017, Moody's upgraded the Company's secured equipment trust certificates and its senior unsecured debt rating to "A3" from "Baa1\." The upgrade of the Company's senior unsecured debt rating was based on the Company's strong liquidity, manageable funded debt, competitive fares, and expanding network\. Also on August 14, 2017, Standard & Poor's upgraded the Company's investment grade credit ratings to "BBB\+" from "BBB\." The upgrade of the Company's investment grade rating was based on the Company's consistent profitability and cost advantage, exceptional liquidity, and manageable funded debt\. The Company maintained its investment grade credit ratings of "BBB\+" with Fitch\.

The Company routinely carries a working capital deficit, in which its current liabilities exceed its current assets\. This is common within the airline industry and is primarily due to the nature of the Air traffic liability account, which is related to advance ticket sales and frequent flyer deferred revenue, which are performance obligations for future customer flights, do not require future settlement in cash, and are mostly nonrefundable\. The Company believes that its current liquidity position, including unrestricted cash and short\-term investments of $3\.3 billion as of December 31, 2017, anticipated future internally generated funds from operations, and its fully available, unsecured revolving credit facility of $1\.0 billion that expires in August 2022, will enable it to meet its future known obligations in the ordinary course of business\. However, if a liquidity need were to arise, the Company believes it has access to financing arrangements because of its investment grade credit ratings, large value of unencumbered assets, and modest leverage, which should enable it to meet its ongoing capital, operating, and other liquidity requirements\. The Company will continue to consider various borrowing or leasing options to maximize liquidity and supplement cash requirements, as necessary\.

The Company has a large net deferred tax liability on its Consolidated Balance Sheet\. The deferral of income taxes has resulted in a significant benefit to the Company and its liquidity position\. Since the Company purchases the majority of the aircraft it acquires, it has been able to utilize accelerated depreciation methods (including bonus depreciation) available under the Internal Revenue Code of 1986, as amended, in 2017 and in previous years, which has enabled the Company to defer the cash tax payments associated with these depreciable assets to future years\. Based on the Company’s scheduled future aircraft deliveries from Boeing and existing tax laws in effect, the Company will continue to defer a portion of cash income taxes to future years\. The Company has paid in the past, and will continue to pay in the future, significant cash taxes to the various taxing jurisdictions where it operates\. The Company expects to be able

56