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

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

None

**PART III**

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

See “Executive Officers” under Item 1, “Our Business,” in Part I of this Form 10\-K for information on the executive officers of Air Group and its subsidiaries\. Except as provided herein, the remainder of the information required by this item is incorporated herein by reference from the definitive Proxy Statement for Air Group's 2018 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year ended December 31, 2017 (hereinafter referred to as our “2018 Proxy Statement”)\.

|                                      |
| ------------------------------------ |
| **ITEM 11\. EXECUTIVE COMPENSATION** |

The information required by this item is incorporated herein by reference from our 2018 Proxy Statement\.

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

**Securities Authorized for Issuance Under Equity Compensation Plans**

|                                                            |                                                                                |                                                                                |                                                                                |
| ---------------------------------------------------------- | ----------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------- |
|                                                            | **Number of securities to be issued upon exercise of outstanding options, warrants and rights** | **Weighted\-average exercise price of outstanding options, warrants and rights** | **Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))** |
| **Plan category**                                          | **(a)**                                                                                | **(b)**                                                                          | **(c)**                                                                                |
| Equity compensation plans approved by security holders     | 1,311,899 ^(1)^                                                                                | $52\.34 ^(2)^                                                                    | 10,927,824                                                                                |
| Equity compensation plans not approved by security holders | —                                                                                | Not applicable                                                                   | —                                                                                |
| Total                                                      | 1,311,899                                                                                | $52\.34                                                                          | 10,927,824                                                                                |

|     |                                                                                |
| --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (1) | Of these shares, 354,475 and 86,992 were subject to options then outstanding under the 2008 Plan and 2016 Plan, respectively, 386,869 were subject to outstanding restricted, performance and deferred stock unit awards granted under the 2008 Plan and 483,553 were subject to outstanding restricted, performance and deferred stock unit awards granted under the 2016 Plan\. Outstanding performance awards are reflected in the table assuming that the target level of performance will be achieved\.  |

|     |                                                                                |
| --- | ------------------------------------------------------------------------------------------------------------------------------------------ |
| (2) | This number does not reflect the 870,432 shares that were subject to outstanding stock unit awards granted under the 2008 and 2016 Plans\. |

|     |                                                                                |
| --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| (3) | Of the aggregate number of shares that remained available for future issuance, no shares were available under the 2008 Plan, 5,129,157 shares were available under the 2016 Plan and 5,798,667 shares were available under the ESPP\. Subject to certain express limits of the 2016 Plan, shares available for award purposes under the 2016 Plan generally may be used for any type of award authorized under that plan including options, stock appreciation rights, and other forms of awards granted or denominated in shares of our common stock including, without limitation, stock bonuses, restricted stock, restricted stock units and performance shares\. Full\-value shares issued under the 2016 Plan are counted against the share limit as 1\.7 shares for every one share issued\. This table does not give effect to that rule\. |

Other information required by this item is set forth under the heading “Beneficial Ownership of Securities” in our 2018 Proxy Statement and is incorporated by reference\.

 97


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

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

EETCs\.  As of December 31, 2019, United had   $9\.6 billion  principal amount of equipment notes outstanding issued under enhanced equipment trust certificates ("EETC") financings included in notes payable in the table of outstanding debt above\.  Generally, the structure of these EETC financings consists of pass\-through trusts created by United to issue pass\-through certificates, which represent fractional undivided interests in the respective pass\-through trusts and are not obligations of United\. The proceeds of the issuance of the pass\-through certificates are used to purchase equipment notes which are issued by United and secured by its aircraft\. The payment obligations under the equipment notes are those of United\. Proceeds received from the sale of pass\-through certificates are initially held by a depositary in escrow for the benefit of the certificate holders until United issues equipment notes to the trust, which purchases such notes with a portion of the escrowed funds\. These escrowed funds are not guaranteed by United and are not reported as debt on United's consolidated balance sheet because the proceeds held by the depositary are not United's assets\.

In February and September 2019, United created new EETC pass\-through trusts, each of which issued pass\-through certificates\. The proceeds of the issuance of the pass\-through certificates are used to purchase equipment notes issued by United and secured by its aircraft\. The Company records the debt obligation upon issuance of the equipment notes rather than upon the initial issuance of the pass\-through certificates\. Certain details of the pass\-through trusts with proceeds received from issuance of debt in  2019  are as follows (in millions, except stated interest rate):

|                        |           |               |                                      |                          |                                                                                |                                                                           |                                                                               |
| ---------------------- | --------- | ------------- | ------------------------------------ | ------------------------ | ---------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------- | ----------------------------------------------------------------------------- |
| **EETC Issuance Date** | **Class** | **Principal** | **Final expected distribution date** | **Stated interest rate** | **Total proceeds received from issuance of debt during 2019 and recorded as debt as of December 31, 2019** | **Amounts returned to the holders of the Pass\-Through Certificates (a)** | **Remaining proceeds from issuance of debt to be received in future periods** |
| September 2019         | AA        | $702          | May 2032                             | 2\.70%                   | $513                                                                                | $—                                                                        | $189                                                                          |
| September 2019         | A         | 287           | May 2028                             | 2\.90%                   | 210                                                                                | —                                                                         | 77                                                                            |
| September 2019         | B         | 232           | May 2028                             | 3\.50%                   | 170                                                                                | —                                                                         | 62                                                                            |
| February 2019          | AA        | 717           | August 2031                          | 4\.15%                   | 651                                                                                | 66                                                                        | —                                                                             |
| February 2019          | A         | 296           | August 2031                          | 4\.55%                   | 269                                                                                | 27                                                                        | —                                                                             |
|                        |           | $2,234        |                                      |                          | $1,813                                                                                | $93                                                                       | $328                                                                          |

(a) These proceeds were expected to be used to purchase equipment notes issued by United and secured by   three  Boeing 737 MAX aircraft, which aircraft were scheduled for delivery by Boeing in 2019\. However, as a result of the Federal Aviation Administration Order prohibiting the operation of Boeing 737 MAX series aircraft by U\.S\. certificated operators (the "FAA Order"), United did not take delivery of these aircraft\. These amounts were distributed to the holders of February 2019 Pass Through Certificates together with accrued and unpaid interest thereon but without premium\. As a result of the FAA Order, the Company did not contemplate using any proceeds from the September 2019 issuance of the EETC pass\-through trusts to fund any Boeing 737 MAX deliveries\.

In  2019 , United borrowed approximately   $105 million  aggregate principal amount from various financial institutions to finance the purchase of several aircraft delivered in  2019 \. The notes evidencing these borrowings, which are secured by the related aircraft, mature in  2029  and have interest rates comprised of LIBOR plus a specified margin\.

In November  2019 , at the request of United, the California Municipal Finance Authority issued its approximately   $295 million  special facility revenue bonds and loaned the proceeds of such bonds to United pursuant to a loan agreement to finance the costs of construction of an aircraft maintenance and ground service equipment complex at Los Angeles International Airport\. The bonds bear interest at   4%  per annum, payable semiannually, commencing July 15, 2020 through the  July 15, 2029  maturity date\. As security for United's obligations under the loan agreement, United also entered into a leasehold mortgage which grants to the trustee of the bonds (acting on behalf of the bondholders) a lien on United's interest in the leased premises and any improvements thereon owned by or leased to United\. As of December 31, 2019, United had recorded approximately   $39 million  related to this debt\.

Unsecured debt

4\.875%  Senior Notes due 2025\.  In May 2019, UAL issued   $350 million  aggregate principal amount of   4\.875%  Senior Notes due January 15, 2025 (the "  4\.875%  Senior Notes due 2025"), which are fully and unconditionally guaranteed and recorded by United on its balance sheet\.

78


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

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

benefit obligations as of December 31, 2018 was 4\.30%, as compared to 3\.63% for December 31, 2017\. The health care cost trend rate assumed for 2018 was 6\.25%, declining to 5\.0% in 2023, as compared to assumed trend rate for 2019 of 6\.0%, declining to 5\.0% in 2023\. A 1% increase in assumed health care trend rates would increase the Company's total service and interest cost for the year ended December 31, 2018 by $9 million; whereas, a 1% decrease in assumed health care trend rates would decrease the Company's total service and interest cost for the year ended December 31, 2018 by $7 million\. A one percentage point decrease in the weighted average discount rate would increase the Company's postretirement benefit liability by approximately $139 million and increase the estimated 2018 benefits expense by approximately $10 million\.

Actuarial gains or losses are triggered by changes in assumptions or experience that differ from the original assumptions and prior service credits result from a retroactive reduction in benefits due under the plans\. Under the applicable accounting standards for postretirement welfare benefit plans, actuarial gains and losses and prior service credits are not required to be recognized currently, but instead may be deferred as part of accumulated other comprehensive income and amortized into expense over the average remaining service life of the covered active employees or the average life expectancy of inactive participants\. At December 31, 2018 and 2017, the Company had unrecognized actuarial gains for postretirement welfare benefit plans of $554 million and $301 million, respectively, recorded in accumulated other comprehensive income\.

**Forward\-Looking Information**

Certain statements throughout Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and elsewhere in this report are forward\-looking and thus reflect the Company's current expectations and beliefs with respect to certain current and future events and anticipated financial and operating performance\. Such forward\-looking statements are and will be subject to many risks and uncertainties relating to the Company's operations and business environment that may cause actual results to differ materially from any future results expressed or implied in such forward\-looking statements\. Words such as "expects," "will," "plans," "anticipates," "indicates," "believes," "estimates," "forecast," "guidance," "outlook," "goals" and similar expressions are intended to identify forward\-looking statements\.

Additionally, forward\-looking statements include statements that do not relate solely to historical facts, such as statements which identify uncertainties or trends, discuss the possible future effects of current known trends or uncertainties, or which indicate that the future effects of known trends or uncertainties cannot be predicted, guaranteed or assured\. All forward\-looking statements in this report are based upon information available to us on the date of this report\. We undertake no obligation to publicly update or revise any forward\-looking statement, whether as a result of new information, future events, changed circumstances or otherwise, except as required by applicable law\.

Our actual results could differ materially from these forward\-looking statements due to numerous factors including, without limitation, the following: our ability to execute our strategic operating plan, including our growth, revenue\-generating and cost\-control initiatives; general economic conditions (including interest rates, foreign currency exchange rates, investment or credit market conditions, crude oil prices, costs of aircraft fuel and energy refining capacity in relevant markets); risks of doing business globally, including instability and political developments that may impact our operations in certain countries; demand for travel and the impact that global economic and political conditions have on customer travel patterns; our capacity decisions and the capacity decisions of our competitors; competitive pressures on pricing and on demand; changes in aircraft fuel prices; disruptions in our supply of aircraft fuel; our ability to cost\-effectively hedge against increases in the price of aircraft fuel, if we decide to do so; the effects of any technology failures or cybersecurity breaches; disruptions to services provided by third\-party service providers; potential reputational or other impact from adverse events involving our aircraft or operations, the aircraft or operations of our regional carriers or our code share partners or the aircraft or operations of another airline; our ability to attract and retain customers; the effects of any terrorist attacks, international hostilities or other security events, or the fear of such events; disruptions to our regional network; the impact of regulatory, investigative and legal proceedings and legal compliance risks; the success of our investments in other airlines, including in other parts of the world; industry consolidation or changes in airline alliances; the ability of other air carriers with whom we have alliances or partnerships to provide the services contemplated by the respective arrangements with such carriers; costs associated with any modification or termination of our aircraft orders; disruptions in the availability of aircraft, parts or support from our suppliers; our ability to maintain satisfactory labor relations and the results of any collective bargaining agreement process with our union groups; any disruptions to operations due to any potential actions by our labor groups; labor costs; an outbreak of a disease that affects travel demand or travel behavior; the impact of any management changes; extended interruptions or disruptions in service at major airports where we operate; U\.S\. or foreign governmental legislation, regulation and other actions (including Open Skies agreements, environmental regulations and the United Kingdom's withdrawal from the European Union); the seasonality of the airline industry; weather conditions; the costs and availability of aviation and other insurance; the costs and availability of financing; our ability to maintain adequate liquidity; our ability to comply with the terms of our various financing arrangements; our ability to realize the full value of our intangible assets and long\-lived assets; and other risks and uncertainties set forth under Part I, Item 1A\., Risk Factors, of this report, as well as other risks and uncertainties set forth from time to time in the reports we file with the SEC\.

38


Annual Report of Southwest Airlines Co\. for year 2017

effective, as defined, or that the derivatives will no longer qualify for hedge accounting\. Ineffectiveness results when the change in the fair value of the derivative instrument exceeds the change in the value of the Company’s expected future cash outlay to purchase and consume jet fuel\. To the extent that the periodic changes in the fair value of the derivatives are ineffective, the ineffective portion is recorded to Other (gains) losses, net, in the Consolidated Statement of Income in the period of the change\. Likewise, if a hedge ceases to qualify for hedge accounting, any change in the fair value of derivative instruments since the last reporting period is recorded to Other (gains) losses, net, in the Consolidated Statement of Income in the period of the change; however, any amounts previously recorded to AOCI would remain there until such time as the original forecasted transaction occurs, at which time these amounts would be reclassified to Fuel and oil expense\. When the Company has sold derivative positions in order to effectively "close" or offset a derivative already held as part of its fuel derivative instrument portfolio, any subsequent changes in fair value of those positions are marked to market through earnings\. Likewise, any changes in fair value of those positions that were offset by entering into the sold positions and were de\-designated as hedges are concurrently marked to market through earnings\. However, any changes in value related to hedges that were deferred as part of AOCI while designated as a hedge would remain until the originally forecasted transaction occurs\. In a situation where it becomes probable that a fuel hedged forecasted transaction will not occur, any gains and/or losses that have been recorded to AOCI would be required to be immediately reclassified into earnings\. The Company did not have any such situations occur during 2015, 2016, or 2017\.

Ineffectiveness is inherent in hedging jet fuel with derivative positions based in other crude oil related commodities\. Due to the volatility in markets for crude oil and related products, the Company is unable to predict the amount of ineffectiveness each period, including the loss of hedge accounting, which could be determined on a derivative by derivative basis or in the aggregate for a specific commodity\. This may result, and has resulted, in increased volatility in the Company’s financial results\. Factors that have and may continue to lead to ineffectiveness and unrealized gains and losses on derivative contracts include: significant fluctuation in energy prices, the number of derivative positions the Company holds, significant weather events affecting refinery capacity and the production of refined products, and the volatility of the different types of products the Company uses in hedging\. However, even though derivatives may not qualify for hedge accounting, the Company continues to hold the instruments as management believes derivative instruments continue to afford the Company the opportunity to stabilize jet fuel costs\.

Accounting pronouncements pertaining to derivative instruments and hedging are complex with stringent requirements, including the documentation of a Company hedging strategy, statistical analysis to qualify a commodity for hedge accounting both on a historical and a prospective basis, and strict contemporaneous documentation that is required at the time each hedge is designated by the Company\. The Company also examines the effectiveness of each individual hedge and its entire hedging program on a quarterly basis utilizing statistical analysis\. This analysis involves utilizing regression and other statistical analyses that compare changes in the price of jet fuel to changes in the prices of the commodities used for hedging purposes\.

All cash flows associated with purchasing and selling fuel derivatives are classified as Other operating cash flows in the Consolidated Statement of Cash Flows\. The following table presents the location of all assets and liabilities associated with the Company’s derivative instruments within the Consolidated Balance Sheet:

94


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

American Airlines Group Inc\.

American Airlines, Inc\.

Form 10\-K

Year Ended  December 31, 2019

Table of Contents

|                                                                                |                                                                                |                                                                                |
| --------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------- |
|                                                                                |                                                                                | **Page**                                                                                |
| [**PART I**](https://americanairlines.gcs-web.com/email-alerts#sF2BC51D3FADC569B988F4928EF3DD1FD)   | [**PART I**](https://americanairlines.gcs-web.com/email-alerts#sF2BC51D3FADC569B988F4928EF3DD1FD)                                                                                | [**PART I**](https://americanairlines.gcs-web.com/email-alerts#sF2BC51D3FADC569B988F4928EF3DD1FD)   |
| [Item 1\.](https://americanairlines.gcs-web.com/email-alerts#s04705AF29D585C7181427D29195D694B)     | [Business](https://americanairlines.gcs-web.com/email-alerts#s04705AF29D585C7181427D29195D694B)                                                                                |
[5](https://americanairlines.gcs-web.com/email-alerts#s04705AF29D585C7181427D29195D694B)        |
| [Item 1A\.](https://americanairlines.gcs-web.com/email-alerts#s1FEE4EFC77D2549388EF88355EE9A43A)    | [Risk Factors](https://americanairlines.gcs-web.com/email-alerts#s1FEE4EFC77D2549388EF88355EE9A43A)                                                                                |
[16](https://americanairlines.gcs-web.com/email-alerts#s1FEE4EFC77D2549388EF88355EE9A43A)       |
| [Item 1B\.](https://americanairlines.gcs-web.com/email-alerts#sFAF64EF2AA3450A8B45AA91A3D7A0659)    | [Unresolved Staff Comments](https://americanairlines.gcs-web.com/email-alerts#sFAF64EF2AA3450A8B45AA91A3D7A0659)                                                                                |
[36](https://americanairlines.gcs-web.com/email-alerts#sFAF64EF2AA3450A8B45AA91A3D7A0659)       |
| [Item 2\.](https://americanairlines.gcs-web.com/email-alerts#s5EF5EE93647C5832A82AB37183327217)     | [Properties](https://americanairlines.gcs-web.com/email-alerts#s5EF5EE93647C5832A82AB37183327217)                                                                                |
[37](https://americanairlines.gcs-web.com/email-alerts#s5EF5EE93647C5832A82AB37183327217)       |
| [Item 3\.](https://americanairlines.gcs-web.com/email-alerts#s3A7874F6DA0A5139ACEA100E17235AFC)     | [Legal Proceedings](https://americanairlines.gcs-web.com/email-alerts#s3A7874F6DA0A5139ACEA100E17235AFC)                                                                                |
[40](https://americanairlines.gcs-web.com/email-alerts#s3A7874F6DA0A5139ACEA100E17235AFC)       |
| [Item 4\.](https://americanairlines.gcs-web.com/email-alerts#sD8438CD08E51550581AE42001BAB5E91)     | [Mine Safety Disclosures](https://americanairlines.gcs-web.com/email-alerts#sD8438CD08E51550581AE42001BAB5E91)                                                                                |
[41](https://americanairlines.gcs-web.com/email-alerts#sD8438CD08E51550581AE42001BAB5E91)       |
| [**PART II**](https://americanairlines.gcs-web.com/email-alerts#sD3C2C8E57FB157FCBCD77F79C9C984A5)  | [**PART II**](https://americanairlines.gcs-web.com/email-alerts#sD3C2C8E57FB157FCBCD77F79C9C984A5)                                                                                | [**PART II**](https://americanairlines.gcs-web.com/email-alerts#sD3C2C8E57FB157FCBCD77F79C9C984A5)  |
| [Item 5\.](https://americanairlines.gcs-web.com/email-alerts#s1074EC04271C5818AFE5930233E0BA64)     | [Market for American Airlines Group’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities](https://americanairlines.gcs-web.com/email-alerts#s1074EC04271C5818AFE5930233E0BA64) |
[42](https://americanairlines.gcs-web.com/email-alerts#s1074EC04271C5818AFE5930233E0BA64)       |
| [Item 6\.](https://americanairlines.gcs-web.com/email-alerts#s39B80C813DB559188D8F93BD9EE47C51)     | [Selected Consolidated Financial Data](https://americanairlines.gcs-web.com/email-alerts#s39B80C813DB559188D8F93BD9EE47C51)                                                                                |
[45](https://americanairlines.gcs-web.com/email-alerts#s39B80C813DB559188D8F93BD9EE47C51)       |
| [Item 7\.](https://americanairlines.gcs-web.com/email-alerts#s426950A17C0D54A0B8B4B87184C38E86)     | [Management’s Discussion and Analysis of Financial Condition and Results of Operations](https://americanairlines.gcs-web.com/email-alerts#s745CA04C29AB534E8CE8FDB5D9020D81)                                    |
[49](https://americanairlines.gcs-web.com/email-alerts#s745CA04C29AB534E8CE8FDB5D9020D81)       |
| [Item 7A\.](https://americanairlines.gcs-web.com/email-alerts#s33D032C199175E1FA9FDD2C149E2F5A6)    | [Quantitative and Qualitative Disclosures About Market Risk](https://americanairlines.gcs-web.com/email-alerts#s33D032C199175E1FA9FDD2C149E2F5A6)                                                               |
[68](https://americanairlines.gcs-web.com/email-alerts#s33D032C199175E1FA9FDD2C149E2F5A6)       |
| [Item 8A\.](https://americanairlines.gcs-web.com/email-alerts#s23C59E4FAEFF5A4CB8416E1E0B71F114)    | [Consolidated Financial Statements and Supplementary Data of American Airlines Group Inc\.](https://americanairlines.gcs-web.com/email-alerts#s23C59E4FAEFF5A4CB8416E1E0B71F114)                                |
[70](https://americanairlines.gcs-web.com/email-alerts#s23C59E4FAEFF5A4CB8416E1E0B71F114)       |
| [Item 8B\.](https://americanairlines.gcs-web.com/email-alerts#s6C697CABDFEA5E68A0D1E1849D0E7C66)    | [Consolidated Financial Statements and Supplementary Data of American Airlines, Inc\.](https://americanairlines.gcs-web.com/email-alerts#s6C697CABDFEA5E68A0D1E1849D0E7C66)                                     |
[115](https://americanairlines.gcs-web.com/email-alerts#s6C697CABDFEA5E68A0D1E1849D0E7C66)      |
| [Item 9\.](https://americanairlines.gcs-web.com/email-alerts#sE263CE946ED45DA69166109362534692)     | [Changes In and Disagreements with Accountants on Accounting and Financial Disclosure](https://americanairlines.gcs-web.com/email-alerts#sE263CE946ED45DA69166109362534692)                                     |
[158](https://americanairlines.gcs-web.com/email-alerts#sE263CE946ED45DA69166109362534692)      |
| [Item 9A\.](https://americanairlines.gcs-web.com/email-alerts#sA6DC360200DD5B63B46D8B23BADEDB4A)    | [Controls and Procedures](https://americanairlines.gcs-web.com/email-alerts#sA6DC360200DD5B63B46D8B23BADEDB4A)                                                                                |
[158](https://americanairlines.gcs-web.com/email-alerts#sA6DC360200DD5B63B46D8B23BADEDB4A)      |
| Item 9B\.                                                                                | [Other Information](https://americanairlines.gcs-web.com/email-alerts#sb6c9071084ad46a3a1efae41b7271f89)                                                                                |
[162](https://americanairlines.gcs-web.com/email-alerts#sb6c9071084ad46a3a1efae41b7271f89)      |
| [**PART III**](https://americanairlines.gcs-web.com/email-alerts#s86F05617732B5B8B937F9B39BF6E4590) | [**PART III**](https://americanairlines.gcs-web.com/email-alerts#s86F05617732B5B8B937F9B39BF6E4590)                                                                                | [**PART III**](https://americanairlines.gcs-web.com/email-alerts#s86F05617732B5B8B937F9B39BF6E4590) |
| [Item 10\.](https://americanairlines.gcs-web.com/email-alerts#s93C3207459685196875A324CA6CBE183)    | [Directors, Executive Officers and Corporate Governance](https://americanairlines.gcs-web.com/email-alerts#s93C3207459685196875A324CA6CBE183)                                                                   |
[162](https://americanairlines.gcs-web.com/email-alerts#s93C3207459685196875A324CA6CBE183)      |
| [Item 11\.](https://americanairlines.gcs-web.com/email-alerts#sE051BDA73CA650199FAC1BE9A0A2FF1F)    | [Executive Compensation](https://americanairlines.gcs-web.com/email-alerts#sE051BDA73CA650199FAC1BE9A0A2FF1F)                                                                                |
[162](https://americanairlines.gcs-web.com/email-alerts#sE051BDA73CA650199FAC1BE9A0A2FF1F)      |
| [Item 12\. ](https://americanairlines.gcs-web.com/email-alerts#s0280E0AF7C135F47B2B994B5B3AEEEF6)   | [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](https://americanairlines.gcs-web.com/email-alerts#s0280E0AF7C135F47B2B994B5B3AEEEF6)                           |
[162](https://americanairlines.gcs-web.com/email-alerts#s0280E0AF7C135F47B2B994B5B3AEEEF6)      |
| [Item 13\.](https://americanairlines.gcs-web.com/email-alerts#s8D8E87C197AD5DD0B192478D3F3527EC)    | [Certain Relationships and Related Transactions, and Director Independence](https://americanairlines.gcs-web.com/email-alerts#s8D8E87C197AD5DD0B192478D3F3527EC)                                                |
[162](https://americanairlines.gcs-web.com/email-alerts#s8D8E87C197AD5DD0B192478D3F3527EC)      |
| [Item 14\.](https://americanairlines.gcs-web.com/email-alerts#sBA8AFCC6E7475AA79923956633D8F877)    | [Principal Accountant Fees and Services](https://americanairlines.gcs-web.com/email-alerts#sBA8AFCC6E7475AA79923956633D8F877)                                                                                |
[162](https://americanairlines.gcs-web.com/email-alerts#sBA8AFCC6E7475AA79923956633D8F877)      |
| [**PART IV**](https://americanairlines.gcs-web.com/email-alerts#s4297FEF75E255699B828C2A887A259A7)  | [**PART IV**](https://americanairlines.gcs-web.com/email-alerts#s4297FEF75E255699B828C2A887A259A7)                                                                                | [**PART IV**](https://americanairlines.gcs-web.com/email-alerts#s4297FEF75E255699B828C2A887A259A7)  |
| [Item 15\.](https://americanairlines.gcs-web.com/email-alerts#s94F78660C35D5A599891AF391677B613)    | [Exhibits and Financial Statement Schedules](https://americanairlines.gcs-web.com/email-alerts#s94F78660C35D5A599891AF391677B613)                                                                               |
[163](https://americanairlines.gcs-web.com/email-alerts#s94F78660C35D5A599891AF391677B613)      |
| [Item 16\.](https://americanairlines.gcs-web.com/email-alerts#s547414BE24F75BD5ABFA5FE0A464C7FB)    | [Form 10\-K Summary](https://americanairlines.gcs-web.com/email-alerts#s547414BE24F75BD5ABFA5FE0A464C7FB)                                                                                |
[184](https://americanairlines.gcs-web.com/email-alerts#s547414BE24F75BD5ABFA5FE0A464C7FB)      |
| [SIGNATURES](https://americanairlines.gcs-web.com/email-alerts#sF9F146D3BABB5316B9931530D78304B2)   | [SIGNATURES](https://americanairlines.gcs-web.com/email-alerts#sF9F146D3BABB5316B9931530D78304B2)                                                                                |
[185](https://americanairlines.gcs-web.com/email-alerts#sF9F146D3BABB5316B9931530D78304B2)      |

3


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

*Raw fuel expense* is defined as the price that we generally pay at the airport, or the “into\-plane” price, including taxes and fees\. Raw fuel prices are impacted by world oil prices and refining costs, which can vary by region in the U\.S\. *Raw fuel expense* approximates cash paid to suppliers and does not reflect the effect of our fuel hedges\.

Aircraft fuel expense increased$489 million, or 34%, compared to 2017\. The elements of the change are illustrated in the following table:

|                                                    |                                      |                                      |                                      |                                      |
| -------------------------------------------------- | ------------------------------------ | ------------------------------------ | ------------------------------------ | ------------------------------------ |
|                                                    | **Twelve Months Ended December 31,** | **Twelve Months Ended December 31,** | **Twelve Months Ended December 31,** | **Twelve Months Ended December 31,** |
|                                                    | **2018**                             | **2018**                             | **2017**                             | **2017**                             |
| ***(in millions, except for per gallon amounts)*** | **Dollars**                          | **Cost/Gal**                         | **Dollars**                          | **Cost/Gal**                         |
| Raw or "into\-plane" fuel cost                     | **$1,938**                           | **$2\.31**                           | $1,437                               | $1\.80                               |
| (Gain)/loss on settled hedges                      | **(24)**                             | **(0\.03)**                          | 17                                   | 0\.02                                |
| Consolidated economic fuel expense                 | **$1,914**                           | **$2\.28**                           | $1,454                               | $1\.82                               |
| Mark\-to\-market fuel hedge adjustments            | **22**                               | **0\.03**                            | (7)                                  | —                                    |
| GAAP fuel expense                                  | **$1,936**                           | **$2\.31**                           | $1,447                               | $1\.82                               |
| Fuel gallons                                       | **839**                              |                                      | 797                                  |                                      |

Raw fuel expense per gallon increased28% due to higher West Coast jet fuel prices\. West Coast jet fuel prices are impacted by both the price of crude oil, as well as the refining costs associated with the conversion of crude oil to jet fuel\. The increase in raw fuel price per gallon during 2018 was driven by a 32% increase in refining margins and a 28% increase in crude oil prices, compared to the prior year\. Fuel gallons consumed increased by 42 million, or 5%, consistent with the increase in capacity of 5%\.

We also evaluate economic fuel expense, which we define as raw fuel expense adjusted for the cash we receive from hedge counterparties for hedges that settle during the period, and for the premium expense that we paid for those contracts\. A key difference between aircraft fuel expense and economic fuel expense is the timing of gain or loss recognition on our hedge portfolio\. When we refer to economic fuel expense, we include gains and losses only when they are realized for those contracts that were settled during the period based on their original contract terms\. We believe this is the best measure of the effect that fuel prices have on our business because it most closely approximates the net cash outflow associated with purchasing fuel for our operations\. Accordingly, many industry analysts evaluate our results using this measure, and it is the basis for most internal management reporting and incentive pay plans\.

Gains recognized for hedges that settled during the year were $24 million in 2018, compared to losses of $17 million in 2017\. These amounts represent cash paid for premium expense, offset by any cash received from those hedges at settlement\.

As of the date of this filing, we expect our economic fuel price per gallon to decrease approximately 4% in the first quarter of 2019, as compared to the first quarter of 2018 due to decreasing crude oil prices\. As both oil prices and refining margins are volatile, we are unable to forecast the full\-year cost with any certainty\.

***Wages and Benefits***

Wages and benefits increased during 2018 by $259 million, or 13%, compared to 2017\. The primary components of wages and benefits are shown in the following table:

|                               |                                      |                                      |                                      |
| ----------------------------- | ------------------------------------ | ------------------------------------ | ------------------------------------ |
|                               | **Twelve Months Ended December 31,** | **Twelve Months Ended December 31,** | **Twelve Months Ended December 31,** |
| ***(in millions)***           | **2018**                             | **2017**                             | **% Change**                         |
| Wages                         | $1,658                               | $1,468                               | 12\.9%                               |
| Pension—Defined benefit plans | 48                                   | 39                                   | 23\.1%                               |
| Defined contribution plans    | 126                                  | 103                                  | 22\.3%                               |
| Medical and other benefits    | 245                                  | 216                                  | 13\.4%                               |
| Payroll taxes                 | 113                                  | 105                                  | 7\.6%                                |
| Total wages and benefits      | $2,190                               | $1,931                               | 13\.4%                               |

Wages increased$190 million with a 7\.2% increase in FTEs\. The increase in FTEs is attributable to the growth in our business and the growth in McGee Air Services, which has brought certain airport ground service positions in\-house that were

 38


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

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

accruals service and an employee's final average compensation\. Additional benefit accruals are frozen under the plan covering certain pilot employees and management and administrative employees\. Benefit accruals for certain non\-pilot employees continue\. United maintains additional defined benefit pension plans, which cover certain international employees\.

**Other Postretirement Plans\.** United maintains postretirement medical programs which provide medical benefits to certain retirees and eligible dependents, as well as life insurance benefits to certain retirees participating in the plan\. Benefits provided are subject to applicable contributions, co\-payments, deductibles and other limits as described in the specific plan documentation\.

Actuarial assumption changes are reflected as a component of the net actuarial loss/(gain) during 2018 and 2017\. The 2018 actuarial gains were mainly related to an increase in the discount rate applied in 2018 compared to 2017\. These amounts will be amortized over the average remaining service life of the covered active employees or the average life expectancy of inactive participants\. The impacts on 2018 and 2017 pension and retiree medical expense are presented below\.

The following tables set forth the reconciliation of the beginning and ending balances of the benefit obligation and plan assets, the funded status and the amounts recognized in these financial statements for the defined benefit and other postretirement plans (in millions):

|                                                   |                                  |                                  |
| ------------------------------------------------- | -------------------------------- | -------------------------------- |
|                                                   | **Pension Benefits**             | **Pension Benefits**             |
|                                                   | **Year Ended December 31, 2018** | **Year Ended December 31, 2017** |
| Accumulated benefit obligation:                   | $4,448                           | $4,739                           |
| Change in projected benefit obligation:           |                                  |                                  |
| Projected benefit obligation at beginning of year | $5,852                           | $5,253                           |
| Service cost                                      | 228                              | 195                              |
| Interest cost                                     | 217                              | 220                              |
| Actuarial (gain) loss                             | (601)                            | 525                              |
| Gross benefits paid and settlements               | (292)                            | (366)                            |
| Other                                             | (8)                              | 25                               |
| Projected benefit obligation at end of year       | $5,396                           | $5,852                           |
| Change in plan assets:                            |                                  |                                  |
| Fair value of plan assets at beginning of year    | $3,932                           | $3,355                           |
| Actual (loss) return on plan assets               | (215)                            | 510                              |
| Employer contributions                            | 413                              | 419                              |
| Gross benefits paid and settlements               | (292)                            | (366)                            |
| Other                                             | (11)                             | 14                               |
| Fair value of plan assets at end of year          | $3,827                           | $3,932                           |
| Funded status—Net amount recognized               | $(1,569)                         | $(1,920)                         |

70


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

***Depreciation and Amortization***

Depreciation and amortization expenses increased by $26 million, or 7%, compared to 2017, primarily due to the addition of eight owned B737\-900ERs and 16 owned E175s to our fleet since December 31, 2017, as well as the acceleration of depreciation taken on certain of our Q400 aircraft\.

We expect depreciation and amortization expense to increase 9% \- 13% in 2019, primarily due to the full year impact of depreciation of our E175 aircraft delivered in 2018 and additional deliveries in 2019, as well as accelerated depreciation on our Q400 fleet as we begin to retire a portion of this fleet\.

***Food and Beverage Service***

Food and beverage service expense increased by $16 million, or 8%, compared to 2017, due to the increased number of passengers, premium class offerings and enhancements to our onboard menu offerings to provide higher quality food and beverage products\.

We expect food and beverage expenses to remain flat in 2019 compared to 2018, primarily due to our increasing focus on reducing waste and changes to our catering process for our regional business\.

***Third\-party Regional Carrier Expense***

Third\-party regional carrier expense, which represents payments made to SkyWest and PenAir under our CPA agreements, increased$33 million, or 27%, in 2018 compared to 2017\. The increase is primarily due to the addition of nine E175 aircraft operated by SkyWest in the current year\.

We expect third\-party regional carrier expense to continue to increase in 2019 as we realize the full\-year impact of the additional E175 aircraft operated by SkyWest\.

***Special Items \- Merger\-Related Costs***

We recorded $87 million of merger\-related costs in 2018 associated with our ongoing integration of Virgin America operations, compared to $116 million in 2017\. Costs incurred in 2018 consisted primarily of severance and retention costs, IT integration costs, and the write\-off of Virgin America related assets connected with our transition to a single PSS in April 2018\. We expect to continue to incur merger\-related costs in 2019\.

***Special Items \- Other***

We recorded other special items of $45 million in 2018\. These consisted of a one\-time settlement fee of $20 million for the termination of a former maintenance services agreement which was subsequently replaced by a new agreement that provides more flexibility for the timing and scope of aircraft engine maintenance\. The remaining $25 million was due to one\-time bonuses paid to employees as a result of tax reform in early 2018\.

***Consolidated Nonoperating Income (Expense)***

During 2018 we recorded nonoperating expense of $58 million, compared to nonoperating expense of $49 million in 2017\. The increase is primarily due to certain disposal costs associated with nonoperating CRJ\-700 aircraft\.

***ADDITIONAL SEGMENT INFORMATION***

Refer to **Note 13** of the consolidated financial statements for a detailed description of each segment\. Below is a summary of each segment's profitability\.

***Mainline***

Mainline adjusted pretax profit was $809 million in 2018 compared to $1\.2 billion in 2017\. The $435 million decrease in pretax profit was primarily driven by a $306 million increase in Mainline non\-fuel operating expenses and a $370 million increase in Mainline fuel expense\. These increases were partially offset by a $231 million increase in Mainline operating revenue\.

 40


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

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the  15th day of  February, 2019 \.

|                        |                         |
| ---------------------- | ----------------------- |
| DELTA AIR LINES, INC\. | DELTA AIR LINES, INC\.  |
| By:                    | /s/ Edward H\. Bastian  |
|                        | Edward H\. Bastian      |
|                        | Chief Executive Officer |

 106


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

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

**5\. Debt**

Long\-term debt included in the consolidated balance sheets consisted of (in millions):

|                                                                                |                  |                  |
| --------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------- | ---------------- |
|                                                                                | **December 31,** | **December 31,** |
|                                                                                | **2018**         | **2017**         |
| *Secured*                                                                                |                  |                  |
| 2013 Credit Facilities, variable interest rate of 4\.26%, installments through 2025  ^(a)^                                                                      | $1,825           | $1,825           |
| 2014 Credit Facilities, variable interest rate of 4\.39%, installments through 2021  ^(a)^                                                                      | 1,215            | 728              |
| April 2016 Credit Facilities, variable interest rate of 4\.52%, installments through 2023  ^(a)^                                                                | 980              | 990              |
| December 2016 Credit Facilities, variable interest rate of 4\.46%, installments through 2023  ^(a)^                                                             | 1,225            | 1,238            |
| Aircraft enhanced equipment trust certificates (EETCs), fixed interest rates ranging from 3\.00% to 9\.01%, averaging 4\.21%, maturing from 2019 to 2029  ^(b)^ | 11,648           | 11,881           |
| Equipment loans and other notes payable, fixed and variable interest rates ranging from 2\.34% to 8\.48%, averaging 4\.26%, maturing from 2019 to 2030  ^(c)^   | 5,060            | 5,259            |
| Special facility revenue bonds, fixed interest rates ranging from 5\.00% to 8\.00%, maturing from 2019 to 2031                                                  | 798              | 857              |
| Other secured obligations                                                                                | —                | 2                |
|                                                                                | 22,751           | 22,780           |
| *Unsecured*                                                                                |                  |                  |
| 5\.50% senior notes, interest only payments until due in 2019  ^(d)^                                                                                | 750              | 750              |
| 4\.625% senior notes, interest only payments until due in 2020  ^(d)^                                                                                | 500              | 500              |
| 6\.125% senior notes                                                                                | —                | 500              |
|                                                                                | 1,250            | 1,750            |
| Total long\-term debt                                                                                | 24,001           | 24,530           |
| Less: Total unamortized debt discount, premium and issuance costs                                                                                | 222              | 236              |
| Less: Current maturities                                                                                | 3,213            | 2,476            |
| Long\-term debt, net of current maturities                                                                                | $20,566          | $21,818          |

The table below shows the maximum availability under revolving credit facilities, all of which were undrawn, as of December 31, 2018 (in millions):

|                               |        |
| ----------------------------- | ------ |
| 2013 Revolving Facility       | $1,000 |
| 2014 Revolving Facility       | 1,543  |
| April 2016 Revolving Facility | 300    |
| Total                         | $2,843 |

Secured financings are collateralized by assets, primarily aircraft, engines, simulators, aircraft spare parts, airport gate leasehold rights, route authorities, airport slots and pre\-delivery payments\.

At December 31, 2018, the maturities of long\-term debt are as follows (in millions):

|                     |         |
| ------------------- | ------- |
| 2019                | $3,258  |
| 2020                | 2,320   |
| 2021                | 3,411   |
| 2022                | 1,346   |
| 2023                | 3,894   |
| 2024 and thereafter | 9,772   |
| Total               | $24,001 |

99


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

Deferred tax (assets) and liabilities comprise the following (in millions):

|                                      |                                      |                                      |         |  |  |  |         |
|:------------------------------------ |:------------------------------------ |:------------------------------------ | -------:| -:| -:| -:| -------:|
|                                      |                                      |                                      |    2019 |  |  |  |    2018 |
| Excess of tax over book depreciation | Excess of tax over book depreciation | Excess of tax over book depreciation | $ 1,233 |  |  |  | $ 1,066 |
| Intangibles \- net                   | Intangibles \- net                   | Intangibles \- net                   |      16 |  |  |  |      15 |
| Operating lease liabilities          | Operating lease liabilities          | Operating lease liabilities          |     416 |  |  |  |       — |
| Other \- net                         | Other \- net                         | Other \- net                         |      58 |  |  |  |      43 |
| Deferred tax liabilities             | Deferred tax liabilities             | Deferred tax liabilities             |   1,723 |  |  |  |   1,124 |
| Mileage Plan™                        | Mileage Plan™                        | Mileage Plan™                        |   (337) |  |  |  |   (315) |
| Inventory obsolescence               | Inventory obsolescence               | Inventory obsolescence               |    (15) |  |  |  |    (15) |
| Employee benefits                    | Employee benefits                    | Employee benefits                    |   (179) |  |  |  |   (172) |
| Acquired net operating losses        | Acquired net operating losses        | Acquired net operating losses        |    (13) |  |  |  |    (64) |
| Operating lease assets               | Operating lease assets               | Operating lease assets               |   (417) |  |  |  |       — |
| Other \- net                         | Other \- net                         | Other \- net                         |    (48) |  |  |  |    (48) |
| Deferred tax assets                  | Deferred tax assets                  | Deferred tax assets                  | (1,009) |  |  |  |   (614) |
| Valuation allowance                  | Valuation allowance                  | Valuation allowance                  |       1 |  |  |  |       2 |
| Net deferred tax liabilities         | Net deferred tax liabilities         | Net deferred tax liabilities         |   $ 715 |  |  |  |   $ 512 |

At December 31, 2019, the Company had federal NOLs of approximately $45 million that expire beginning in 2032 and continuing through 2036, and state NOLs of approximately $55 million that expire beginning in 2029 and continuing through 2036\.

Virgin America experienced multiple “ownership changes” as defined in Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), the most recent being its acquisition by the Company\. Section 382 of the Code imposes an annual limitation on the utilization of pre\-ownership change NOLs\. Any unused annual limitation may, subject to certain limits, be carried over to later years\. The combined Company’s ability to use the NOLs will also depend on the amount of taxable income generated in future periods\.

Valuation allowances are provided to reduce the related deferred income tax assets to an amount which will, more likely than not, be realized\. The valuation allowance was not material at both December 31, 2019 and December 31, 2018\.

Components of Income Tax Expense

The components of income tax expense are as follows (in millions):

|                                             |                                             |                                             |       |  |  |  |       |  |  |  |       |
|:------------------------------------------- |:------------------------------------------- |:------------------------------------------- | -----:|:- |:- |:- | -----:|:- |:- |:- | -----:|
|                                             |                                             |                                             |  2019 |  |  |  |  2018 |  |  |  |  2017 |
| Current income tax expense (benefit):       | Current income tax expense (benefit):       | Current income tax expense (benefit):       |       |  |  |  |       |  |  |  |       |
| Federal                                     | Federal                                     | Federal                                     |  $ 26 |  |  |  | $ (5) |  |  |  | $ 127 |
| State                                       | State                                       | State                                       |    13 |  |  |  |     9 |  |  |  |    35 |
| Total current income tax expense            | Total current income tax expense            | Total current income tax expense            |    39 |  |  |  |     4 |  |  |  |   162 |
| Deferred income tax expense (benefit):      | Deferred income tax expense (benefit):      | Deferred income tax expense (benefit):      |       |  |  |  |       |  |  |  |       |
| Federal                                     | Federal                                     | Federal                                     |   175 |  |  |  |   125 |  |  |  |   (3) |
| State                                       | State                                       | State                                       |    33 |  |  |  |    19 |  |  |  |    40 |
| Total deferred income tax expense (benefit) | Total deferred income tax expense (benefit) | Total deferred income tax expense (benefit) |   208 |  |  |  |   144 |  |  |  |    37 |
| Income tax expense                          | Income tax expense                          | Income tax expense                          | $ 247 |  |  |  | $ 148 |  |  |  | $ 199 |

71


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

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

**8\. Accumulated Other Comprehensive Income (Loss)**

The components of accumulated other comprehensive income (loss) (AOCI) are as follows (in millions):

|                                                            |                                                                                |                                           |                                                         |       |           |
| ---------------------------------------------------------- | --------------------------------------------------------------------------------------- | ----------------------------------------- | ------------------------------------------------------- | ----- | --------- |
|                                                            | **Pension,
Retiree
Medical and
Other
Postretirement
Benefits** | **Unrealized Gain (Loss) on Investments** | **Income
Tax Benefit
(Provision)**  **^(1)^** |       | **Total** |
| Balance at December 31, 2015                               | $(3,831)                                                                                | $(9)                                      | $(991)                                                  |       | $(4,831)  |
| Other comprehensive income (loss) before reclassifications | (461)                                                                                | 9                                         | 166                                                     |       | (286)     |
| Amounts reclassified from AOCI                             | (102)                                                                                | —                                         | 37                                                      | ^(2)^ | (65)      |
| Net current\-period other comprehensive income (loss)      | (563)                                                                                | 9                                         | 203                                                     |       | (351)     |
| Balance at December 31, 2016                               | (4,394)                                                                                | —                                         | (788)                                                   |       | (5,182)   |
| Other comprehensive income (loss) before reclassifications | (27)                                                                                | (1)                                       | 14                                                      |       | (14)      |
| Amounts reclassified from AOCI                             | (87)                                                                                | —                                         | 32                                                      | ^(2)^ | (55)      |
| Net current\-period other comprehensive income (loss)      | (114)                                                                                | (1)                                       | 46                                                      |       | (69)      |
| Balance at December 31, 2017                               | $(4,508)                                                                                | $(1)                                      | $(742)                                                  |       | $(5,251)  |

|       |                                                                                |
| ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(1)^ | Relates principally to pension, retiree medical and other postretirement benefits obligations that will not be recognized in net income until the obligations are fully extinguished\. |

|       |                                                                                |
| ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| ^(2)^ | Relates to pension, retiree medical and other postretirement benefits obligations and is recognized within the income tax provision on the consolidated statement of operations\. |

Reclassifications out of AOCI for the years ended December 31, 2017 and 2016 are as follows (in millions):

|                                                                             |                                   |                                   |                                                                                |
| --------------------------------------------------------------------------- | --------------------------------- | --------------------------------- | ----------------------------------------------------------------------------------------- |
|                                                                             | **Amount reclassified from AOCI** | **Amount reclassified from AOCI** | **Affected line items on the**

**consolidated statement of**

**operations** |
|                                                                             | **Year Ended December 31,**       | **Year Ended December 31,**       | **Affected line items on the**

**consolidated statement of**

**operations** |
| **AOCI Components**                                                         | **2017**                          | **2016**                          | **Affected line items on the**

**consolidated statement of**

**operations** |
| Amortization of pension, retiree medical and other postretirement benefits: |                                   |                                   |                                                                                |
| Prior service benefit                                                       | $(132)                            | $(134)                            | Salaries, wages and benefits                                                              |
| Actuarial loss                                                              | 77                                | 69                                | Salaries, wages and benefits                                                              |
| Total reclassifications for the period, net of tax                          | $(55)                             | $(65)                             |                                                                                |

Amounts allocated to OCI for income taxes as further described in Note 4 will remain in AOCI until American ceases all related activities, such as termination of the pension plan\.

160


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

Stock Options

Stock options to purchase common stock are granted at the fair market value of the stock on the date of grant\. The stock options granted have terms of up to ten years\.

The fair value of each option grant was estimated on the date of grant using the Black\-Scholes option\-pricing model with the following weighted\-average assumptions used for grants:

|                                                    |                                                    |                                                    |          |  |  |  |          |  |  |  |          |
|:-------------------------------------------------- |:-------------------------------------------------- |:-------------------------------------------------- | --------:|:- |:- |:- | --------:|:- |:- |:- | --------:|
|                                                    |                                                    |                                                    |     2019 |  |  |  |     2018 |  |  |  |     2017 |
| Expected volatility                                | Expected volatility                                | Expected volatility                                |     30 % |  |  |  |     30 % |  |  |  |     51 % |
| Expected term                                      | Expected term                                      | Expected term                                      |  6 years |  |  |  |  6 years |  |  |  |  6 years |
| Risk\-free interest rate                           | Risk\-free interest rate                           | Risk\-free interest rate                           |  2\.41 % |  |  |  |  2\.61 % |  |  |  |  2\.04 % |
| Expected dividend yield                            | Expected dividend yield                            | Expected dividend yield                            |  2\.09 % |  |  |  |  1\.94 % |  |  |  |  1\.10 % |
| Weighted\-average grant date fair value per share  | Weighted\-average grant date fair value per share  | Weighted\-average grant date fair value per share  | $ 16\.84 |  |  |  | $ 17\.18 |  |  |  | $ 41\.19 |
| Estimated fair value of options granted (millions) | Estimated fair value of options granted (millions) | Estimated fair value of options granted (millions) |      $ 4 |  |  |  |      $ 1 |  |  |  |      $ 4 |

The expected market price volatility and expected term are based on historical results\. The risk\-free interest rate is based on the U\.S\. Treasury yield curve in effect at the time of the grant\. The expected dividend yield is based on the estimated weighted average dividend yield over the expected term\. The expected forfeiture rates are based on historical experience\.

The tables below summarize stock option activity for the year ended December 31, 2019:

|                                               |                                               |                                               |          |          |  |  |  |                                                  |  |  |  |                                                       |                                                       |                                                       |  |  |  |                                                   |
|:--------------------------------------------- |:--------------------------------------------- |:--------------------------------------------- | --------:| --------:|:- |:- |:- | ------------------------------------------------:|:- |:- |:- | -----------------------------------------------------:| -----------------------------------------------------:| -----------------------------------------------------:|:- |:- |:- | -------------------------------------------------:|
|                                               |                                               |                                               |   Shares |   Shares |  |  |  | Weighted\-
Average Exercise Price Per Share |  |  |  | Weighted\-
Average
Contractual Life (Years) | Weighted\-
Average
Contractual Life (Years) | Weighted\-
Average
Contractual Life (Years) |  |  |  | Aggregate Intrinsic
Value
(in millions) |
| Outstanding, December 31, 2018                | Outstanding, December 31, 2018                | Outstanding, December 31, 2018                |  573,242 |  573,242 |  |  |  |                                         $ 57\.78 |  |  |  |                                                  6\.6 |                                                  6\.6 |                                                  6\.6 |  |  |  |                                               $ 6 |
| Granted                                       | Granted                                       | Granted                                       |  252,200 |  252,200 |  |  |  |                                           66\.52 |  |  |  |                                                       |                                                       |                                                       |  |  |  |                                                   |
| Exercised                                     | Exercised                                     | Exercised                                     | (21,322) | (21,322) |  |  |  |                                           36\.14 |  |  |  |                                                       |                                                       |                                                       |  |  |  |                                                   |
| Canceled                                      | Canceled                                      | Canceled                                      |  (5,366) |  (5,366) |  |  |  |                                           68\.94 |  |  |  |                                                       |                                                       |                                                       |  |  |  |                                                   |
| Forfeited or expired                          | Forfeited or expired                          | Forfeited or expired                          |  (4,699) |  (4,699) |  |  |  |                                           70\.98 |  |  |  |                                                       |                                                       |                                                       |  |  |  |                                                   |
| Outstanding, December 31, 2019                | Outstanding, December 31, 2019                | Outstanding, December 31, 2019                |  794,055 |  794,055 |  |  |  |                                         $ 60\.98 |  |  |  |                                                  6\.5 |                                                  6\.5 |                                                  6\.5 |  |  |  |                                               $ 7 |
| Exercisable, December 31, 2019                | Exercisable, December 31, 2019                | Exercisable, December 31, 2019                |  341,322 |  341,322 |  |  |  |                                         $ 50\.50 |  |  |  |                                                  4\.3 |                                                  4\.3 |                                                  4\.3 |  |  |  |                                               $ 7 |
| Vested or expected to vest, December 31, 2019 | Vested or expected to vest, December 31, 2019 | Vested or expected to vest, December 31, 2019 |  793,684 |  793,684 |  |  |  |                                         $ 60\.98 |  |  |  |                                                  6\.5 |                                                  6\.5 |                                                  6\.5 |  |  |  |                                               $ 7 |

|                                               |                                               |                                               |      |  |  |  |      |  |  |  |      |
|:--------------------------------------------- |:--------------------------------------------- |:--------------------------------------------- | ----:|:- |:- |:- | ----:|:- |:- |:- | ----:|
|  *(in millions)*                              |  *(in millions)*                              |  *(in millions)*                              | 2019 |  |  |  | 2018 |  |  |  | 2017 |
| Intrinsic value of option exercises           | Intrinsic value of option exercises           | Intrinsic value of option exercises           |  $ 1 |  |  |  |  $ 1 |  |  |  |  $ 6 |
| Cash received from stock option exercises     | Cash received from stock option exercises     | Cash received from stock option exercises     |    1 |  |  |  |    1 |  |  |  |    3 |
| Tax benefit related to stock option exercises | Tax benefit related to stock option exercises | Tax benefit related to stock option exercises |    — |  |  |  |    — |  |  |  |    2 |
| Fair value of options vested                  | Fair value of options vested                  | Fair value of options vested                  |    3 |  |  |  |    2 |  |  |  |    3 |

Stock Awards

Restricted Stock Units (RSUs) are awarded to eligible employees and entitle the grantee to receive shares of common stock at the end of the vesting period\. The fair value of the RSUs is based on the stock price on the date of grant\. Generally, RSUs “cliff vest” after three years, or the period from the date of grant to the employee’s retirement eligibility, and expense is recognized accordingly\. Performance Share Units (PSUs) are awarded to certain executives to receive shares of common stock if specific performance goals and market conditions are achieved\. There are several tranches of PSUs which vest when performance goals and market conditions are met\.

80


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

We account for marketing agreements, including American Express, consistent with the accounting method that allocates the consideration received to the individual products and services delivered\. We allocate the value based on the relative selling prices of those products and services, which generally consist of award travel, baggage fee waivers, lounge access and the use of our brand\. We determined our best estimate of the selling prices by considering discounted cash flow analyses using multiple inputs and assumptions, including: (1) the expected number of miles awarded and number of miles redeemed, (2) ETV for the award travel obligation, (3) published rates on our website for baggage fees, discounted access to Delta Sky Club lounges and other benefits while traveling on Delta and (4) brand value\.

We defer the amount for award travel obligation as part of loyalty program deferred revenue and recognize loyalty travel awards in passenger revenue as the mileage credits are used for travel\. Revenue allocated to services performed in conjunction with a passenger’s flight, such as baggage fee waivers, is recognized as travel\-related services in passenger revenue when the related service is performed\. Revenue allocated to access Delta Sky Club lounges is recognized as miscellaneous in other revenue as access is provided\. Revenue allocated to the remaining performance obligations, primarily brand value, is recorded as loyalty program in other revenue over time as miles are delivered\.

Goodwill and Indefinite\-Lived Intangible Assets

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

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

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

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

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

Goodwill \.  Our goodwill balance, which is related to the airline segment, was  $9\.8 billion  at  December 31, 2018 \. Based upon our qualitative assessment of all relevant factors, including applicable factors noted in " Key Assumptions " above, we determined that there was no indication that goodwill was impaired\.

 44


Annual Report of Southwest Airlines Co\. for year 2018

adjustments are accounted for on a prospective basis through depreciation and amortization expense\. See Note 1 to the Consolidated Financial Statements for further information\.

The Company believes it is unlikely that materially different estimates for expected lives, expected residual values, and impairment evaluations would be made or reported based on other reasonable assumptions or conditions suggested by actual historical experience and other data available at the time estimates were made\.

***Fair Value Measurements and Financial Derivative Instruments***

The Company utilizes unobservable (Level 3) inputs in determining the fair value of certain assets and liabilities\. At December 31, 2018, these consisted of its fuel derivative option contracts, which were an asset of $138 million\. The Company utilizes financial derivative instruments primarily to manage its risk associated with changing jet fuel prices\. See "Quantitative and Qualitative Disclosures about Market Risk" for more information on these risk management activities, Note 10 to the Consolidated Financial Statements for more information on the Company’s fuel hedging program and financial derivative instruments, and Note 11 for more information about fair value measurements\. Also, see Note 2 to the Consolidated Financial Statements for information about required changes to hedge accounting per the New Hedging Standard\.

All derivatives are required to be reflected at fair value and recorded on the Consolidated Balance Sheet\. At December 31, 2018, the Company was a party to over 200 separate financial derivative instruments related to its fuel hedging program for future periods\. Changes in the fair values of these instruments can vary dramatically based on changes in the underlying commodity prices\. For example, during 2018, market "spot" prices for Brent crude oil peaked at a high of approximately $86 per barrel and hit a low price of approximately $50 per barrel\. During 2017, market spot prices ranged from a high of approximately $67 per barrel to a low of approximately $45 per barrel\. Market price changes can be driven by factors such as supply and demand, inventory levels, weather events, refinery capacity, political agendas, the value of the U\.S\. dollar, geopolitical events, and general economic conditions, among other items\. The financial derivative instruments utilized by the Company primarily are a combination of collars, purchased call options, call spreads, put spreads, and fixed price swap agreements\.

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

The Company determines the fair value of fuel derivative option contracts utilizing an option pricing model based on inputs that are either readily available in public markets, can be derived from information available in publicly quoted markets, or are quoted by its counterparties\. In situations where the Company obtains inputs via quotes from its counterparties, it verifies the reasonableness of these quotes via similar quotes from another counterparty as of each date for which financial statements are prepared\. The Company has consistently applied these valuation techniques in all periods presented and believes it has obtained the most accurate information available for the types of derivative contracts it holds\. Due to the fact that certain inputs used in determining the estimated fair value of its option contracts are considered unobservable (primarily implied volatility), the Company has categorized these option contracts as Level 3\. Although implied volatility is not directly observable, it is derived primarily from changes in market prices, which are observable\. Based on the Company’s portfolio of option contracts as of December 31, 2018, a 10 percent change in implied volatility, holding all other factors constant, would have resulted in a change in the fair value of this portfolio of less than $12 million\.

Fair values for financial derivative instruments are estimated prior to the time that the financial derivative instruments settle\. However, once settlement of the financial derivative instruments occurs and the hedged jet fuel is purchased and consumed, all values and prices are known and are recognized in the financial statements\. Although the Company continues to use a prospective assessment to determine that commodities continue to qualify for hedge accounting in specific locations where the Company hedges, there are no assurances that these commodities will continue to qualify

60


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

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

Cash Equivalents and Restricted Cash Equivalents and Investments\.  Cash equivalents generally consist of money market funds\. Restricted cash equivalents and investments generally consist of money market funds and time deposits, which primarily support letters of credit that relate to certain projected self\-insurance obligations and airport commitments\. The fair value of these investments is based on a market approach using prices and other relevant information generated by market transactions involving identical or comparable assets\.

Short\-Term Investments\.  The fair values of short\-term investments are based on a market approach using industry standard valuation techniques that incorporate observable inputs such as quoted market prices, interest rates, benchmark curves, credit ratings of the security and other observable information\.

Long\-Term Investments\.  Our long\-term investments that have historically been measured at fair value primarily consist of equity investments in Grupo Aeroméxico, the parent company of Aeroméxico, and the parent company of GOL\. During 2017, we completed a tender offer for additional shares of Grupo Aeroméxico\. With the completion of the tender offer, our investment is accounted for under the equity method and is no longer measured at fair value on a recurring basis\. As of December 31, 2017, our long\-term investments include our shares in China Eastern and the parent company of GOL\. Our investments are valued based on market prices and are classified in other noncurrent assets\.

Hedge Derivatives\.  A portion of our derivative contracts are negotiated over\-the\-counter with counterparties without going through a public exchange\. Accordingly, our fair value assessments give consideration to the risk of counterparty default (as well as our own credit risk)\. Such contracts are classified as Level 2 within the fair value hierarchy\. The remainder of our hedge contracts are comprised of futures contracts, which are traded on a public exchange\. These contracts are classified within Level 1 of the fair value hierarchy\.

|   |                                                                                |
| - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | *Fuel Contracts\.*  Our fuel hedge portfolio consists of options, swaps and futures\. The hedge contracts include crude oil and refined products, as these commodities are highly correlated with the price of fuel that we consume\. Option contracts are valued under an income approach using option pricing models based on data either readily observable in public markets, derived from public markets or provided by counterparties who regularly trade in public markets\. Volatilities used in these valuations ranged from   10%  to   28%  depending on the maturity dates, underlying commodities and strike prices of the option contracts\. Swap contracts are valued under an income approach using a discounted cash flow model based on data either readily observable or provided by counterparties who regularly trade in public markets\. Discount rates used in these valuations vary based on maturity dates utilizing the London interbank offered rate ("LIBOR")\. Futures contracts and options on futures contracts are traded on a public exchange and valued based on quoted market prices\.  |

|   |                                                                                |
| - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| • | *Foreign Currency Exchange Contracts\.*  Our foreign currency derivatives consist of Japanese yen and Canadian dollar forward contracts and are valued based on data readily observable in public markets\. |

NOTE 3 \. INVESTMENTS

Short\-Term Investments

The estimated fair values of short\-term investments, which approximate cost at  December 31, 2017 , are shown below by contractual maturity\. Actual maturities may differ from contractual maturities because issuers of the securities may have the right to retire our investments without prepayment penalties\.

|                                          |                                          |                                          |                                      |
| ---------------------------------------- | ---------------------------------------- | ---------------------------------------- | ------------------------------------ |
| **(in millions)**                        | **(in millions)**                        | **(in millions)**                        | **Available\-**

**For\-Sale** |
| Due in one year or less                  | Due in one year or less                  | Due in one year or less                  | $323                                 |
| Due after one year through three years   | Due after one year through three years   | Due after one year through three years   | 465                                  |
| Due after three years through five years | Due after three years through five years | Due after three years through five years | 19                                   |
| Due after five years                     | Due after five years                     | Due after five years                     | 18                                   |
| Total                                    | Total                                    | Total                                    | $825                                 |

 64